As most of us will recall from our school days, an iceberg is a deeply deceptive thing since 90% of its mass lies hidden beneath the waves. Like an iceberg, the full reality of FATCA remains largely hidden from view, even now, a mere 20 days before its implementation.
Much attention has been paid to FATCA’s most visible aspects – the growing numbers of both signed and “in substance” agreements - as well as the more than 77,000 FFIs which have entered the Portal of Mordor and received their shiny new IRS deputy badges. As Robert Stack, deputy assistant treasury secretary for international tax affairs crowed, “The strong international support for FATCA is clear, and this success will help us in our goal of stopping tax evasion and narrowing the tax gap.”
But appearances are indeed deceiving with FATCA, and the imminent danger lies not so much with what is already seen, but that which remains to be seen, still lurking in the shadows beneath the surface.
The IRS itself recently realized that progress was going painfully slowly on officially signing-up the 263 tax jurisdictions which it recognizes (196 Independent States in the World and 67 Dependencies and Areas of Special Sovereignty) to its list of IGAs. It therefore decided to lump together all the full-terms (signed agreements) with the preemies (“in substance” agreements) to suddenly come up with a combined list of 70 more-or-less IGAs. Well, here’s what that actually looks like:
Conversely, here is the current list of jurisdictions which have no FATCA agreement of any kind (with some notable entries highlighted in bold):
Antigua and Barbuda
Ashmore and Cartier Islands
Bosnia and Herzegovina
British Indian Ocean Territory
Central African Republic
Cocos (Keeling) Islands
Coral Sea Islands
Falkland Islands (Islas Malvinas)
French Southern and Antarctic Lands
Heard Island and McDonald Islands
Micronesia, Federated States of
Papua New Guinea
Saint Kitts and Nevis
Saint Pierre and Miquelon
Saint Vincent and the Grenadines
Sao Tome and Principe
South Georgia and the South Sandwich Islands
Trinidad and Tobago
Wallis and Futuna
Meanwhile, the number of FFIs which have registered with the IRS currently stands at 77,354. The total number of FFIs worldwide (all financial institutions outside of the U.S.) is unknown, but estimates have ranged from several hundred thousand to the low millions. A common estimate has been one-million, which looks like this:
As you can see from both charts, the red areas represent large zones of uncertainty and danger in the imminent rollout of FATCA. The language is quite clear in the IRS documentation: 30% withholding will begin on July 1st for FFIs which are not deemed to be FATCA compliant. Because of pass-through payments and the desire to avoid all possible risks associated with FATCA regulations, there is every reason to believe that FATCA-compliant financial institutions will immediately begin large-scale withholding on transactions with thousands of non-compliant FFIs from hundreds of jurisdictions with no IGAs in place.
It is also becoming clear that the nations and territories which will bear the full brunt of FATCA withholding are amongst the poorest and least-prepared in the entire world, especially Africa. FATCA will crack open both historic and brand-new fault lines between rich and poor nations everywhere. Read the list again, and extrapolate our very near future.
Like an iceberg, FATCA’s greatest danger lies well beneath the surface; unseen, and patiently awaiting its moment of destiny. July 1st will most surely go down in the history books as a day of tragic infamy and the beginning of a calamity whose outlines we have only begun to discern through dark and troubled waters.