Since I did not see much in the way of in depth reporting on the FATCA public hearings of May 15th, I searched out the written testimony and sat down for a read this weekend. Thought I would share a few observations, (not an exhaustive analysis) and the provide the entire document for your own reading pleasure, so you can draw your own conclusions.
After all the opening patronizing comments about supporting the goals of FATCA and thanking the IRS for “allowing” them to comment, the speakers got down to some pretty serious criticism and concerns about FATCA rules which are currently in a 388 page draft form.
Sadly, there was very little outright push back at all these extraterritorial compliance requirements, other than to say, by some, “we can’t do that!” Maybe those that stayed home are sending a message with their absence!
The strongest statements of what was wrong with FATCA, in my opinion came from Japan, Sweden and BlackRock.
The BIGGEST issue, that almost all expressed concern about was implementation delays. There is way too much uncertainty to spend a lot of money and IT time on something still unworkable and not final. The general consensus was that it would take 18-24 months from the point of finalization to implementation, if it was doable at all.
Here are a few selected classic quotes.
The Bank of New York Mellon, Harris Horowitz, managing director and global head of tax at BlackRock said……. “We support the goal of evasion of U.S. taxes ,ah, stopping the evasion of U.S.taxes –(Laughter) Sorry”
The Canada Banking Association said, “Financial institutions cannot be expected to start building systems until the regulations and the FFI agreements are finalized.”
The head of tax at TD Bank Group said “We cannot even begin implementation in earnest until the regulations, intergovernmental agreements, and relevant forms are finalized.”
Brazil said, “Regarding the deadlines, we think that after the rules are established for pass-though, we would need at least 5 years to be able to put operational systems in place.”
Sweden said, “The definition of financial accounts is unclear, and we have tested that on our lawyers, that they read the text of the regs and no one understands it.” (Laughter)
Also, in my reading of the comments, I was struck by the general pessimism about the rules and how unworkable they are. Many concerns about the unintended consequences and systemic risks to the international financial markets were expressed.
Certainly the KYC (know your client) and AML (Anti Money Laundering) regulations were mentioned by many speakers as a better method to be used in place of the obnoxious and unworkable documentation requirements of FATCA. There was much pleading for using Risk assessment models as a better way of assessing who needed to comply. There were also many pleas for this or that entity or group to be “deemed compliant” and lots of exemptions requested.
For the readers interest, here is a non exhaustive list of comments I noted and jotted down.
-Rules unfairly favor U.S. banks over FFIs
-Need a risk based approach
-Due diligence inconsistent with AML/KYC
-Conflicts with local and foreign law
-unprecedented extraterritorial reach
-Documentation renewal and records very expensive, eliminates the convenience of opening an online account.
-Entity documentation should be made considerably less burdensome
-superannuation and retirement funds must be deemed compliant
-has some degree of inconsistency and unreasonableness
-Implementation should be delayed ~18-24 months after final regs.
-Treasury has not considered FATCA’s impact on investors, capital markets, and penalizes U.S. funds
-Extremely unreasonable and unfair that punitive withholding tax would be imposed
-Regarding Mutual funds- one-size-fits-all approach doesn’t work in practice
– FFIs will need to quarantine some branches/affiliates in countries where compliance cannot be achieved.
-Regs a step backward, unnecessary impediments, a very negative effect on U.S.
competitiveness, U.S. jobs, and U.S. capital markets.
-The definition of a “U.S. person” very complicated for IT support criteria.
-It’s another inconsistent and unreasonable aspect of FATCA.
-Impossible for financial institutions to meet required target dates
-Certain “so called” Entities are not really entities so need exceptions
-Unnecessary and costly duplication of effort and must be modified in the final regulations
– and many many more…
Finally…
Thinking about what I read, you have to wonder what is the likelihood that the IRS is going to resolve all those problems in the short time left before the final Regs are due this fall? I see that this story is out tonight on Reuters saying that the U.S. aims at 5 EU tax evasion deals this month. I don’t see how they do it without just ignoring a lot of the issues presented in these hearings.
