What is FATCA, anyway?
Foreign Account Tax Compliance Act (FATCA) is a US law that attempts to force foreign financial institutions to report balances, receipts, and withdrawals in accounts that belong to Americans. If a bank or financial institution does not file such reports, the IRS will charge a 30% withholding tax on income from those investments.
The United States is the only country in the world which taxes based on citizenship rather than residency, on worldwide income of individuals, in the same manner as residents.
Center for Freedom & Prosperity
President Andrew Quinlan
to fiscal imperialism
I wrote recently about the need to draw a line in the sand on FATCA. Long story short, if current efforts to form an international tax cartel are not halted immediately, we can look forward to a future with a bleak economic outlook due to depressed worldwide investment, non-existent financial privacy for individuals and thus greater human rights violations across the globe, higher taxes and bigger government.
For those who haven’t tracked the issue closely – and given the abysmally inadequate media coverage to date that is most people – the Foreign Account Tax Compliance Act (FATCA) seeks to strong arm every financial institution in the world into doing the job of the IRS. FATCA is said to be about stopping tax evasion, but while its backers argue that there is $100 billion lost (a dubious claim) to tax evasion each year, government bean counters score FATCA as bringing in less than $1 billion annually. The price for 1% effectiveness, by their own numbers, is hundreds of billions in worldwide compliance costs, reduced foreign investment in the US and the loss of jobs.
FATCA Had No Committee Review And No Deliberation
FATCA was passed as an afterthought to pay for the HIRE Act in 2010. Given the lack of deliberation – there were no hearings or debate over the issue – it’s no surprise that FATCA was written so poorly as to be nearly unenforceable. Establishing agreements between the Treasury Department and each individual financial institution was not going to work. The logistics were a nightmare even without the additional obstacles posed by local privacy laws that conflicted with FATCA’s dictates. To get around these problems, the bureaucrats got creative and devised a scheme to trick foreign governments into relinquishing their sovereignty: intergovernmental agreements (IGAs).
The IGAs relieve Treasury of the responsibility to deal with institutions individually, farming that out to foreign governments instead. In return, foreign governments are promised reciprocation from the US. But it’s all a sham.
Foreign Governments Are Being Conned
The foreign governments think they are signing treaties, which Treasury happily lets them believe. Moreover, they don’t understand the US political system well enough to understand that Treasury cannot make law – only enforce it. Unlike a parliamentary system, the US government is based on a system of checks and balances that separates power between different branches, the FATCA law does not grant any authority to sign such agreements and promise reciprocation.
Treasury Acting Without Authority
Continuing their pattern of acting first and asking for authority later, if at all, the administration is reportedly prepared to ask Congress for authority to compel US banks to provide reciprocal reporting for IGA partners. Forcing US banks to comply with FATCA-like reporting requirements, a prospect not authorized in FATCA itself, significantly raises the domestic costs of a law already unable to be justified on cost-benefit grounds. But offering up domestic institutions on a silver platter serves the administration’s purpose, which is to trick as many countries into enforcing FATCA as possible so that Treasury doesn’t have to.
Congress, having changed hands since 2010, is likely to tell the administration to go pound sand. They certainly ought to. The question is whether this will wake up foreign governments to the fact that they are being hoodwinked. The US will not burden itself the way FATCA burdens the rest of the world, no matter what the tax bureaucrats are promising. Moreover, Treasury has set up the IGA’s to allow itself the power to alter the deals at any time going forward, as exposed by James Jatras, anti-FATCA lobbyist and manager of repealfatca.com.
US Institutions Now In The Crosshairs… This is Just the Beginning
Foreign governments aren’t the only ones being fooled. Domestic US financial institutions have largely been asleep, either thinking that FATCA is a foreign problem, or believing that they can simply fight for regulatory victories on the margins – a carve-out here, a protection there – and avoid the unpleasant business of standing up to those with regulatory power over their industry. They are in for a rude awakening, however, when they learn that FATCA isn’t really about tax evasion at all, but about expanding the scope and power of government. As soon as FATCA is fully in force, the next expansion will begin. After all, they will still be claiming there is $99 billion each year in supposed tax evasion losses to capture! It will never end.