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FATCA: The all stick and no carrot approach to US taxation reporting

Almost everyone would agree that paying tax is not an enjoyable exercise. Companies and individuals alike tend to go to great efforts to minimise their tax liability without crossing the line into tax evasion.

Paying tax is an important part of society as it is our contribution to keeping a country and all of its services up and running. Without it, no-one would pick up the garbage, no-one would police the streets and no-one would keep the lights on at night.

But where do we draw the line? Many individuals and businesses conduct business, own assets or work in more than one country during any given year during our lives. Should we be paying tax to one country if the work or profit comes from our efforts in another country? When this happens it is known as “double taxation”. There are arguments for and against and ultimately we must abide by the law. Everyone in this scenario tends to stop at one time or another and ask themselves; “should I pay tax twice on my money?”

FATCA

The Foreign Account Tax Compliance Act (FATCA), which looks amazingly similar to “FAT-CAT”, is a US government introduced measure to report details of US citizens globally, irrespective of their residential status or location. It also has serious implications for other countries and the privacy of individuals.

Under FATCA, US taxpayers holding financial assets outside the US must report those assets to the IRS. This includes US expatriates living abroad who no longer have any ties to the US.

FATCA also requires foreign banks and governments to report information directly to the IRS about all accounts held by US citizens or by foreign entities in which US taxpayers hold an interest. The US Senate passed the FATCA bill in 2010 and although the legislation is highly controversial, it is also one of the most silent and unknown pieces of law that most Americans know nothing about.

The effect on US citizens living abroad

For those citizens living in the US with no foreign interests or assets, FATCA means very little. To those that do, there are several unfortunate impacts that have left American expats feeling discriminated against and bogged down in red tape. For a start, nearly every foreign bank has a question listed on their new bank account sign up forms asking “Are you an American citizen? Yes/No?” On the most basic level, this sends a message that as an American you are treated differently. In fact there have been known cases of Americans being refused an account on the basis of their red, white and blue nationality as the bank feels that complying with FATCA is not worth it unless significant funds are being deposited into the account. This ultimately means discrimination on the basis of nationality.

American expats that have not lived in or had anything to do with the US for years, are now being asked to report and pay tax to a government that does nothing for them. Fundamentally this is a case of taxation without representation. It doesn’t take a historian in American history to work out that this is in direct contrast to American culture and freedoms.

The fallout of this, is that record numbers of American citizens have renounced their citizenships since 2010 with the number climbing higher and higher each year, with the exception of only one year. The American government’s response was to increase the fee for US citizenship renunciation from several hundred dollars to $2,350 and of course list them publicly on the renunciation name and shame register. The trend of exponentially increasing renunciations of American citizenships has clearly not been hampered by these measures. 

All stick and no carrot approach

One of the real shames of this legislation is the initial promise of the American government to reciprocate information through the program to other countries above and beyond the normal inter-governmental agreements (IGAs) in place. This however, has not transpired as promised. The incentive given to other countries during the negotiation and implementation of FATCA was that any uncompliant country would have any and all US outbound transfers and transactions taxed or levied until compliance was met and that foreign aid payments may be reduced or halted pending compliance. So for countries, particularly those with bigger issues to deal with, a huge expense was required to become compliant and submit to FATCA. The carrot promised was never delivered and the fear of the stick motivated forced change.

So which countries are compliant and which ones aren't?

Almost every country has submitted to FATCA. This includes all of the traditionally “private” banking countries such as Switzerland, the Isle of Mann and the Cayman Islands. Under FATCA, banking in these countries is as open and transparent as banking with Wells Fargo or Bank of America on US soil. Effectively, those US citizens banking in these countries may be liable for any tax associated in that country, as well as a tax component from the IRS.

Only a few countries remain non-compliant or not moving towards compliance at the time of writing this article. This list is compiled by matching the list of countries on the IRS FATCA page that are compliant or compliant in principle against a full list of all recognised countries under the United Nations register. Investing or banking with them is not advised as they carry a much higher risk profile than most countries. They include:

·         Cabo Verde

·         Cuba

·         Eritrea

·         Iran

·         Kosovo

·         Laos

·         Nauru

·         North Korea

·         Palestine

·         Syria

·         Tuvalu

·         Vatican See

These countries fall into one of two categories. Either they are so under resourced or so small in scale that they simply cannot employ the measures to comply with FATCA. Alternatively, they are so insular from global society that FATCA is of little concern to them, as is the case with North Korea.

The FATCA repeal movement

Following its enactment, FATCA seemed to be on a roll. Dozens of countries signed IGAs, spurred by their financial industries terrified of threatened sanctions on “recalcitrant” institutions. Massive compliance practices sprang up, raking in billions of dollars. Court challenges in the US and other countries went nowhere. FATCA, it seemed, was here to stay.

Prospects of getting rid of FATCA brightened in 2017. The 2016 election ushered in a Republican President and a GOP congressional majority, with a platform plank calling for FATCA’s repeal. A DC-based Campaign to Repeal FATCA (www.repealfatca.com) was launched with support from deVere Group CEO Nigel Green. The campaign secured the support of powerful tax reform groups, like Americans for Tax Reform (headed by the influential Grover Norquist), National Taxpayers Union, and others. Senator Rand Paul (R-Kentucky) and Congressman Mark Meadows (R-North Carolina, chairman of the conservative House Freedom Caucus) introduced repeal bills.

A hearing chaired by Mr Meadows excoriated FATCA’s privacy violations. Mr Paul and Mr Meadows, as well as Congressman Bill Posey (R-Florida), a member of the Financial Services Committee and long-time FATCA critic, have written to Treasury Secretary Steven Mnuchin asking for cancellation of the IGAs, which would itself gut FATCA and set it up for repeal.

Dan Hadley is a British /Australian economist for JLB and business management consultant based in Adelaide, South Australia.

FATCA: The all stick and no carrot approach to US taxation reporting
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