Also these deals depend on DATCA, and it is not done. Regulations have not yet been issued. As Isaac Brock readers know, the U.S. reciprocity promise is in the DATCA details, and I understand there is growing Congressional opposition to this domestic version of FATCA that is supposed to make these FATCA partnerships work. If DATCA gets stopped either by legislative or legal means, I think that puts a big wrench in the IRS 5 deal wringer. There is a recent Miami Herald story entitled “New IRS rule scares foreign depositors.” which you might want to read. I don’t think the opposition to DATCA is going away soon. I know the IRS has yet to issue the rules, and there will assumedly be a comment period and hearings. I would think that will get more press than the FATCA hearings, so this DATCA battle isn’t over until the FATCA Lady sings.
Another consideration. If these “EU deals” happen while they are still finalizing FATCA rules, it actually might complicate FATCA for a lot of bigger FFIs with groups operating across Partner and non partner countries. There will be different rules for the same group. That will cause real headaches, as there will be a myriad of effective dates across a single group. Additionally different governments will have different procedures across the same group, and that make things more complex which is the opposite of “lightening the load.” which some analysts insist FATCA partnerships will do.
It seems to me, given the short time frames before final regulations are due in the Fall, the IRS will have to make some key decisions shortly. Either they will they just press ahead without due consideration of the testimony I read, and this was all just kabuki theater, or they will have to announce some delays soon so FFIs know what to expect.
What was missing in those hearings, and maybe that is just what happens at all such Public hearings is that there were no questions asked by the IRS and Treasury group who were there to just to listen, I guess. Not sure what, if anything, they actually heard and took on board. Maybe that happens later in back rooms and side conversations, but I would of thought that for some of the more technical points being made, someone would have at least asked for a clarification.
Finally, I have put up links to 5 of the testimonies which were of particular interest to the Isaac Brock Society readers in Canada and put them in the appropriate thread dealing with the subject.
The Canadian Bankers Association
TD Bank Group, a worldwide financial services group headquartered in Toronto, Canada
Australian and New Zealand Banking Industry
World Council of Credit Unions.
If someone wants to read the entire testimony, below is a copy for your reference.
FATCA Public Hearing May 15 2012
If you need it, here is a link to FATCA definitions
@justme, for whichever reason it is the work of madmen.
@Just Me, maybe it is ‘academic’, and maybe ‘political’ tax, or, more likely, a combination. Given that they know intimately about the lobbying efforts by anyone with any substantial money, corporations, etc. they have to know that they are accepting that there will be many with enough resources to get around whatever is proposed. Given that they know that in many countries, we are already thoroughly overseen and taxed by stable and democratic governments very similar to the US, they know that the ‘tax haven’ excuses don’t fly. If coupled with plans to get rid of the FEIE, or the foreign tax credits – it would gather more into the net of those who could be assessed with US tax on top of their home country taxes. Perhaps that is it? I think it is a grand scheme to get an ‘in lieu of’ tax from every single US ‘person’, no matter what their circumstances. In that case, all other countries better rethink that ‘savings’ clause in the treaties – or suffer the drain of assets being sucked out of their economies – particularly those with the most numbers of US ‘persons’.
Or is it just a ruse? – to distract away from those within the US that have the power and assets to lobby for their own interests to be exempted – like the corporations incorporating in Delaware, and holding their assets offshore? Those ‘abroad’ then are a very easy group to scapegoat – and they know it. So, that would support your analysis that it is a ‘political tax’ (with a supporting cast from the academics) – to distract those at home from the structured and sanctioned inequalities. That seems inherent in the ways that the attempts of corporations to ‘minimize’ taxation are sanctioned by the IRS in public statements as logical and understandable, but any criticism of the tax-by-reporting-form-penalty-proxy continues to be labelled ‘evasion’ – in spite of knowing that there is most often 0 actual US tax owed. It has to be deliberately disingenuous.
It’s simply scapegoating, without a shard of economic reality.
Like a sad mad king who imagines a crow stole off with his fortune,
“Oh, no – all the money we had is gone!!!”
“Where did it go, oh how and where? We were once soooooo wealthy?”
“Those expats took it; they took it offshore, and are hiding it there!”
May I suggest the perfect person to run this integrated global financial juggernaut? http://www.youtube.com/watch?v=cKKHSAE1gIs
@bubblebustin
Thanks for my morning chuckle! Dr. Evil truly is the perfect person to run the ‘integrated global financial juggernaut’.
