Buried in an ostensible jobs bill signed by President Obama last year is a little-noticed job-destroying government regulation that threatens to trigger a massive outflow of capital from the American economy.
See also: FATCA means Americans will pay more for things like Toilet Paper
The US economy is in bad shape. Many want the federal government to fix it — to end the deficits, create jobs and get America back onto the track of growth and stability. President Obama came to Washington with great promises: to restore international respect for the United States and to bring back the jobs. When signing the HIRE Act of 2010 on March 18, 2010, President Obama said:
A consensus is forming that, partly because of the necessary — and often unpopular — measures we took over the past year, our economy is now growing again and we may soon be adding jobs instead of losing them. The jobs bill I’m signing today is intended to help accelerate that process.
Now the HIRE Act of 2010 contains a time bomb called FATCA (Foreign Account Tax Compliance Act), which has indeed accelerated a process. Unfortunately that process is not job generation but job destruction caused by an exodus of capital from the United States. Investment means jobs; a departure of investment capital means job losses. Thus, the HIRE Act is really the “FIRE Act”.
The Background of FATCA and FBAR
FATCA (Foreign Account Tax Compliance Act) is the brood of FBAR (Foreign Bank Account Report). FBAR requires that US persons divulge foreign accounts to the Treasury Department, but few knew about or ever complied with it (see When Government turns Predator). To stanch the bleeding of US capital into secret bank jurisdictions like the Cayman Islands and Switzerland, Congress introduced FATCA into law as part of the HIRE Act. FATCA requires that Foreign Financial Institutions (FFIs) reveal the accounts of US persons to the IRS. The FFIs will then have to collect tax withholdings for the IRS from these clients. If by January 1, 2014 the FFI is unwilling to reveal their US clients’ accounts, the IRS will impose a punitive 30% withholding on all payments to the FFIs, on dividends, interest and gross sales of stocks, bonds, and financial derivatives.
A sample transaction
Let’s suppose a foreign investor trades stocks on a US exchange, but his broker is FATCA non-compliant. One day he buys 10,000 shares of XYZ at $25 per share, and the next day, he takes advantage of a nice uptick of $1.00 in XYZ and sells at $26 per share. He makes a tidy profit of $10,000. But because his broker is non-compliant, the IRS now withholds 30%, not of the profit but of the gross proceeds of the sale! So the client now receives the sum of $260,000 minus 30%. The foreign investor is unhappy because his $250,000 investment has become $182,000. If he wants his money back, he must file a US tax return.
No investor would accept such conditions. Hence, an FFI must either comply with the invasive regulations of FATCA or simply abandon the US markets.
Are FFIs likely or unlikely to comply with FATCA?
After some study, FFIs have warned that the costs of FATCA compliance will be in the hundreds of millions and likely in excess of whatever taxes that the IRS could gather through its enforcement (not that the IRS cares about that!). It is likely many FFIs will simply choose to leave the United States, taking their clients’ money with them. In an open letter, “Farewell America,” Wegelin & Co., a private Swiss bank, cited their reasons for leaving the United States: excessive regulations, tax issues, and above all, the insolvency of US government. Now add the expense of FATCA, and many other FFIs are going to follow Wegelin’s lead. American Citizens Abroad has cited Japanese and European FFIs as indicating a strong likelihood that they would pull out of the United States.
FFIs could also face privacy lawsuits from affected customers. Canada’s privacy laws, for example, may not permit banks to divulge clients’ account information, for compliance is voluntary. Thus, Canada and several other countries would probably require a change in their privacy laws before their FFIs could lawfully comply with FATCA.
The Unintended Consequences of FATCA
(1) FATCA is causing resentment amongst US allies.
FATCA’s enforcement of US tax globally has resulted in serious alarm and backlash. FATCA is a clear violation of President Obama’s campaign promise on July 2007:
To renew American leadership in the world, I intend to rebuild the alliances, partnerships, and institutions necessary to confront common threats and enhance common security. Needed reform of these alliances and institutions will not come by bullying other countries to ratify changes we hatch in isolation. It will come when we convince other governments and peoples that they, too, have a stake in effective partnerships.
FATCA is an attempt to impose unilaterally the collection of US taxes without consideration of the laws and the rights of sovereign nations, and that makes it bullying of the worst kind. In response, some FFI’s are already turning away US citizens and closing their existing accounts; their business is not worth the hassle anymore.
