The Foreign Account Tax Compliance Act, or FATCA, dubbed by its opponents as ‘the worst law most Americans have never heard of’, has again been hitting international headlines, after America’s Internal Revenue Service (IRS) recently announced that it is giving all non-US financial institutions a further six months to become FATCA compliant.
Here, iExpats catches up with lawyer James Jatras, a former US Diplomat and Senate staffer, who set up a high profile campaign to have the contentious legislation repealed.
The background: The deadline for all foreign financial institutions (FFIs) has been pushed back to 1st July 2014 from 1st January 2014.
Should it be implemented, FATCA would require every FFI – including all banks, building societies, investment companies and so on – in the world to contract directly with the IRS to supply detailed information on the accounts of US persons. Any FFI failure to comply, would be hit with a 30 per cent withholding penalty.
Since it was first announced, the US Treasury has been trying to convince the world’s governments to sign an intergovernmental agreement (IGA), which would mean all the financial institutions in the country that has agreed, would then be obliged to report directly to the IRS.
The US claims FATCA’s main objective is to catch tax evaders.
James, firstly, could you outline again why you launched the ‘Repeal FATCA’ campaign? And, specifically why this tax act could, or perhaps already is, negatively impacting American expatriates around the world.
I started RepealFATCA.com as, essentially, a placeholder for a substantive FATCA-repeal campaign, for which there remains a crying need. The fact is, FATCA is an ill thought-out law that is just begging to be undermined and set up for repeal.
When I first learned of it in September 2011 – which sounds late, but keep in mind that it still remains virtually unknown in the US – as a citizen it struck me as simply bizarre and unjust that such a harmful piece of legislation could be foisted on the rest of the world, not to mention the United States, without someone blowing the whistle on it. So, I wanted to provide a rallying point for all those who stand to be injured by FATCA – which one way or the other is pretty much everybody. Also, as a lobbyist, I saw a professional opportunity to perform a needed service.
As for the impact on expats, the degree of ignorance among institutions as to how FATCA actually would work is astounding. The anecdotal evidence is overwhelming that Americans’ accounts are being closed and new business from Americans is being turned away, on the completely mistaken belief that this will somehow insulate institutions from FATCA.
Such [mis]information is even being given officially in some cases, for example by Bangko Sentral ng Pilipinas (BSP, Central Bank of the Philippines) Deputy Governor Nestor A. Espenilla Jr: “It’s not a matter of commitment. If you are a Philippine bank and have US nationals, you have a reporting obligation. The intent of the US government is to run after US tax evaders who are living outside the country. Any bank has an option. If you don’t want the hassle, don’t do business with US nationals.”
I don’t mean to pick on Mr. Espenilla, who I am sure simply has been a victim of poor professional advice, but each one of these assertions is inaccurate: FATCA, as enacted, is a “matter of commitment” for each and every non-American financial institution on the planet (where the US gets that quasi-divine authority is another matter); its intent is not to run after expat tax evaders, since it targets neither where the American account-holder lives nor activities indicative of evasion; and whether or not a bank does business with US nationals, it will get the hassle in any case, with the burden of proving to the IRS’s satisfaction it has due diligence in place to identify “US Persons” – simply asserting they have no American clients will not protect a bank one iota from FATCA’s crushing costs.
So, Americans abroad end up being victimised by this kind of misunderstanding.
And on a broader note – besides the reasons already mentioned about the problems it is causing for US expats and businesses which operate globally – why should FATCA be repealed?
Even FATCA’s top supporters concede that the “statute as written was wholly unachievable.” In its request for new statutory authority to impose FATCA-like rules domestically, even the Administration has made the stunning admission that “in many cases, foreign law would prevent foreign financial institutions from complying with FATCA,” hence the unavoidable need for “intergovernmental agreements” (IGAs) with foreign governments to abrogate local human rights, data privacy, and other protections.
To do that, in many cases they need to offer reciprocity. However, it has become clear that the Treasury doesn’t have the legal authority to promise the world’s governments such reciprocity. And this, I believe, is what governments are beginning to realise, hence the delay in signing the IGAs. This crucial factor is, I suspect, what could, ultimately, be FATCA’s downfall.
Why do you think this decision to extend the deadline was taken? How significant is it? And what are the wider implications for the FATCA concept of this move?
It is significant, but not for the reasons Treasury is giving [which is that the delay is due to ‘0verwhelming interest’]. Far from indicating the world is beating a path to their door, it illustrates the exact opposite.
Firstly, many FFIs planning to comply without an IGA signed by their governments understandably find the 544 pages of regulations nearly incomprehensible. And that’s assuming local privacy and data protection laws would allow them to comply, which as noted, often is not the case.
Secondly, the IGAs to “solve” these problems won’t, because it would require national tax authorities in each country to replicate the same dense FATCA requirements in domestic law.
Besides, the IGA process appears to have bogged down. Treasury has expected to sign 17 IGAs by the end of 2012. Instead, they had four. Here we are more than halfway through 2013, and they only have nine – barely half of their 2012 year-end target. The implication for FFIs is that they should stop thinking of FATCA as their problem and start seeing that Treasury is the one with the problem.
