This comment by Jim Jatras is too important to let it be lost in our comment stream:
To Tim, Petros et al.at IBS:
The organizers at George Mason Law School inform me that the video of the event will be posted in a few weeks. Yes, it was great to have a chance to offer a few points directly to Prof. Harvey and Jesse Eggert at Treasury. Once the video is up, we can let viewers to decide who might be a flake and who is not.
Bottom line from the event is that it confirmed my sense going in of FATCA’s extreme political vulnerability and ripeness for repeal — if financial institutions (both US and non-US) and foreign governments would stop acting as, in effect, FATCA enablers. Most significant: Prof. Harvey, Mr. Eggert, and pretty much everyone admitted in substance that FATCA as written can’t be enforced. IGAs (intergovernmental agreements) are essential for the US to implement what would otherwise be an unenforceable regime. No one pretended that FATCA could be successfully enforced solely as a unlilateral and direct U.S. imposition. Either Washington will be successful in pressuring or tricking other countries into enforcing FATCA on themselves, or the whole scheme collapses.
As such, IGAs – such as the one finalized with the UK (though Parliament still needs approve it) and being negotiated with many other governments – are positively counterproductive for foreign firms and governments. They have the effect of rescuing FATCA.
But as I pointed out — and no one disputed — IGAs have another, unintended consequence: they repatriate FATCA’s costs to U.S. Under “original FATCA,” as enacted, American firms’ costs were relatively minimal, basically as a withholding agent for “recalcitrant” foreign firms, which would bear the vast bulk of the costs. But under the IGAs, similar obligations would be imposed on US domestic firms for reporting non-US residents’ data to the IRS, for transfer to foreign governments. (Indeed, under Article 6 of the “reciprocal” version of the IGA, the U.S. commits to achieving full reciprocity in data exchange with the “partner” country.) These costs – which would be passed on to American consumers – could be massive, since US firms will have to report on multiple countries, not just one. Not only will this be quite costly and invasive for American domestic institutions, it would be especially problematic for non-bank institutions (e.g., insurance companies, pension funds) that don’t routinely collect the kind of anti-money-laundering and “know your client” information banks do.
So Treasury faces a conundrum. On the one hand, FATCA can’t succeed without going down the IGA road. On the other hand, IGAs mean that FATCA costs that originally would be carried almost entirely by FFIs are now to be imposed here in the U.S. That changes the political landscape to FATCA’s detriment.
As IBS participants are aware, very little about any of this has appeared in the U.S. media. (And most of what has appeared are thinly veiled ads by compliance vendors – tax lawyers, accountants, etc. – who expect to educate their kids and retire on FATCA.) Americans only dimly perceive the looming threat to their privacy, pocket books and personal freedom. But if this were well-publicized through an active media campaign, that could change – and help set the stage for FATCA’s demise. But because U.S. interests are not (yet) sufficiently alerted to the this danger, I believe it is vital that non-US financial interests provide the catalytic initial support. Unfortunately, that has not yet happened. Instead (perhaps not fully appreciating that ours is not a parliamentary system) foreign firms are still begging their governments to negotiate with the Americans for relief — leading to the counterproductive IGAs.
As indicated on my site http://www.repealfatca.com, a place-holder for a campaign aimed at arousing U.S., there has only begun some pushback on FATCA based on repatriation of the outrageous costs FATCA would impose. IBS readers are of course familiar with the July 25 letter to Secretary Timothy Geithner from Rand Paul (R-KY) and three colleagues, just prior to the release of the “model” agreements. (Also, I thank IBS for bringing to my attention the letter from Rep Dave Reichert, with whom I plan to follow up, along with other Ways and Means Committee offices with whom I’m in contact.). Treasury’s answer to Rand Paul and his colleagues earlier this month is entirely inadequate and ignores entirely the Senators’ questions about costs, and other touchy issues. (At the George Mason event I argued about this with Mr. Eggert.) Treasury’s avoidance of talking about domestic costs is significant, as it flags a key, possibly fatal FATCA vulnerability.
The kind of pressure evidenced by the Paul-plus-three and Reichert letters could increase dramatically and be combined with legislative initiatives to stymie FATCA’s enforcement and help lead to its repeal. (Also, remember that we’re about to have an election, which also could change the landscape with respect to FATCA.) There is a standard panoply of techniques used in concert with lobbying Congress to achieve the passage – or repeal – of legislation. These include hearings, ordering cost/benefit studies (which never was done for FATCA), withholding enforcement funding, freezing Executive Branch nominations, and perhaps most importantly, blocking implementation of the IGAs as the “weak link” in the FATCA enforcement plan, combined with a vigorous PR campaign to “brand” FATCA as (this is only slightly hyperbolic) the worst law ever. But this requires a serious, sustained – and funded – on-the-ground Congressional lobbying and media effort. Simply writing letters to Congress explaining why FATCA is bad cannot accomplish the needed task, especially if they represent only the concerns of foreign (or for that matter, expat) interests.
