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
@Em, and @bubblebustin; thanks for your comments. Feel free to use anything you find useful. I’ll think about the submission, but I’d rather just contribute bits to one.
I’ll take a closer look at the guidelines.
@badger THANK YOU for suggesting I reference your comments in my submission. You at one point directed a rather lengthy comment to me that I would like to use some of, but I can’t find it anywhere (I remember thinking at the time that I should copy it). It had to do with how citizenship based taxation/FATCA steals from the Canadian economy. You wouldn’t have a copy or link to it somewhere would you?
Very belated reply to you @bubblebustin, It’s probably too late for your submission. Sorry for not replying earlier, I got lost, and only returned to this thread today by accident. I can’t find the post you wanted.
Did you get an acknowledgment of your submission?
“US-based tax lawyer Douglas Stransky considers the impact of FATCA, the onerous US tax regime which is already turning Americans into ‘financial pariahs’ overseas…”
……..”One suggestion under consideration to prevent Americans abroad from being ostracised would be for Congress to adopt a residence-based taxation rather than a citizenship-based taxation. This would mean Americans overseas would be taxed with a withholding tax on US source
income, similar to the way the US taxes foreigners on US sourced income.”…..
from:
from article ‘Who will really be snared by FATCA?’
Author: Douglas S. Stransky
IFAonline |
21 Aug 2012 | 07:05
http://www.ifaonline.co.uk/ifaonline/opinion/2199953/who-will-really-be-snared-by-fatca?WT.rss_f=Regulation+-+Investment&WT.rss_a=Who+will+really+be+snared+by+FATCA%3F+
@badger,
That’s ok, I managed to piece together something that I think adequately covered many issues for us and what the Canadian government should allocate funding for. Still waiting to hear back, but there was acknowledgement that the submission was received. Thanks for your response. You and so many have made so many good comments that it wasn’t hard to find more than the allowable 350 words per answer!
@bubblebustin;
your efforts are greatly appreciated, and the information you’ve shared re contacts with MP Weston and others.
@badger
Thank you. Hopefully everything each of us does will culminate into positive change. I haven’t heard anything from Weston since I sent by submission to him and the Finance Committee.
Re your above posted article by Douglas Stransky,
‘Then there are the FFIs that elect to keep their American account holders but will avoid FATCA by no longer investing in the US. Those FFIs would not have US income and therefore no risk of a 30% withholding tax for noncompliance.
Consequently, those FFIs could eventually become known as places for tax cheats to put their money. Tax evasion would go on despite FATCA, just in a different place.’
Well, duuuuuh! Seems to me that the biggest obstacle to FATCA is citizenship based taxation. Maybe they should get rid of it as it of no net value to them.
@bubblebustin;
Love the characterization that only ‘evaders’ and ‘cheats’ could possibly object to FATCA and all that it entails. Okay, lets do a survey: hands up, lets count all those who would volunteer to have their legal post-tax accounts subjected to a punitive system so complex that no-one knows how it will work, with possibility of 30% withholding/remittance to the IRS and other unintentional fallout and collateral damage – all applied to savings earned and held where you live and pay taxes – outside the US. And, put up your hands if you volunteer to pay extra fees taken from all account holders to pay for all of that unnecessary compliance? And step forward if you volunteer to subject all your personal financial account data – on entirely legal and post-tax assets to the IRS – to be collected and stored in its vulnerable and leaky systems and databases that have already result in tens of thousands of cases of domestic US identity fraud.
What, no volunteers? You must all be evaders and cheats then.
It’s witch hunt.
What’s wrong with the US Fatca tax law
‘The Peterson Institute’s Mr Hufbauer has called on Congress to delay the implementation of Fatca for five years. ‘During that time, the Treasury Department should be instructed to negotiate cooperative, two-way, reporting agreements that would require financial institutions in both countries to report the holdings of foreign taxpayers who are citizens of the other country,’ he wrote…Then after five years, the Treasury ‘should dispassionately evaluate’ the reporting burdens and the additional revenue raised. At that point, a sensible decision can be made on whether Fatca should be allowed to take effect, Mr Hufbauer concluded in his report.’
http://globalparadigms.blogspot.ca/2011/08/whats-wrong-with-us-fatca-tax-law.html
I’ve made a couple of requests to Richard Chu of Business in Vancouver to do a story on FATCA, and although he hasn’t yet done so, he’s just recently written about what many companies say is a notable increase of more aggressive government audits of their foreign operations, ‘focusing their analysis on the transfer-pricing of cross-border transactions’.
‘As tax authorities get increasingly hungry for tax dollars, you’re going to see more and more of this double taxation’.
http://www.biv.com/article/20120821/BIV0102/308219947/global-corporate-tax-dollar-grab-intensifies
Does anyone know if Canadian RRSPs will be added to other accounts at a financial institution for the purposes of determining the aggregate amount at the financial institution? I seem to recall that they may be an exception in FATCA for some retirement accounts, but I’m not sure the the type of retirement account had to almost exactly duplicate US type retirement accounts.
