The U.S.’s newest export is its onerous tax law. Armed with FATCA—the Foreign Account Tax Compliance Act—the IRS now has the power to access Americans’ foreign bank accounts in its crusade to reel in tax evaders.
FATCA was an amendment to the 2010 HIRE Act, quietly tacked on as a sure harbinger of government “revenues,” and became law July 1 of this year. This global tax law requires all Foreign Financial Institutions (FFIs) to report on all American accounts in excess of $50,000 or face a freeze out from access to U.S. financial markets, a disastrous consequence for financial institutions. If the FFIs do not turn over all American account information—account numbers, balances, names, addresses, and U.S. identification numbers—to the IRS, further punishment comes in the form of a 30% withholding tax on all U.S.-originated income. (For further analysis of the finer tunings of this byzantine scheme consult white papers on the topic provided by the Tax Executive Institute.)
So far, over 80 countries and over 77,000 financial institutions have signed on to abide by FATCA, including notable tax havens like Switzerland and the Cayman Islands. Even Vladimir Putin signed a law recognizing FATCA and mandating making Russia’s financial system become IRS-compliant, though Putin waited until only one day before the deadline.
FATCA is the latest, and seemingly most powerful, weapon in the IRS’s arsenal to enforce its system of taxing worldwide income. Along with the African country of Eritrea, which has a GDP per capita of $776, the U.S. is the only other country in the world to tax its citizens based on income they earn anywhere in the world.
Momentum for a law like FATCA can be traced back to an unprecedented 2009 deal struck between the U.S. government and Swiss bank UBS. The Swiss bank avoided criminal prosecution by agreeing to hand over account names suspected of belonging to U.S. tax evaders and by agreeing to pay the Department of Justice $780 million in fines. In May of this year, Credit Suisse paid $2.6 billion for similar charges. These number combined makes up about 1% of the estimated annual amount of money the US government misses out on due to tax evasion.
Expectedly. FATCA has financial institutions on edge. A Forbes article from 2011 claimed that compliance costs alone—not including penalties and fees—could amount to $100 million per institution regardless of any wrongdoing. A single overlooked, undeclared American account can trigger the 30% withholding tax on all of the FFI’s U.S. income. The fallout on the finance industry and the economy at large is incalculable, but almost certainly negative.
FATCA will pay for itself if it manages to bring in at least $800 million a year in tax receipts. However, the law was passed without a cost-benefit analysis or regulatory impact study, so it is unknown just what ramifications the law could have on US and foreign financial institutions.
Furthermore, even though it imparts massive power upon the IRS, the law is vague in regards to exactly whom it concerns. FATCA stipulates FFIs must turn over information on clients who are “US Persons,” a definition which includes green-card holders and non-citizens with financial ties to the U.S. In fact, the Economist quoted a tax professor from McGill University saying even Canadian snowbirds spending enough time in the U.S. could be “caught in the net.” The same article even questions the impact on the IRS itself, claiming that the agency might not have enough staff to deal with the mass influx of information from the FFIs.
Those experiencing the immediate negative impact of FATCA are the 7 million American expats. Foreign banks are declining to accept new accounts from Americans living abroad, lest they face possible future fines, taxes, and regulatory costs. Perhaps most notably, Deutsche Bank is closing its U.S. accounts in countries like Belgium where it does not have enough of a presence to keep up with the increased compliance necessary to maintain these accounts.
FATCA also boosts the U.S.’s legal extraterritoriality to unmatched and unprecedented levels. Georges Ugeux, founder of business consulting firm Galileo Global Advisors and citizen of both the U.S. and Belgium, called the law “bullying and selfish.”
With the flurry of problems and controversy surrounding FATCA, the IRS announced in May that there would be a two-year “transition period” where those institutions making good-faith compliance efforts would be exempt from taxes and other sanctions. This move buys time for companies to prepare for whatever FATCA might entail; according to a survey by Deloitte, 92% of CFOs of North American companies reported being unprepared for FATCA’s implementation.
Still, a growing number of politicians, businesspeople, expats, and privacy advocates are calling for the complete repeal of FATCA.
The Republican National Committee (RNC) is currently seeking to do so, saying the law “has inadvertently ensnared every United States Citizen living overseas due to its overzealous invasion of privacy and punitive taxation and enforcement.” The RNC also cited a Times magazine article that reported on the sevenfold increase in Americans renouncing their citizenships between 2008 and 2011, due in part because of the passage of FATCA. In 2013 2,999 more renounced their U.S. citizenships, and in the first quarter of 2014 more than a 1,000 did so as well, according to the Economist.
Outside of the financial- and economic-themed news sources, the FATCA issue has been relatively underreported. Understandably, the nation is currently focused on the other controversy surrounding the IRS and its alleged targeting of conservative political groups. Furthermore, the intricacies of FATCA are mired in the relatively esoteric realms of international finance and banking.
Nevertheless, FATCA is one of the most important developments of the decade in the realms of international law and finance and privacy concerns. It has augmented the IRS into a truly unprecedented international policing power, and it stands to reshape the world economy in ways that are contrary to free markets, free exchange, and harmonious business and political relationships with foreign countries.
Casey Breznick is a sophomore in the College of Agriculture and Life Sciences. He can be reached at cb628@cornell.edu