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FATCA Reality Check

Contributed by Lynne Swanson and Victoria Ferauge
October 9, 2013

To the shock of many Europeans, the United States Foreign Account Tax Compliance Act (FATCA) is not just about catching American tax evaders.  A U.S. law intended to combat offshore tax evasion by Americans living in United States is instead snaring honest citizens of other countries.

FATCA (Foreign Account Tax Compliance Act) is a law that was voted in 2010 by the U.S. Congress. FATCA requires all non-US banks and other financial institutions around the world to report local account information of all “U.S. persons” living outside the United States to American Internal Revenue Service (IRS).  If they don’t comply, they face huge financial penalties from United States.

What Exactly Is a “US Person?”

A “US Person” can be a citizen of the EU or of another country who is completely unaware that the United States has a claim on him or her. “US Person” can be anyone with a connection to the United States: a US citizen, Green Card holder, anyone born in the US or born abroad to at least one American parent, or anyone who spends a substantial amount of time on US soil every year. 

Most of these people are not tax evaders, although IRS, Treasury and some members of U.S. Congress perpetuate the myth that they are and imply that Americans abroad are renouncing U.S. citizenship solely in order to evade taxes. 

With the recent Myths vs. FATCA document issued by U.S. Treasury, the attack on the personal integrity of these “U.S. persons” outside United States continues.

Treasury suggests that global objections to FATCA are simply myths.

FATCA problems for financial institutions and governments around the world are not a myth. The people FATCA impacts are not a myth.   

Here is a FATCA reality check.

Reality: The Compliance Burden

Does the U.S. Treasury really believe 544 pages of regulation plus constant changes and amendments are not a burden to banks around the world, in developed and developing countries alike: Spain, Japan, Germany, Thailand, Italy, Romania, or Norway.  Some countries like Bangladesh or Burundi may not have the sophisticated technology or resources to implement complex regulations.  

Financial institutions and governments around the world have been very clear: Identifying U.S. persons, adapting systems and reporting to a foreign government is an enormous administrative undertaking requiring massive expenditures.

United Kingdom was the first country to sign an Intergovernmental Agreement (IGA).  That country’s HM Revenue and Customs (HMRC) says: 

“The adoption of FATCA by the United States imposes a new burden on UK businesses.”

Without an IGA, HRMC estimated  FATCA would have affected 300,000 UK entities and created a one-off cost to UK businesses £2-3billion ($3.2 –4.8 billion) with ongoing costs of £100m - £170m ($160-$$272 million) annually.

With an IGA HMRC estimates a lower number of 75,000 UK entities are now affected by FATCA. Current estimate of the one off cost could be around £0.9bn -

£1.6bn, ($1.4-2.56 billion) with ongoing costs of £50 million - £90 million ($80-$144 million) annually.

One European Chamber of Commerce estimates average initial implementation costs of $5 to $10 million per financial institution. If introduced by all financial institutions world-wide, that could be a global cost of $1000-$2000 billion (or $1 to $2 trillion.) This represents approximately the yearly gross domestic product of Brazil or India.

JP Morgan projected costs far higher at $100 million per each multinational. Multiply those projections worldwide and it’s clear these staggering costs will far exceed the $8billion FATCA might raise for the American IRS over 10 years.

It might be more efficient and economical for worldwide financial institutions to simply write checks totaling $8 billion to U.S. Treasury.

Reality:  Renunciations of American Citizenship

Recently, Treasury published names of over 1000 American citizens who completed the expensive and bureaucratic process to give up their American citizenship in the summer quarter ending June 30, 2013.

U.S. Treasury denies that the rise in renunciations has anything to do with FATCA.  The law, they say will “impose no new obligations on U.S. citizens living abroad” and it makes no sense to renounce. They point out doing so does not relieve a former U.S. citizen’s existing tax obligations.

FATCA does add new obligations to an already onerous tax and reporting regime for Americans abroad - new obligations like form 8938 which duplicates information that they already provide in their yearly FBAR (Foreign Bank Account Report).  Worse, FATCA has already had severe adverse consequences for Americans who live, work and raise families outside the U.S. many of whom are also citizens of the countries in which they reside.”