*Final rules not out. 80% chance rrsps will be excluded.
@Clint
Yes, they are included in the aggregate amount for FBAR’s, as they have nothing to do with income tax reporting and go the Treasury Dept.
‘The IRS also announced special “streamlined” procedures for reporting certain foreign retirement accountant, mentioning specifically Canadian Registered Retirement Savings Plans. Individuals will be allowed to retroactively elect to defer income in those accounts.’
http://www.theglobeandmail.com/globe-investor/personal-finance/taxes/flaherty-pleased-with-irs-partial-tax-amnesty-decision/article4374962/
Does anyone know if I can count my mortgage, my line of credit and the highest aggregates on my various credit cards against the aggregate amount for FBAR and FATCA purposes?
@Petros:Not sure about FBAR (I’d guess probably not), but for FATCA you definitely can’t. According to 26 CFR § 1.6038D–2T:
And 26 CFR § 1.6038D–5T (Valuation guidelines) says:
http://www.gpo.gov/fdsys/pkg/FR-2011-12-19/html/2011-32263.htm
The next question, of course, is whether the maximum penalty for misreporting on Form 8938 is based on your actual net asset position in foreign financial accounts, or on the mythical “total value” under FATCA rules. We know which one the IRS wants, of course.
To comment on my own question,,I have found out from a reliable source that, as of yet, the inclusion of RRSP in the aggregate amount is still an unknown.
So, Cornwalliscal is correct that the final rules are not yet out.
@Clint
I’m eager to hear more.
@ bubblebustin
My question referred to FATCA only, not FBAR. You may want to contact the Canadian Bankers Association for more information.
@ Petros
I like the idea of subtracting what you owe. Sounds fair to me!!!.
@clint
My US tax accountant should know, pending the final rules being released. I know that under FATCA, reporting is required only on aggregate amounts exceeding $200K, if you reside abroad.
*Bubblebustin. I believe you are talking about form 8938. This is the one that US cits are supposed to attach to their tax return. (As opposed to reporting done by financial institutions-those have not been finalized.)
If you and a spouse live abroad, the thresholds are $200k at the end of the year or 300k at any time during the year for filing singly and 400k/600k for those filing jointly.
@Eric Thanks for that serious response to my cynical question. Your information is really useful to show the dishonesty of the US in regards to these bank accounts especially as it relates to expats. My point was that anyone who fills out these forms has already allowed the IRS and the United States government to compromise truth. I won’t do that.
Bahama’s won’t budge on FATCA, yet.
“From the Ministry’s point of view, one thing we want to do before a recommendation is made to government on whether to consider an intergovernmental agreement or not is to, one, get a thorough understanding and assessment of the financial services industry and the different sectors within the industry, and we would like to perform that professional assessment,”
Why isn’t Canada coming out with at least a statement like this? What a way to keep 1M people in suspense, Mr Flaherty!
http://www.tribune242.com/news/2012/aug/28/no-government-decision-yet-over-fatca-compliance/
http://www.careerbuilder.ca/ca/jobseeker/jobs/jobdetails.aspx?job_did=J3H8DM6TX163K6VJ46N
I guess it is going to happen whether we like it or not!
*I see a lot of advertised jobs for FATCA but most of them are in the U.S. , UK and Switzerland. There are some in Canada as they do assessment and planning for it. But I don’t see much else happening so far elsewhere globally, other than the big consulting and advisory firms getting ready for selling their services and compliance certifications. I think what is likely to happen is there will be delays for implementation announced within a month or two. Recall the output of the May meeting which indicated a big emphasis on the need for a postponement of 12 to 18 months from the time of final regulations issued towards a ready implementation. This is if it’s a go …………….. But instead, maybe countries and banks begin dumping not only U.S. customers but also U.S. assets and U.S. bonds, so that there are no U.S. persons and very little or no U.S. source assets involved with foreign banks – that way they can all certify as FFIs and implement more easily the requirements. What this could mean is banks may decide to liquidate U.S. assets – stocks, bonds, and other assets over the next 6 to 12 months.
http://www.miamiherald.com/2012/09/02/2982225/florida-bankers-spread-the-word.html#storylink=cpy
“Bankers are fighting the regulation that
requires them to report interest information on accounts held by
non-resident foreign depositors”
Read more here: http://www.miamiherald.com/2012/09/02/2982225/florida-bankers-spread-the-word.html#storylink=cpy#storylink=cpy
Further developments in the hypocritical efforts inside the US to stop the collection and reporting on non-resident accounts inside the US via DATCA. What is good for everyone else according to the US, is very bad for the banks inside the US – for economic reasons. So, we can suffer economic harm as US individual persons living outside the US, and have all our legal registered already taxed savings fully reported to the US, and persecuted for having TFSAs, RDSPs and RESPs, but US banks – especially in Florida, get legislator help to stop reciprocal reporting – over worries that they’ll lose money. Yup, no US demands for transparency and FATCA type sound bites about money laundering in Florida USA, only when it is to be forced on ordinary account holders in Canada, and other countries.