(2) FATCA is causing resentment amongst US citizens abroad.
US citizens abroad, numbering about six million, would normally be America’s good-will ambassadors. But they have become angry because of the threat of excessive FBAR penalties. Those who thought they could ignore FBAR now dread FATCA, which will force their FFIs to tattle on them. An increasing number of Americans are renouncing their US citizenship. The US consulates have had so many requests for renunciation that they have started arranging group sessions, like the one at the US Consulate in Toronto in October. Moreover, some Americans abroad have pulled all of their investments out of the United States and are also planning their vacations to non-US destinations, not from anger alone but also from fear that border guards will arrest them and that a computer system will soon link the IRS to border enforcement.
(3) FATCA will result in a massive flight of foreign investment capital.
Richard W. Rahn writes in the Washington Post that FATCA has already sent foreign capital fleeing. He claims that the people running Washington are “mental midgets” unaware of how their policies affect the economy. He estimates that FATCA will cause the departure of an estimated $14 trillion of private foreign investment, destroying as many as 10,000,000 jobs in the United States.
Conclusion
By signing the HIRE Act with its FATCA provisions, President Obama has bullied our allies, penalized FFIs, alienated many American citizens and seriously jeopardized any possibility of an economic recovery. Apparently, Mr. Obama’s ideological predisposition in favor of taxes and against wealth blinds him to a balanced approach to the economy and its problems. FATCA’s imposition on FFIs is hegemony of the worst kind. Foreign investors are interpreting FATCA as a sign of the desperation that often precedes the imposition of capital and currency controls. In an investment climate now dominated by fear, capital flight is inevitable. FATCA only ensures its arrival and it will exaggerate its effects.
American Citizens Abroad reaches the following conclusions regarding the legislation:
FATCA legislation is predicated on the faulty assumption that foreigners throughout the world with no predisposition to favor the U.S. will react positively to its attempts to convert them into unpaid IRS agents. Faced with similar investment and personnel options without the legal jeopardy and financial risks, reasonable people will choose non-U.S. alternatives. FATCA implementation will constitute a major disruption of the entire international financial world as we know it today. Reasonable persons and entities will develop effective antibodies to this perceived infection, in ways too numerous and manifold to predict. What can be predicted is that the cumulative effect of this legislation will be a major blow to U.S. economic interests and prestige. At stake for the United States is the potential loss of trillions of dollars of investment, the opportunity for American companies and financial institutions to compete in a competitive global environment and the possibility for American citizens residing overseas to survive and thrive. In brief, the economic future of the United States.
In a time when government has caused what may be irreparable economic problems, we don’t need “help” like this. Mr. Obama, please stop helping us.
Peter W. Dunn blogs at the Righteous Investor
NB: The above article appeared in the American Thinker. I want to thank Monty Pelerin for his many helpful suggestions to improve this article. Petros
@Christrophe,
Regarding Twitter. No I have not found out why I am blocked, which is frustrating. I may have to start over with a new account, to get things into the #FATCA #FBAR #OVDI hash tag stream(s).
I see that @urbandaddyblog is getting his tweets in that stream, which is good. There is also a brand new one (minnow expat from UK) @Kyla4u that just started tweeting. Of course Renounce with his new twitter name @USCitizenAbroad is there, as is Isaac Brock @IsaacBrockSoc if FATCA is in the title for the auto tweets that go out. Otherwise someone has to separately tweet it with a designated #FATCA hash tags.
Frankly,we need an army of minnow tweeters to counter the “Legal, Accounting, Consulting firms, Compliance Advisory firms, Information Technology and Software firm industrial complex” that dominates the FATCA hash tag. They are a rich source of information, but they have a vested interest in FATCA happening.
Now, I know there is a lot of Blockers who have no use for Twitter. I understand that. I was in that camp a few months back, but now appreciate the value when you see how quickly information can spread from this media. Twitters can be banal, trivial, or profound enough to help bring on a revolution. So for the recalcitrant out there, I would encourage you to dip a toe in. It really is easy. Just don’t get blocked like me.
Time to send another message to Twitter, and see what gives. They aren’t that great at responding to help desk requests.
@ Just Me
“Twitter currently has me blocked … “
Maybe you were exceeding their tweed limit. 😉
@ Em..