Are you surprised by the decision?
This is not surprising. Treasury’s timetable for getting IGAs signed is far behind schedule. Treasury’s explanation for the delay – “the groundswell of international interest in FATCA” – is absurd on its face. If there was such a “groundswell,” why would they need another six months to try to push everybody into IGAs? This is just a poor excuse for the fact that there isn’t a groundswell, that on the IGA front they’re behind where they expected to be at the end of 2012. “Every additional country we bring on board” – or fail to have brought on board yet – means they have to contemplate trying to enforce FATCA directly, of which Treasury is even more terrified of than the FFIs are.
You say that FATCA’s deadline has been rolled back because too few countries have signed the IGA. Yet the UK, for one, seems to be forging ahead with this…
I’m not an expert on British parliamentary procedure. However, it seems that since the Public Committee in the Commons approved the relevant provision of Finance Bill 2 (originally Clause 219, now Clause 222), the Lords have rubber-stamped it. It’s now unclear what its status is.
I am informed that the bill containing the poisonous Clause 222 now has been “laid” before the house. Whether this means the Commons still has the option to withhold final approval before the UK undertakes what can only be seen as an ill-advised, one-side commitment is uncertain. But if and when Clause 222 is enacted into British law, it would give HMRC what amounts to unlimited authority to issue regulations to compel FATCA compliance by British institutions.
But those regulations – which certainly will run to hundreds of pages telling UK institutions what they must do, and when they must do it – are not going to write themselves. HMRC bureaucrats will have to write them, which will take months. At some point someone at HMRC, or the Finance Ministry, or the Cabinet will have to decide when the various requirements will go into effect. Meanwhile, the entire premise of UK compliance – that of US reciprocity – will become more and more untenable. Perhaps then HMRC will find itself in the same situation Treasury has been in with its repeated delay of US FATCA regulations — afraid to pull the trigger.
In fact, the absurdity of the situation could be worse for HMRC, since while Treasury is balking at moving forward with regulations on foreign firms theoretically to “recover” US taxes owed, HMRC would be hammering domestic UK firms to the tune of billions of pounds — with absolutely nothing to show for it.
At the very least, Parliament should hold off on final action (or if they don’t, HMRC should refrain from issuing regulations) until it’s clear whether the ‘Yanks’ will reciprocate – which they won’t. It seems Parliament and HMRC are aware of Treasury’s delay announcement but not of Congress’s refusal to allow US reciprocity. They need to start paying attention to the fact the US does not have a parliamentary system.
Which countries are expected to imminently sign?
It’s hard to tell. An IGA with Canada was ‘imminent’ – eight months ago. It’s likely a few more countries will sign in the next few months, but it’s hard to predict which ones. Most recent signals from places as diverse as Switzerland and Hong Kong point in the opposite direction, that the IGA process is getting more difficult for Treasury, not easier.
Another fact that is not well known is that these IGAs are not treaties nor authorized by FATCA: they have the force of law for non-US, not for the US. This is part of the ‘scam’ that Treasury is trying to pull, and foreign governments don’t appear to have caught on to. Foreign governments (for example, the UK as I mentioned earlier) would solemnly, in good faith, lock their FATCA compliance into stone in the form of domestic law and regulation. The US, on the other hand, would not, and the IGA itself is only as good as the signature on it, since it would not be brought to the Senate for advice and consent (as a treaty) or to the full Congress. In fact, I have first-hand knowledge of at least one government that specifically indicated to Treasury they would consider an IGA only if it took the form of a treaty protocol, with Senate approval, so they could be sure it would bind the US as well. Treasury flatly refused: an IGA they know to have no binding US legal status is all they would offer. What does that tell you?
Who, apart from the Treasury officials of course, is really pushing the FATCA agenda?
Mainly from two sources. First, foreign governments that are afraid to defy the US or have deluded themselves into thinking that FATCA compliance, if it were mutual (which it won’t be), would lead to a bonanza of tax revenues, also a pipe dream. Second, the people who would be the only real beneficiaries of FATCA: the so-called “FATCA Compliance Complex” (FCC) of tax lawyers, accountants, and software and technology firms, who hope to make a fortune selling compliance to FFIs.
Has the US Treasury made any concessions at all to FATCA, or do you still feel it to be as “odious” as it ever was, in your opinion?
There’s no way anyone can put enough lipstick on this pig to make it kissable. The only way to deal with FATCA is to repeal it. To do that, first we need to bog down its implementation, starting with undermining reciprocity – a task that is largely accomplished.
Still, Treasury is slowly and painfully plodding ahead with the IGA process, and concealing from their foreign partners that their promises of reciprocity are false.
Meanwhile, the anti-FATCA campaign is hampered by the disparity of resources from sufficiently exposing Treasury’s misrepresentations and from adequately informing the American public. If firms that stand to lose millions each complying with FATCA devoted just one percent of what they’d spend on compliance into repealing FATCA, they could save the other 99 per cent!
With adequate resources, I have no doubt we could first render FATCA unenforceable and then set it up for repeal, probably as part of a tax reform package in 2014 or 2015. But right now it could tip either way.
|click here to connect with an independent financial advisor for expert, whole of the market advice today.|