RegionsNorth AmericaThe Case Against FATCA

The Case Against FATCA

Since it was first mooted, the author has been a leading critic of the Foreign Account Tax Compliance Act (FATCA) legislation that Washington is preparing to bring into effect on 1 July 2014.

Announced by President Obama in 2009, and passed by Congress in 2010, FATCA was purportedly designed with the ‘simple premise’ of combating offshore tax evasion.

Such a proposal sounds a noble and worthwhile mission, so why am I opposing FATCA? Because it will do little, if anything at all, to address the valid and serious concerns surrounding tax evasion and it will present – indeed already is presenting – a host of damaging, unintended and far-reaching consequences.

Among these is that FATCA will reduce foreign investment in the US, at a time when its economy is beginning to show signs of a sustainable potential recovery, due to the threat of the US Internal Revenue Service (IRS) withholding 30% of investors’ funds. It is my strongly held belief that investors, who of course have the extensive resources to do so, will simply take their investments elsewhere.

A reduction in investment from overseas will, naturally, have a negative impact on American jobs, which could hamper US economic growth and therefore the global recovery.

In short, the potential revenues that FATCA could generate for the US Treasury will be outweighed by huge foreign investment losses.

In addition, there are other major issues. For instance, this toxic tax act will turn – and there is much evidence to suggest that it already is turning – US persons who live outside America into financial pariahs, as foreign (non-US) financial institutions (FIs) are turning their backs on them as clients, due to the complexities of complying with FATCA’s regulations. Other reasons for my opposition include that FATCA will potentially violate some local foreign (non- US) laws, it disregards foreign nations’ sovereignty, and because it could potentially damage vital international and trade relations.

Compliance costs

Another of the main arguments levied against this highly controversial piece of legislation, is regarding the unnecessary, highly
complex and extremely costly burden which is being thrust upon organisations across the world in order to become ‘FATCA compliant.’

It is estimated that the law’s implementation will cost organisations a staggering US$1-2 trillion to raise US$8bn in so-called ‘lost revenues’ over a whole decade.  Spending so much for such a comparatively meagre return just doesn’t appear that efficient. Indeed, it’s outrageous that so many organisations have to outlay so much time and so much expense in order to become defacto IRS enforcers.

It’s been extensively reported that every foreign financial institution (FFI) in the world will be required to report all their
American clients’ financial activities directly to the IRS. Failure to do so by any FFI will mean that they will face heavy penalties (a withholding tax of 30%) and, in effect, exclusion from the US financial system.

However, global firms outside the financial services sector should not assume that they will not be affected by FATCA. Due to its enormous scope, all multinational enterprises are now having to, or will have to, analyse whether they have any parts of their business operations worldwide that would fall foul of the onerous and burdensome FATCA regulations.

In essence, this means, among other things, identifying and understanding the different entities, and their individual operations and systems, within your business structure.

More specifically, corporate treasurers will need to address the types of payments that their firm’s different entities make or receive to or by US persons or organisations – because new or different reporting obligations might be required. They will need to study the new IRS registration methods, their retirement funds, treasury centres and holding companies, to select just a
handful of areas which are likely to need attention.

Another major hurdle for firms, which has gone largely unreported thus far, is regarding data security. As Denis Kleinfeld, a high-profile international tax lawyer recently pointed out: “The idea that a government-run computer system containing private financial information can be secured from information theft is ludicrous.

“Among high value financial targets which have been hacked is the Federal Reserve. Details as to bankers’ login information, credentials, internet protocol addresses, and contact information on more than 4,000 banks were stolen.”

With this in mind, I would suggest that weighing up the significant cyber-security issues, which could result in high level and costly litigation, should be a major influencing factor for corporate treasurers and chief financial officers (CFOs), among others, when analysing costs, benefits and risks of becoming FATCA-ready.

With all that I’ve highlighted here, and much more besides, it’s clear to see that becoming FATCA compliant is proving to be a lengthy, labour-intensive and costly process for organisations worldwide. Moreover, those firms offering ‘FATCA compliance solutions’ are clearly finding this all extremely lucrative.

Looking ahead

There is an intense international campaign underway, led by James Jatras, a former US diplomat-turned-foreign policy lawyer and lobbyist, to have the FATCA repealed – for campaign details: While I fully and publicly support this campaign I acknowledge that, come mid-2014, there is a very real possibility that FATCA, or perhaps a ‘diluted’ version of it, may come into effect.

However, the major stumbling block for the US government is that, to date, many countries have yet to agree to the intergovernmental agreement (IGA) that would demand their FIs become compliant. This is a serious problem for those trying to implement it, as clearly FATCA’s strength is ultimately reliant upon every country in the world adhering to it.

While I’m unaware of any nation that has outrightly rejected an IGA with America on this issue, there does appear to be a distinct lack of urgency to sign up – which must be the cause of much annoyance, frustration and negotiation at the US Treasury.

One obvious example is China. The People’s Republic, it would seem, is refusing to play ball on the matter, probably because FATCA contravenes several existing Chinese laws, there is a risible lack of reciprocity in the IGA and so China would barely benefit from its implementation. It could also be because Beijing feels this US law is an extraterritorial overreach.

Interestingly, but perhaps not unsurprisingly due to China’s political influence and economic might, no other Asian country has yet finalised a FATCA arrangement.

Additionally, Canada, which is viewed as ‘The Big Must Have’ by the US authorities, due to the number of citizens of American origin (an estimated one million) living there and the amount of cross border transactions between the two nations, is still
mulling over the concept. This is despite the US Treasury publicly asserting that it hoped to have the deal signed by the end of 2012. For the time being at least, Ottawa is not caving into demands.

On the flip side there is the UK. Britain has, as it so often does, acted as America’s poodle by finalising FATCA regulations and therefore enforcing a non-British law on British citizens and organisations at the cost of, according to Her Majesty’s Revenue and Customs (HMRC), hundreds of millions of pounds.  These costs that will be passed on to the consumer, one suspects.

Other countries that appear to be falling into line with the US’s FATCA programme include Denmark, Mexico, Norway, Ireland, Spain and, interestingly, traditional ‘havens’, such as Switzerland, the Bahamas, and the Cayman Islands. However, all these countries, and the others which are on their way to becoming ‘FATCA compliant’, also need to implement the agreements within their own domestic laws too. That might prove to be difficult and time-consuming, meaning that they could potentially miss the 1 July deadline that Washington is aiming for.

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