I am not even close as compared to others I see, so that is not the reason! Will eventually figure it out, or start over. I have perserved @FBAR_Compliant under another email address, so it can be resurrected. Right now, I am @FATCA_BlowBack
@ Just Me
I don’t tweet so I don’t understand all the terminology. What is “perserved”?
Em…. That is my dyspepsia kicking in, combined with being in a rush… 🙂 I, of course meant “preserved” as in to keep alive, or in existence. Just didn’t want someone else to take the alias until I figure out what is happening and/or why I am blocked..
@ Just Me
My apologies but there are a lot of new terms I’ve had to learn since finding IBS (it’s a good thing, good for the brain) so it looked like another thing I should know about but didn’t. You can’t imagine how long it took me to figure out SOL. I hope you get unblocked soon. You do know what “dyspepsia” is right? That was to see if I was paying attention I think.
@Em, re SOL – even though I now have ample reason to associate that abbreviation with discussions about taxation and reporting, in my mind I keep also thinking it means ‘s- – t out of luck’ as well. Which it could, in this context, depending….. : (
@ badger
LOL. I just took a look at my comment and yours and counted 4 references to the gastro-intestinal tract between them. Dyspepsia indeed!
@em, with very good reason, as all this has been toxic and hard to swallow – with some of the other symptoms listed here http://en.wikipedia.org/wiki/Dyspepsia
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It’s interesting to note that Wegelin & Co., a bank with significant financial expertise, has even stated that these overly aggressive tax collection laws will actually harm the US in the end and *cost* it significantly more than it could ever hope to raise–by an enormous amount too.
“The least worst outcome that we expect for the USA and for the Treasury in particular, is significantly higher financing costs for debt incurred in the future. We calculate the medium-term contribution by the American tax authorities to this added expense, as a result of the “keep foreigners out” strategy described above, at around 50 basis points. And this is precisely the Obama administration’s miscalculation. Their aggressive attitude to tax exiles will generate extra funds, perhaps running into billions, but the price they pay will be exorbitant. An increase in the credit spread of 50 basis points on total public debt of over 10 trillion US dollars represents increased costs of 50 billion per annum. The sums don’t work: to make up for this would require additional taxable funds of some 2 trillion US dollars.”
http://www.scribd.com/doc/19350839/Wegelin-Document-on-American-Taxes-and-Assets (p.6-p.7)
The FATCA train keeps chugging along, full steam. The IRS has issued details on the FATCA registration process for FFI’s.
http://apps.irs.gov/businesses/small/international/article/0,,id=258313,00.html
It talks about how a tax id number or SSN will be required (as if the person at a foreign financial institution is likely to be american?), then finally says that if person responsible at the FFI doesn’t have that then they will have to get a FATCA identification number.
At the bottom, it says,
“Comments on the proposed regulations and other FATCA implementation issues have
been and continue to be received. All comments will be considered as we work
toward finalizing the Notice of Proposed Rule-Making and the FFI registration
process. Given this ongoing work, all information/guidance on the FFI
registration system provided at this stage is subject to change.”
I take this with a healthy dose of cynicism. They’ll receive the comments, all right, but will they read them? Will they make a difference? doubt it.
New article today on FACT agreements between Switzerland, Japan and the US:
http://www.marketwatch.com/story/us-changing-irs-rules-for-swiss-japan-banks-2012-06-21
In short:
-Treasury says Swiss, Japan banks can report directly to IRS
-Pact with five EU countries foresees report to respective governments
-Swiss finance ministry says details need to be ironed out
-Swiss bank lobby welcomes deal
-Swiss, US still in talks to solve past tax matters
Interesting power play here between China and Singapore vs US over Iran Sanctions. Basically, the US backed down using the exemption loop hole plus warnings! Could this be a model for new found backbone for FATCA non compliance or will the US start allowing certain governments a “deemed compliant” category as a face saving way to mitigate impacts for recalcitrant countries like China?
China, Singapore Excluded From U.S. Sanctions Targeting Iran
Probably wishful thinking on my part, then again with recent changes in interest in US Treasuries by FFIs with FATCA and new renminbi direct exchange, could something be developing? Humm…
Soon everyone might be using the renminbi
then again, I am probably just scratching at straws.