@Just Me, @badger, Sometimes people just do impulsive or stupid things, or things based on incorrect information. Not everything has a logical explanation. My opinion is that the US motive is what they say, to catch “tax cheats”, and they just didn’t consider the cost/benefit or the terrible unintended consequences of their plan. Yes, FATCA costs much more than its estimated revenue, and causes more harm than benefits to the US. But Congress just didn’t care about it when they passed the law, and the IRS has to implement whatever is in the law, no matter how absurd it is.
Breaking News…
Canada Bracing for Massive Influx of Wisconsin Boat People
Okay folks, not much time left.
During the October 27, 2011 Hearing on “Proposed Regulations to Require Reporting of Nonresident Alien Deposit Interest Income” there was an interesting debate. Just a few sound bites below. Canada is mentioned in the opening remarks from Ms Mahoney and the apprehensions concerning Mexico are raised later during the hearing.
The full text is at http://financialservices.house.gov/UploadedFiles/112-78.pdf
Mrs.MALONEY.
Thank you. And I would like to welcome all the witnesses here today. This hearing concerns a proposed IRS rule that would require U.S. banks and broker-dealers to report to the IRS any deposit interest income paid on a U.S. account opened in the name of a non-U.S. person who resides abroad.
Currently, banks are required to report the amount of interest earned on the bank deposits of people who are U.S. citizens or citizens of Canada. The proposed regulation would expand that role to all nonresident aliens who hold accounts at U.S. banks. The idea behind the proposed regulation is to strengthen the exchange of information programs that the United States has with other countries. It is also expected to increase taxpayer compliance by making it more difficult for U.S. individuals to avoid information reporting by claiming to be nonresident aliens. Simply stated, the United States should not actively make it easier for the laws of other countries to be broken or evaded.
From Ms Wilkin’s statement:
“America should not be a tax haven for international tax evaders. We do not believe that the United States should be a haven for citizens of other countries who wish to evade their tax obligations to their home country.
Regardless of the economic benefit to the United States from the inflow of capital, we should not make it easier for the laws of other countries to be broken or evaded. There is a global growing consensus that responsible governments must cooperate in exchanging tax information in order to combat the rampant tax evasion that is facilitated by offshore tax havens. And make no mistake; the United States is a tax haven for citizens of other countries.
“Chairman Bachus asked, ‘‘Do we want to have blood on our hands as a result of these rules?’’ I want to tell you, the United States already has blood on its hands. For every dollar of tax revenue that is taken out of the governments of developing countries, it impairs the ability of those countries to provide health and safety measures to feed its citizens, to provide sanitation, to provide health care, and to provide military and police that are not corrupt. Every time we facilitate a dollar coming out of those economies, we have blood on our hands. In any case, it is wholly inappropriate to combat unlawful activity in one country by encouraging unlawful activity in another country. We applaud the IRS for proposing these rules. And we support their implementation.”
And from the debate:
Mrs.MALONEY. And can you explain how the proposed IRS rule is related to the FATCA, the Foreign Account Tax Compliance Act?
Ms. WILKINS.
The FATCA that was passed last spring requires foreign branches of the U.S. banks and foreign financial institutions to report to the IRS interest earned by U.S. citizens and residents. So, what the IRS is doing by collecting the information in these proposed rules is just turnabout is fair play. They are saying that if you will collect this information for us so that we can collect tax, we will collect this information for you. I think that these rules are very important to encourage foreign financial institutions to comply with FATCA.
Mrs. MALONEY.
And what impact do you think it would have on foreign compliance or cooperation with our country?
Ms.WILKINS.
I think it will help a lot. I think the IRS and the Treasury are getting a lot of pushback from the foreign financial institutions and from foreign governments about FATCA. And I think promulgation of these rules and
more rules like this will help create cooperation among all the governments in the world
Mr. LUETKEMEYER.
Thank you, Madam Chairwoman.
Ms.Wilkins,
in your conclusion, you make the statement, ‘‘make no mistake, this is about tax evasion.’’ According to what I am reading here and my understanding of the rules, the IRS does not collect taxes on nonresident deposits. Is that correct?
Ms. WILKINS.
That is correct.
Mr. LUETKEMEYER.
So the tax evasion then is from people who come here and try to avoid taxes in other countries.
Ms. WILKINS.
That is right. This is about the United States helping people evade taxes.
Mr. LUETKEMEYER.
So why is it our problem to try and help other countries collect their taxes?
