Why Republicans Are Right to Support Repeal of FATCA!

by Sparta on January 26, 2014

in FATCA (Foreign Account Tax Compliance Act), James George Jatras (team member), U.S. Senate and Congress

RepealFATCA has the story:

Unintended negative consequences far outweigh any benefits

Repeal FATCA
January 24, 2014 | Source RepealFatca.com | filed in News | Author James George Jatras for RepealFATCA.com

Today the Republican National Committee adopted a resolution proposed by Republicans Overseas, an advocacy group for an estimated 7.6 million Americans who live and reside abroad, to repeal the “Foreign Account Tax Compliance Act” (FATCA).  Enacted by an all Democrat-controlled Congress in 2010 as a budgetary “pay for” in unrelated legislation, FATCA never received the kind of scrutiny it deserved prior to enactment.  There was no cost/benefit analysis, no regulatory impact study, and no floor debate or amendment process in either the House or the Senate.

Predictably, the GOP’s action resulted in a spate of slanted reporting that the party was seeking repeal of an “anti-tax dodging law” or “law targeting offshore tax dodgers,” in turn generating tendentious and shockingly inaccurate commentaries about facilitating tax evasion by wealthy individuals and corporations.  (FATCA only applies to individuals’ accounts and assets, not corporations’.  Wealth or even a minimum suspicion of tax-dodging has no relevance to FATCA’s “haul ‘em all in approach.)

Nobody disagrees that tax laws should be enforced vigorously, and tax evasion – including illegally hiding assets overseas – should be detected and punished.  But FATCA is a bad law that doesn’t achieve that purpose.  In fact, not a single provision of the FATCA statute targets tax evasion activity.  Instead, FATCA relies on a dragnet approach, demanding wholesale the personal financial information of millions of mostly middle-income people who are not even suspected of wrongdoing and who in most cases don’t owe any taxes.

Among FATCA’s dysfunctional features:

  • Costs outweigh benefits: Starting on July 1, financial institutions all over the world would be required to report the account information of any “U.S. Person,” a regulatory mandate that could cost a trillion dollars worldwide in compliance expenses.  By contrast, Congress’s Joint Committee on Taxation estimates FATCA’s revenue gain at less than one billion dollars a year – enough to fund the government for about two hours.  Even the IRS’s internal Taxpayer Advocate Service says that “FATCA-related costs equal or exceed projected FATCA revenue.
  • Killing American jobs:  As the Department of Justice admits, FATCA has no legal authority over foreign institutions outside the U.S.:

“Beginning in 2014, FATCA requires foreign banks to report to the [U.S. Internal Revenue] Service, among other things, the amount of interest that they pay to U.S. citizens and residents. . . . To incentivize foreign banks otherwise outside the United States’ jurisdiction to comply with these reporting requirements, FATCA imposes a 30 percent U.S. withholding tax on many payments made by U.S. institutions to noncompliant foreign banks.”

[Florida Bankers Association and Texas Bankers Association v. United States Department of Treasury, et al., 1:13-cv-00529-JEB, United States District Court for the District of Columbia, Defendants’ Motion for Summary Judgment, November 8, 2013, p. 8; emphasis added.]

Accordingly, FATCA relies on the threat of reprisal: withholding 30% of U.S.-source payments to “recalcitrant” firms.  This threat has caused many institutions to drop American clients, refuse to hire Americans or even do business with them.  In addition, once FATCA goes fully into effect (now scheduled for July 1, 2014), some firms will withdraw funds from the United States, reducing investment in our economy and killing jobs.

  • Violation of personal privacy:  FATCA invades Americans’ privacy by forcing disclosure of personal financial records in violation of most countries’ privacy laws and without probable cause or even suspicion of criminal activity.  Some personal information would be funneled through foreign agencies, providing additional risk of malfeasance.  Personal information given to the IRS would be reportable to intelligence agencies.
  • Self-inflicted partial default:  Foreign purchases of U.S. Treasury securities and the reliability of interest payments are essential to America’s financial stability.  Interest on Treasury securities are among the assets on which payments to “recalcitrant” foreign institutions would be withheld, impacting U.S. creditworthiness.  Even a slight market change in U.S. borrowing costs could have a disastrous impact on the deficit and our economy.
  • Higher taxes: FATCA is a key component of the Organization for Economic Cooperation and Development’s global drive for “equalizing” taxes at higher rates, including in the United States.
  • Costs imposed on U.S. consumers: Even FATCA advocates admit this law can’t successfully be imposed on hundreds of thousands of firms globally. The Treasury Department has been negotiating “intergovernmental agreements” (IGAs) with foreign governments, promising (with questionable legal authority, since IGAs are not authorized or even mentioned in FATCA, nor are being submitted to the Senate for advice and consent) to force U.S. banks, credit unions, insurance companies, pension funds, etc., to report foreign residents’ accounts to foreign governments.   This would mean imposing FATCA’s crushing compliance costs on domestic U.S. firms — and then passing them on to American consumers.  These costs would be deducted, further reducing tax receipts.
  • Relations with trading partners and allies:   Because FATCA applies only to non-U.S. firms, it is a discriminatory practice in violation of trade agreements, inviting WTO and other challenges.  Moreover, the main purpose of IGAs is to abrogate other countries privacy protections that preclude their compliance with FATCA:

“In many cases, foreign law would prevent foreign financial institutions from complying with [FATCA] […] Such legal impediments can be addressed through intergovernmental agreements under which the foreign government agrees to provide the information required by FATCA to the IRS.”

[Analytical Perspectives to the Fiscal Year 2014 Budget, page 202, emphasis added.]

In short, FATCA is a gross violation of international norms and respect for sovereignty.  IGAs do nothing to solve FATCA’s defects and in fact are the enforcement mechanism for imposing U.S. law on other countries, under a veneer of “cooperation.”  Because they are often called “treaties” by our “partners” (starting with the United Kingdom) and enacted into domestic law, they are binding on the “partner.”   However, they don’t bind the U.S. side in any meaningful way, and Treasury can in effect change the terms at will.

In particular, FATCA is deeply resented in Canada, our biggest trade partner and non-domestic energy source, where FATCA threatens to violate the privacy rights of a seventh of the Canadian population.

Defending FATCA by pointing to tax evasion is like trying to justify Prohibition as a tool against alcohol abuse.   Unintended negative consequences far outweigh any benefits. 

Republicans have taken the first step in the United States to give FATCA the critical scrutiny it has not yet received – and which it cannot survive.  (This is all the more reason why foreign governments should not sign IGAs. The Treasury Department claims the GOP resolution will not impede their efforts to implement FATCA worldwide.  We shall see . . . )

It’s time to begin as national discussion in the U.S. on offshore tax evasion and cost-effective ways to combat it while preserving personal privacy.

But FATCA is not the way to do it.

James George Jatras
Editor, RepealFATCA.com


Notice: The foregoing may be posted, republished, or quoted with attribution.

Contact RepealFATCA.com and find out how you can help get rid of “the worst law most Americans have never heard of!   
Email: RepealFATCA@gmail.com or jim@globalstrategicpr.com 
Twitter: @RepealFATCA
Phone:  +1.202.375.1007

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