This topic has probably been commented on before so forgive me if I comment on it again.
The below link shows the top buyers/ holders of US Government debt by country or country group. The top 12 countries/ country groups hold more than US$4.1 trillion of the total US$5.3 trillion US Government debt held overseas, i.e., 77%. Generally, the US should not upset these 12 countries/ country groups* since they could decide to reduce their debt holdings or refrain from purchasing more in the future. Of these top 12 countries/ groups, three have signed a FATCA agreement (UK) or FATCA pre-agreement (Japan and Switzerland) and the other nine have not.
These countries, which include China, Brazil, Hong Kong and Russia (and also Venezuela, Iran and Algeria), maintain leverage over the US in any FATCA negotiations. As an opinion, if any of these countries simply advised the US that they wished to be exempt from FATCA, playing the US Government debt card, it might be rather difficult for the US to not agree to such as request.
http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
*-It could be argued that China, Japan and Taiwan will gladly continue to buy US Government debt for export-related reasons, i.e., to help ensure access to the US market, irrespective of FATCA, but they would still hold this trump card in FATCA negotiations.
Wall Street criticises FACTA
Some IT companies are actually using FATCA as a business opportunity:
“Prosperity 24.7 have launched a product based on Microsoft Dynamics CRM called Pro FATCA which deliver the requirements from a data capture perspective, for reporting of your existing data and to assess its compliance with the required regulation.“
David Randall, Programme Director of Prosperity 24.7 added “We are uniquely positioned as a business within our sector as we possess the capabilities to be able to provide the required services and software to help businesses move forward swiflty.
See the full article, which ironically is titled “FATCA: Tax Compliance. Simplified“.
@Innocente. You have a good point. However, in this article that specifically talks about Russia, it is mentioned that most FFIs won’t wait for their respective governments to negotiate before starting implementing the law.
@Christophe,
You probably know this, but that Wall Street criticizes FATCA article above is referencing the William McGurn story posted here… Just putting this comment here for cross linking..
Also there is another Russian story here… Again, just a cross post.
Oldie but a goody!
http://www.theglobeandmail.com/report-on-business/rob-commentary/why-the-irs-crackdown-puts-canadian-banks-in-a-tight-spot/article1359750/
http://amyalkon.mensnewsdaily.com/2012/07/17/how-our-government-is-killing-americans-business-prospects-abroad-and-at-home/
See interesting CRS report and statistics (including many re Canadian investment in the US, ex. banking sector) linked in this quote;
“So we are now actively infuriating not only some of the roughly five
million American expatriates who are seeing their bank accounts
shuttered all over the globe, but also the very type of job-creating
Swiss investors and executives to whom a prudent country might be a tad
more welcoming. As this Congressional Research Service report [PDF]
puts it, “Foreign direct investments are highly sought after by many
state and local governments that are struggling to create additional
jobs in their localities.””
@badger, we need more articles like this that don’t make it about allegiances, but examine the financial ramifications.
@bubblebustin;
The economic and business arguments are very compelling. It would be good to see someone spell out in the media – and to Parliament, the exact ways in which this hurts start-ups and entrepreneurs in Canada – jeopardizing non-US business partners and investors, merely because one individual party happened to inherit the unwanted US citizenship-based taxation burden and the unwarranted citizenship-based asset reporting obligation to the IRS.
Are we at the point now in Canada, that all those young people affected (ex. dual-born) need to be urged to renounce US status at first opportunity, before opening any accounts or earning any wages, simply in order to be able to have the option of operating a business here just like those born with only Canadian status? Is Canada in favour of having such a large segment of the population shackled from birth and unable to operate a successful business here because they carry the IRS burden that their counterparts – single-citizenship Canadians didn’t inherit?
We talk a lot about the unwarranted intrusion into our personal savings, and the impact on individual bank accounts, but not as much re business accounts.
There may be other articles or reports in professional or industry journals (international tax, business, economics, policy, etc.) which point out in dispassionate ways that it is counterproductive, to discourage non-US people and entities to invest or do business with the US if the potential tax and reporting liabilities – and tax complexity makes it too costly, or too full of potential pitfalls to make it worthwhile. It should be fairly simple to back up the assertion that when a company or business outside the US has one US ‘person’ signatory on it’s accounts, the resulting accounting and reporting burden asserted by the US merely on the basis of birth citizenship, is unreasonable, illogical, and costly when not directly related to any actual existing US operations or US income of the business. No-one conducting a Canadian or other non-US business, with no other US tax obligation should have to open their non-US business banking records up to the IRS when the only US connection is the inherited citizenship of one of the principles.
