The Foreign Account Tax Compliance Act (#FATCA) is a law requiring all foreign financial institutions (FFI) to provide the United States’ Internal Revenue Service (IRS) with financial account details of any American Persons who has accounts with it. If a FFI does not comply, then it is subject to a 30% withholding tax on all its American transactions.
There are arguments for and against #FATCA, and even though I am fully against it, I will try to present both arguments.
- The United States has suffered from tax evasion where its citizens and residents park their nest eggs abroad tax free. FATCA forces other countries to report these monies to the IRS. Estimates of taxes that will be recovered vary from $250 million a year to $792 million per year. The actual amounts received in taxes to date is only about $400 million.
- Since implementation in 2010, the Treasury Department has received about $8 billion from FBAR penalties — fines for not reporting overseas accounts; which are not tax revenues but reporting violations.
- More American Persons living abroad have become tax compliant. I cannot find figures on this, but I know it is true because it is true for me and many I know (online).
- There is no cost to American taxpayers. *At least this is argued. There is an indirect cost via increased compliance costs of US banks and the associated lost tax revenue.
- FATCA adds a layer of transparency — money cannot be squirrelled away anonymously.
Summary: the positives are compelling. FATCA is bringing home lost tax dollars, is preventing at least some tax evasion, and this is the argument commonly made.
- FATCA infringes on the right to be free of unwarranted searches as described in the 4th Amendment of the U.S. Constitution:
- It imposes costs on foreign financial institutions whose only ties are American customers. #CBT
- It imposes burdens on non-American persons. #FATCA & #CBT
- It infringes on the sovereignty of foreign nations (by applying American tax law on foreign soil). #FATCA & #CBT
- It helps capital from foreign economies into the American economy. #FATCA & #CBT
- Americans are being denied basic banking services.
- American small businesses abroad are less competitive through higher taxes and compliance costs. #CBT
- Threatens $2.2 trillion in American exports.
- Increases the impetus for the world to move away from the U.S. dollar as the global reserve currency.
- American livelihoods are impacted and threatened. #CBT
- In some cases violates attorney client privilege (when an attorney living abroad has foreign clients whom he or she has authority over their financial accounts).
- Exposes personal financial information to hacking.
- American citizens are renouncing their citizenship in record numbers.
- Americans living abroad are becoming disenfranchised and may be acting as a negative force on the global opinion of the USA.
- It exacerbates the world’s existing image of America as a bully.
- The US refuses to comply with its promise of reciprocity.
- There is no tax revenue gain.
Most of these negatives are real. Others such as loss of trade are as yet undocumented. I take the individual citizen living abroad as the canary in the coal mine. Americans have lost all financial accounts and have even had mortgages cancelled, small businesses have suffered through loss of financing, and some individuals have lost jobs (existing and potential) due to their signing authority on foreign commercial accounts. And over 4,000 of us are now renouncing annually with no signs of letup.
Some of these negatives are inextricably linked with citizen-based taxation (CBT). CBT was not as much an issue before FATCA as most Americans ignored their American income tax obligations. Actually most did not know they had tax obligations, and many today still don’t know they do. Others simply refuse to comply, and while I don’t know the compliance rates, all discussion I’ve seen says they are still far below 50%.
Most of us who live abroad think CBT should be abolished and replaced with residence-based taxation. This is how the majority of the world taxes its citizens: you are taxed if you live in a country, but if you move away, you are not. Why the US continues with this practice boggles our minds. It is virtually the same practice King George imposed on American colonists which is commonly known as taxation without representation. We get zero American services, so why should we be taxed?
One way to look at these issues is to reverse the roles. Suppose all other countries taxed their citizens in the US. Some 40 million foreign nationals would then have to file taxes abroad, and because of all the flimsy tax treaties the US has, the estimated $400 per head would leave the US ($16 billion annually versus the $3.6 billion the US extracts from foreign lands.) Plus, every American bank would have to supply financial information on every foreign person they had as a customer; which would mean verifying each customer’s nationality. The American financial services industry would not go for it; the American people would not go for it; and the American government would not go for it (as evidenced by the existing refusal to comply with its own law).
This is a bi-partisan issue. CBT was first created by President Lincoln, a Republican, and these laws have been supported and added to by both parties. Many of the Republicans are now understanding the complete immorality of CBT and FATCA, but most Democrats are clinging to their need to control.
There are better ways to catch tax cheaters. Recruit some business schools. Consult countries like Canada who have logical processes to protect taxes. tax money as it leaves, not the people. But Americans don’t want to do things the best way; they have to do things their way; because American way is always the best.