How do we know that FATCA and its consequences are driving the rising renunciations?  Because the renunciants themselves say so.  A few have had the courage to speak to the media.  Far more are not prepared to go public with their story for fear of reprisals from both financial institutions and U.S. government.  

The stories they tell about the impact of FATCA on them are consistent: loss of banking services and hardship in meeting the compliance requirements.  Those who have renounced are very clear that FATCA figured prominently in their decision.

Reality:  US Persons Are Financial Outcasts

U.S. Treasury says turning away U.S. persons will not rid financial institutions of the obligation of complying with FATCA. That may be true.

Yet, that is not preventing financial institutions in some countries from shutting out U.S. persons. Some have discovered that local banks refuse to open accounts for them when they moved abroad. Others who are long term residents or citizens of other countries have had their bank accounts closed, and even mortgages cancelled, because of FATCA.

These cases have been well documented by American Citizens Abroad (ACA) and Association of Americans Resident Overseas (AARO), two organizations that have advocated for Americans abroad since the 1970’s.

Reality:  FATCA Is Extraterritorial

With FATCA, United States is attempting to impose its laws and demands on the rest of the world. Canada’s Finance Minister has called this “extraterritorial” and “unwarranted.”  Many other government leaders have pointed out FATCA violates their countries’ laws and even constitutions.

Some countries like the UK are changing their laws to accommodate FATCA.  Other countries are refusing, with some saying it is not possible to adhere to FATCA under their nations’ constitutions.

Reality: FATCA Is Not A New Global Standard

Last year, US Treasury projected 17 countries would sign an IGA by December 31, 2012 with another 50 lined up. Over nine months later, only about 10 have signed and a mere 9 or 10 others may be close to signing. More than 170 countries haven’t signed.

Negotiations with other countries are proceeding much slower than Treasury anticipated. Many are resisting or signing reluctantly due to financial threats (30% withholding) U.S. government holds over them.  

That hardly is “significant international interest” as claimed by U.S. Treasury.  Instead, it’s significant international resistance.

There is worldwide interest by many countries in information exchange on the offshore accounts of their tax residents - not on accounts held by their citizens who are living and working abroad. 

FATCA contravenes international norms by demanding information on “US persons” who are bona-fide long-term residents, and often citizens, of other countries.

FATCA differs from international goal of income information exchange by demanding total assets, account balances, transactions, account numbers and other personal identifying information.

Another way for achieving the international objective of combating offshore tax evasion would be with a model like the long-standing effective Canada-US Bilateral Tax Information Exchange Agreement or the European Union Savings Tax Directive.

A true International information exchange would, of course, mean U.S. financial institutions reporting on interest income of non-resident aliens who invest in the United States. This promised “reciprocity” is resisted by U.S. banks. There are already lawsuits by two American banking associations. Some members of Congress predict reciprocity will cause flight of investment and capital from the United States. 

As it stands now, foreign governments perceive FATCA as one more unilateral U.S. demand with which they may have to comply because they fear sanctions if they don’t. 

FATCA is not a new global standard. 

Reality Check:

In the Social Construction of Reality, Peter Berger wrote: “He who has the bigger stick has the better chance of imposing his definitions of reality.”

In this case, even having the bigger stick does not make U.S. Treasury’s preposterous myths true.

Failure to face that reality will not fix FATCA.



Lynne Swanson is a retired human resources manager, writer and blogger. Born and raised in United States, she has been a Canadian citizen for 40 years.

Victoria Ferauge is an information technology professional. An American citizen originally from Seattle, she lived in Japan and has lived in France with her French husband and family for nearly 20 years.


Tags: FATCA | United States | tax | law | Tax | Compliance | offshore | Europe | interest | Canada | business | banking | Other | regulation | Norway | Romania | Spain | Thailand | United Kingdom | Bangladesh | HM Revenue and Customs (HMRC)



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