So, there may be potentially brilliant entrepreneurs and inventors, who will have to first divest themselves of any US status – well before any actual business success, rather than jeopardize any potential partners or discourage non-US investors. That has nothing to do with ‘evading’ or even ‘avoiding’ US taxes. It deters anyone abroad with inherited US status from starting a business – since the unwanted US status discourages others from investing in them.
In that case, it is an incentive for anyone who inherited US taxable status abroad, and who is even just thinking of starting a business in Canada, or anywhere else outside the US, to renounce beforehand, because the US citizenship is just a heavy and dangerous burden – with absolutely no return. Likewise, it does not make any economic sense to retain US citizenship as an individual abroad, given the size of the huge potential pitfalls for the unwary, and expensive ongoing specialized accounting costs to prove every year that zero US tax is owed, and to get official IRS blessing that our entirely legal, post-tax ordinary savings (transparently registered with our SIN tax number, and reported by our banks to the CRA) are not pirate treasure.
Likewise, no non-US entity, without an existing US tax obligation, located and operating outside the US, is going to give permission for a mere employee to disclose all their corporate or workplace accounts and assets to the IRS, simply because one individual employee with a co-signatory role happened to inherit the US citizenship burden. The company or employer has no reason to agree, and every reason to insist that they have no legal or other reason to comply. It is simply insane of the US to insist that a mere individual employee do this. No non-US company or entity would ever agree, and they would fire or sue an employee who did it without permission. Plus, the individual might hold the potential to co-sign a check, but have no access to the requisite bank and account records in order to report as demanded by the IRS.
We need some help from organizations in Canada that speak for, or assist small business. They can speak to the insanity of having routine business accounts reported to the IRS in situations when the only tax relationship to the US was inherited from a parent, and there is otherwise absolutely no US origin assets, operations, or proceeds.
There must be other voices inside the US that back up that comment from the GAO report. Who inside the US will come forward to say that they don’t want tourism dollars, our consumer dollars http://www.nytimes.com/2012/03/21/business/us-stores-learn-the-ropes-of-shipping-to-foreign-shoppers.html?_r=3&scp=2&sq=stephanie+clifford&st=cse , our business dollars, our real estate purchases and fees, from buyers and investors outside the US? I would certainly hope to hear the US Retail Council opposing anything that would cause us to refrain from buying US goods. http://www.retailmeansjobs.com/
Maybe in good times they could just shrug it off, but in a prolonged recession, you can’t afford to alienate a million or more consumers and investors just north of the border. As the article above said “As this Congressional Research Service report [PDF] puts it, “Foreign direct investments are highly sought after by many state and local governments that are struggling to create additional jobs in their localities.”” http://amyalkon.mensnewsdaily.com/2012/07/17/how-our-government-is-killing-americans-business-prospects-abroad-and-at-home/
@badger
You make it clear that American exceptionalism may soon include being considered pariahs in the world.
Have you considered making a pre-2013 budget submission to Canada’s Finance Committee, or contributing to mine as one of the million like us in Canada?
http://isaacbrocksociety.ca/2012/07/20/more-correspondence-from-the-office-of-john-weston-mp-irs-is-a-budget-issue-for-the-government-of-canada-get-your-voice-heard-before-the-deadline-for-2013s-budget-submissions/
@ badger
That was an excellent comment about the effect US tax policy has on business. It has affected my husband and me in that we thought about starting up a small business here in Canada just as we did when we lived in the USA but then we put the thought aside because neither of us wanted to deal with the IRS forms as it would mean trying to reconcile the required Canadian accounting with US accounting. (We are DIY in the tax filing department simply because we cringe at the idea of hiring someone else to do it.) We may be past the age to seriously think about starting a new business now but when my husband is finally free of his American citizenship it will be nice to know that we can if we want to. As for us spending our tourist dollars below the border — not going to happen — ever — because we will never forgive or forget FATCA. Anyway, would you mind if I borrowed an excerpt or two from your comment to beef up some e-mails I have planned? And please consider bubblebustin’s suggestion.