Investing for Survival--the Foreign Account Tax Compliance Act

            The Foreign Account Tax Compliance Act by Robert Bauman

For the ancient peoples of Europe and Asia, conquest by the Roman Empire meant centralized control, the suppression of local laws, and the imposition of a unified system of rules.

Today I ask: Has the United States Internal Revenue Service (IRS) adopted the imperial Romans as their model and as the inspiration for the Foreign Account Tax Compliance Act (FATCA)?

FATCA is a U.S. law that aims to order all offshore banks and other foreign financial institutions to report information directly to the IRS about financial accounts held by U.S. taxpayers or by trusts, corporations, or other foreign entities that have substantial U.S. ownership interests.

Foreign banks that don’t comply with FATCA reporting rules could have a 30% tax imposed on all their U.S.-based transactions and those of their U.S. clients. The Financial Times reports that offshore banks are furious at being deputized as IRS agents. But if they refuse to comply, the banks face a choice of paying that punitive 30% withholding tax or withdrawing completely from U.S. markets.

This unprecedented U.S. law, adopted in 2010 with little public notice, assumes that the jurisdiction of the U.S. government now extends to every bank and financial institution in the entire world. It also assumes that U.S. tax and reporting laws supersede the laws of every other nation, whether those countries like it or not.
Its opponents bill FATCA as an effort by a tax-hungry administration to combat tax evasion by U.S. persons holding cash or investments in offshore financial accounts.

Unlike many other countries, the U.S. government does not have a territorial tax system that ends at its borders. U.S. citizens are taxed on all their worldwide income without regard to where the individual lives or where the income originates.

For many years before the enactment of FATCA, U.S. taxpayers with financial assets outside the United States have been required by law to report those assets to the IRS and to pay any taxes due—and most do so.

But as politicians (from both parties) have gone looking for more revenue in recent years, they’ve turned their attention offshore. They assume that every American engaged in offshore banking or investing probably is engaged in tax evasion.

What FATCA means for you and me is that foreign financial institutions—including banks, investment brokerages, and insurance companies—are going to be awash in new reporting regulations. That’s if they agree to keep welcoming U.S. clients once FATCA comes into force. And that is a very big “if.”
In the face of protests from thousands of offshore banks – as well as protests from governments in Canada, Panama, Switzerland, the Bahamas, and other countries – in July the IRS announced that the original January 1, 2013, effective date for FATCA has been dropped.

Under the new IRS schedule, offshore private banks will not have to provide details on U.S. clients with accounts with more than $50,000 until mid-2014. Lower-value accounts at private banks won’t need to be reported until 2015. (Offshore private banks face the most onerous FATCA requirements.)

Adhering to these complex IRS reporting regulations will cost offshore financial institutions hundreds of millions of dollars for greatly expanded compliance staffs, software programs, and investigations of their U.S. clients.

FACTA presents a special problem for millions of Americans who live and work offshore. These expats are confronted with an obligation to file all sorts of new reports that carry penalties and possible criminal indictments for non-compliance. Many have had established bank accounts closed and have been refused new ones, as offshore banks opt to stay out of this FATCA mess.

If you ran a business, would you cater to clients that cost you more to serve and who bring with them more risks? Or would you say, “Thanks, but no thanks,” and focus your business elsewhere? That is the decision thousands of foreign institutions are about to make—or already have made.

What the tax-hungry U.S. politicians have ignored is that, if FATCA ever comes into force, it will cripple foreign investment in the U.S. at a time when the faltering economy needs all the foreign cash it can get.
There is some hope that after the 2012 U.S. elections, Congress will come to its senses and repeal FATCA. But few are betting that the IRS, unless forced to, will abandon its Imperial Roman attitude—even as the American Empire it serves declines.