We hear all the time that “FATCA is here to stay” – mostly, as I say, from practitioners with a pecuniary interest in a very expensive FATCA regime, many of them non-Americans with no experience with the US political system. But based on my experience, I am convinced repeal is a realistic outcome – if there is launched a campaign comparable to other projects for the passage or repeal of legislation. Unfortunately, while impacted firms (mainly foreign ones, but American too) have already spent millions sending pointless comment letters to Treasury and gearing up for compliance to the tune of untold billions of dollars in the aggregate, and millions per institutions, none has yet seen fit to commit a small fraction of this to exploiting FATCA’s manifest vulnerabilities.
Indeed, by point of comparison, there are significant examples of the sudden house-of-cards collapse of what had been considered unassailable initiatives, once an intelligent and active campaign to that end was launched:
a. The Medicare Catastrophic Coverage Act of 1988-89 (“Rarely has a Government program that promised so much to so many fallen apart so fast.” Unlike FATCA, the Catastrophic Coverage Act – which was repealed 17 months after it was enacted – had a clear and identifiable set of beneficiaries.
b. Dubai Ports World debacle of 2005-2006. (As it happens, I had a hand in killing the Dubai Ports World deal, despite the solid support for it from the White House of George W. Bush, Congressional majorities in both the Senate and House and Republicans and Democrats alike, and editorial support from publications including the Financial Times, the Wall Street Journal, the Los Angeles Times, the Washington Post, The Economist, and top commentators including Tony Snow, Thomas Friedman, Rush Limbaugh, former president Jimmy Carter, Senator John Warner, and Bill O’Reilly. In addition Senator John McCain stated he believed Americans “should trust the President on this issue.” In the end, they didn’t.)
Dramatic turnarounds of this sort aren’t automatic or easy. Nor is the outcome certain. But what is certain now, is that if a repeal campaign is not launched, Treasury will continue with its methodical campaign to pull country after country into IGAs and eventually solidify a “global FATCA” – an outcome that might have been averted with some active and intelligent opposition in the US.
That said, based on the observations above, there is enough reason to suggest that that in addition to spending huge sums of money on FATCA compliance – already described as a practitioners’ “gold rush,” especially for tax lawyers – devoting a comparatively small amount to seeing if this costly nightmare can be averted altogether. For large firm the difference between compliance and supporting a repeal effort could be one between hundreds of millions of dollars versus tens of thousands of dollars.
My guess is that FATCA could probably be repealed in about a year – before the most draconian regulations go into force – with an effort costing between $50 and $100 thousand per month. Obviously, the more money devoted to the effort, the greater the likelihood and speed of success. Even if a foreign interest takes the lead in launching the effort, a coalition of interests – including domestic American ones – is important. To put it bluntly, Congress will respond to concerns of costs inflicted on U.S. domestic interests, they are far less concerned about costs imposed on foreign interests.
This also relates to some criticism I’ve seen on IBS and elsewhere regarding my focus on costs to firms and not, specifically, the unfair costs FATCA imposes on (for example) expats and dual nationals in Canada and elsewhere, not to mention related issues stemming from American worldwide taxation. Short answer: I am interested in solving this problem. Like it or not, the fact is that the legitimate complaints expats have about FATCA and related impositions cannot get FATCA repealed – but the ones I have pointed to have that potential. Moreover, unlike individual expats, the impacted financial interests have the resources to support the kind of effort needed at cost far less than they are facing to comply with FATCA. To put it another way: if you are an expat or dual national in Canada or somewhere else, focusing on how FATCA unfairly injures you is not going to relieve you of that injury. Instead, you need to think of who you know in the banking, insurance, pension, investment, etc., industry, either in the U.S. or abroad, and suggest that they would be protecting their own interests (not to mention yours) by jumping off the IGA and compliance hamster-wheel and freeing up some resources to bringing FATCA down.
Two closing thoughts:
First: No doubt some will read this and say, “Sure, he tags tax lawyers, accountants, and so forth with lucrative motives, but isn’t he also just trying to drum up business?” Of course. But let me note that not only is what I am proposing far less costly than the truly obscene amounts that would be spent on compliance, the purpose would be to relieve what I sincerely believe to be a tragic mistake. One of the lawyers at the George Mason event, at the opening of the second panel, posed the relative costs of FATCA as a projected $1 trillion worldwide versus a projected recovery of lost taxes at less than $1 billion a year. It doesn’t take a math genius to figure out this is a bad exchange, since that $1 trillion will be spent on an activity that contributes absolutely nothing to the American or global economy other than compliance with the FATCA edict itself. In comparison, I would not be continually beating this drum (at the risk of “flake” characterizations) unless I believed I was offering the “right” product to the marketplace, not only from a business perspective but morally.
Second: As I mentioned in closing at the George Mason event, a few months ago a U.S. financial industry lobbyist in Washington told me that he thought FATCA would be repealed in the end, but it would follow the trajectory of the Catastrophic Coverage Act. That is, it would be pulled back after it had turned into a horrendously expensive global train wreck. My thought is, wouldn’t it be better to save the time and cost – not to mention the economic wellbeing of who knows how many individual persons – by undertaking that now, and not waiting until today’s foolhardiness had matured into tomorrow’s catastrophe?