Ms. WILKINS.
Why are we—
Mr.LUETKEMEYER.
Answer my question. That is my question.
Ms. WILKINS.
It is the same reason we are prosecuting the Swiss banks. Because they are facilitating tax evasion by our residents.
Mr. LUETKEMEYER.
Yes, but our work—those people evading taxes in other countries, they are other countries’ problems. That is not our problem, is it—
Ms. WILKINS.
We are asking governments of other countries to collect information through—
Mr. LUETKEMEYER.
Yes, but we are helping them—we are asking them to help us find our citizens who are cheating and not paying taxes here. Why should we be worried about collecting taxes for other countries?
Ms. WILKINS.
We shouldn’t help them the way they are helping us?
Mr. LUETKEMEYER.
If they request it. But they are not requesting it, are they
Maloney is wrong about the existing reporting requirments applying to Canadian citizens they apply ONLY to Canadian Residents but people in Washington are wrong about a lot of things.
@Tim
Yes, from the minutes of the hearing, it is evident that there is considerable confusion and many misunderstandings.
Ah, but MORE rules are needed and will fix everything!
thanks, Ohlala for posting this. Very interesting and kind of sadly funny.
@Just Me – LOVE IT. Wisconsin boat people!
*re: reporting ‘interest’ earned on bank accounts – so why then does FATCA seek to eventually require that banks and institutions report ALL transactions, not just interest? “Currently, banks are required to report the amount of
interest earned on the bank deposits of people who are U.S. citizens or
citizens of Canada. The proposed regulation would expand that role to all nonresident aliens who hold accounts at U.S. banks”.
Interest on our accounts in Canada are already reported directly to the CRA. That is fine with – it makes it easy to report the taxable earnings and pay taxes correctly and in full. But, the eventual FATCA endgoal – the collection of information on each and every financial transaction for each and every US deemed ‘person’ ‘abroad’ goes far beyond that. That’s like fingerprinting every single person in the country, just IN CASE one percent will eventually commit a serious crime.
Our countries of residence already have layers of oversight in place. This is like saying that the rest of the world is incompetent, and incapable of designing and carrying out their own oversight programs in their own financial systems.
The IRS already has such serious data privacy breaches and problems with identity theft domestically, that it places in jeopardy the account numbers, locations, personal identification SSNs, of those covered by FATCA and FBARS, and other similar reporting at similar risk, for no reason other than that they presume that we’re all criminals in waiting.
And what recourse would we have if our data was stolen or compromised? What assistance or compensation would there be? There is already significant TAS criticism of the way in which those facing that situation domestically have not had quick or helpful resolution of the problem – which is a very good indicator of what a US ‘person’ outside the US can expect – the same level of customer service received now abroad = zero. Ex. IRS help sessions cancelled in embassies and consulates ‘abroad’. Lots of punitive enforcement, without any education.
@ oohlala
If there was ever a smoking gun on the relationship between FATCA and DATCA, that testimony was it. Thanks for digging it out and posting it here.
Of course, Congress doesn’t understand much when it comes to the differences in how we apply taxes on Citizens, while all the other countries apply taxes on residents, and so they are naturally confused about the reciprocity of what they are doing, or think they are doing.
I think Bacus shows the ultimate in Hubristic irony, with his concerns expressed in this statement:
“For every dollar of tax revenue that is taken out of the governments of developing countries, it impairs the ability of those countries to provide health and safety measures to feed its citizens, to provide sanitation, to provide health care, and to provide military and police that are not corrupt. Every time we facilitate a dollar coming out of those economies, we have blood on our hands.”
Of course, as we know, U.S. Citizenship taxation does exactly what he says he is sooo concerned about, puts “blood on our hands” but I am sure that point is totally lost on him!
Also, in Mr Wilkens comment, is the give away on GATCA which I have long thought now FATCA was really all about…
There is a global growing consensus that responsible governments must cooperate in exchanging tax information in order to combat the rampant tax evasion that is facilitated by offshore tax havens.
*”It is also expected to increase taxpayer compliance by making it more difficult for U.S. individuals to avoid information reporting by claiming to be nonresident aliens.”
When has a US person exempted him or herself from income reporting by becoming a non resident alien?
@bubblebustin..
I think the concern is, that a U.S. person gives their money to a family member Non Resident to deposit in US Banks for them, and thus avoid reporting it or having the interest declared for tax purposes. This is said to be an issue with our Latin American Green Card or Visa holders. I do not know how prevalent it is, but where there is a will and a loop hole, there is a way. I do know of Mexican friends who have money in Texas banks for the purpose of keeping it out of Mexican authority eyes, so that is what this is about.
@justme
Sorry that my formating was quite poor. The statement in quotes was made by Ms Wilkins of Citizens for Tax Justice, not Chairman Bachus. She was simply addressing her remark to him, thus his name at the beginning of the paragraph.
“Chairman Bachus asked, ‘‘Do we want to have blood on our hands as a
result of these rules?’’ I want to tell you, the United States already
has blood on its hands. For every dollar of tax revenue that is taken
out of the governments of developing countries, it impairs the ability
of those countries to provide health and safety measures to feed its
citizens, to provide sanitation, to provide health care, and to provide
military and police that are not corrupt. Every time we facilitate a
dollar coming out of those economies, we have blood on our hands. In any
case, it is wholly inappropriate to combat unlawful activity in one
country by encouraging unlawful activity in another country. We applaud
the IRS for proposing these rules. And we support their implementation.”
Sounds to me like the US is the Switzerland of the Americas? At least Switzerland doesn’t parade itself around as a champion of open banking systems like the hugely hypocritical US does! Delaware sounds like the US equivalent of Luxembourg or Liechtenstein where companies or entities go to register themselves for tax purposes yet are not actually based there as well.
I hope that the Eurozone gets everything over here in order soon (either way…), because then I think that all of the media attention that has been directed at us will return to the shoddy state that the US is in. A lot of people here are starting to wonder whether or not there is something going on behind the scenes and whether some powerful vested interests in the US and UK are trying to bring down the Euro as a competing currency.
I personally believe that it is a mix of weak banks and the above as the anti-Euro lobby has gone into a frenzy this week after Merkel talked about introducing a federal Europe – The US would seem to gain from a collapse of the Euro in my view in the longterm as a competing currency for oil transactions would be wiped away.
@all
Sorry for misusing this thread, but I hope I will be able to post here at IBS soon. I just found this article in the Swiss press today. It’s in german so you’ll have to use google to translate.
http://bazonline.ch/ausland/amerika/Wenn-der-blaue-Pass-zu-teuer-wird/story/19612132
@UncleTell
Mal wieder ein echt super Artikel aus der Schweiz 🙂 Many thanks are owed to those of you in Switzerland who find these articles, because I have otherwise only really seen this covered in the US and Canadian press. I love how they still use some of the words like “Renouncer” and “Exit Tax” in English. Really highlights the uniqueness of the US I think.
@Don
No problemo 🙂
I was having my lunch break today in my office and I came across it while surfing the internet. There are a few mistakes that i’ll have to comment on once it’s open for commenting.
@Don, “I love how they still use …”
Also some lovely new English-y phrases, courtesy of Google translate. “The legislature draws the screw.” “They make the defaulters from the dust.” And my personal favourite, “The 30-year-old claims it stiff and strong.” 🙂
@ oohlala
Gotcha… I did a little formatting to make it clearer… 🙂
@ bubblebustin
“When has a US person exempted him or herself from income reporting by becoming a non resident alien?”
Actually that is exactly what I am doing. When, hopefully, the USCIS puts a stamp on my belatedly filed I-407 then, as I understand it, I will officially be considered a “non resident alien” which is a strange way to say I am what I am — a Canadian living in Canada. And the twist is I had already exempted myself, based on not knowing I was still considered to be a US person, from FBAR reporting. Despite being aware now that they think I am a US person, I am going to wilfully proceed to refuse to do a FBAR or any other creepy form they might think I owe them. I am a Canadian and my bank accounts are none of their business. Every bit of interest earned on those accounts has been reported on our jointly filed 1040s and that is all they get from me. Needless to say, I do not have any bank accounts in the USA.
Maybe I am painting a target on myself by saying all this here but they would have to send a drone across the border to shoot me.
@Em, they will need a lot of drones, I think. I know others have stated this, and me – I’m with you all the way. I owe the US nothing, I owe the IRS nothing, and that’s exactly what they’ll get from me. I’m very glad I am Canadian and have the protection of my govt (at least for now).