reprinted with permission from Tax Connections
Prior to the enactment of FATCA, Congress and the Executive were in possession of concrete-evidence revealing FATCA would fail to collect any meaningful amount of tax-revenue from U.S. persons evading tax through offshore financial center holdings. Congress should have halted enactment of HIRE – if in fact, FATCA’s purpose was to collect tax-revenue from offshore tax evasion by U.S. persons.
The United States Congress used estimates from the Joint Committee on Taxation (JCT) as the foundation for supporting the Foreign Account Tax Compliance Act (FATCA), contained in the Hiring Incentives to Restore Employment Act (HIRE).
HIRE was a tax expenditure designed to encourage U.S. small business to hire new employees. HIRE included two tax expenditures of note: a payroll tax exemption to employers and a one-thousand dollar tax credit for employers hiring employees between February of 2010 and January of 2011. [1] FATCA was included in HIRE because the tax revenue collected from FATCA was supposed to offset the tax expenditures authorized by HIRE. [2] The tax revenue FATCA was said to be targeting was from U.S. persons with foreign bank accounts who were evading tax.
In July of 2008, and around the time of the UBS scandal and the Global Financial Crisis the U.S. Senate Permanent Subcommittee on Investigations held a hearing and issued a report entitled “Tax Haven Banks and U.S. Tax Compliance”. [3] The underlying justification for FATCA as a substantial revenue raiser rested on a single statement found in a footnote in the 2008 hearing report: “Each year, the United States loses an estimated $100B in tax revenue due to offshore tax abuses.” [4] In a 2009 follow-up report, the Ways and Means’ Subcommittee on Select Revenue Measures held a hearing entitled: Banking Secrecy Practices and Wealthy Americans. During this hearing, the Senate increased the U.S. tax revenue loss-estimate by 50 percent stating: “Contributing to the annual tax gap are offshore tax schemes responsible for lost tax revenues totaling an estimated $150B each year.” [5] The estimates entered into the record during these hearings measured the offshore tax gap, or the amount of tax revenue[6] that would be collected if offshore tax evasion by U.S. persons holding foreign bank accounts was ended. One month, before HIRE was signed into law by President Obama, new evidence revealed the offshore tax gap was nowhere near as large as previously thought.
On February 23, 2010, the JCT released a report estimating that FATCA would instead, only collect $8.7B over ten-years or $870M per year; a huge difference from last-year’s estimate of $150B per year.[7] Assuming this latest estimate was accurate, the 2008 and 2009 estimates were drastically overinflated – to the tune of over $149B annually! At that point, a reasonable person puts on the breaks and asks questions. At the very least Congress should have engaged in some due diligence to determine why there was such a huge discrepancy. After all, there was plenty of time remaining on the legislative clock,[8] and the report invalidated the policy justification for FATCA. Instead, Congress and President Obama steamrolled FATCA into law in less-than a month after the JCT estimate – almost like, they wanted to hurry to get it in, before someone caught wind that the FATCA had nothing to do with closing the fictitious $150B offshore tax gap, because there was really no tax revenue outstanding. (Part I….To Be Continued)
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[1] The Hiring Incentives to Restore Employment (HIRE) Act of 2010 (Pub.L. 111–147, 124 Stat. 71, enacted March 18, 2010, H.R. 2847).
[2] HIRE was originally a $150B dollar incentive package, but the package was reduced to $15B before enactment. It would be interesting to take a look at the timing of the reduction in the HIRE economic incentive package (from $150B to $15B), and compare it with the JCT’s February 23rd estimate, to determine if the reduction in the spending package was a result of learning FATCA would not collect any meaningful amount of tax revenue from offshore accounts, because there was none to collect.
[3] Tax Haven Banks and U.S. Taxpayer Compliance, Senate Permanent Subcomm. on Investigations, Comm. on Homeland Security and Governmental Affairs, 110th Cong. (2008).
[4] Ibid.
[5] Banking Secrecy Practices and Wealthy Americans, Senate Ways and Means Subcomm. on Select Revenue Measures, 111th Cong. (2009). Emphasis added.
[6] In the U.S., we have a 1099 system, where banks are forced to report interest and dividends. Unless there is some income from the account, it follows that there can be no income tax due from that account. The way to determine whether there is income from an account is to require the accountholder’s financial institution to report on the income from the account.
[7] The 2010 JCT report estimate of $8.7B in offshore tax evasion tax-revenue to be collected over ten-years or $870M per year (median average). It should be noted that the report breaks down the estimate by year. Therefore the median average is not the best number to use in every case. Individual calculations based on empirical data from a particular year proving the current validity of the report will incorporate the amounts listed on the report for each relevant year in question to preserve the integrity of the proposition for which the calculation was intended to support.
[8] The House Ways & Means Committee held the Hearing on Banking Secrecy Practices and Wealthy American Taxpayers on March 31st, 2009. The House passed the original version of HIRE on June 18th, 2009. The JCTs estimate was released on February 23rd, 2010. HIRE passed the Senate the following day on February 24th, 2010 (with amendment). The House followed by adding an amendment on March 4th, 2010 (with amendment) which was approved by the Senate on March 17th, 2010. March 18th, 2010, President Obama signed HIRE into law, and thereby FATCA into law as well. Therefore, there was a full month from the time the JCT report was issued, and the day President Obama signed HIRE (containing FATCA) into law. (Part I….To Be Continued)
There’s been an uptick in FATCA articles recently, all negative. I wonder how much longer the Democrats can tout it as a panacea for offshore tax evasion? I wonder how long the Republicans can ignore it?
Nice to see something at Tax Connections that isn’t just the usual thou-must-comply BS. I get tired of constantly correcting it. I’m surprised sometimes that they are willing to publish my comments.
Somebody needs to whisper in Trump’s ear and let him know that FATCA is another one of Obama’s “accomplishments”. No need to bother him with the details (he wouldn’t understand any of it, anyway) just that it was passed by the Obama administration and can easily be undone. It would be gone in a month.
The questions remains with all the yammer—why did the “sovereign” nations all bend over, spread their collective cheeks and sign FATCA?? these ‘nations’ failed their citizens and sold them out–are these “nations” simply us lap dogs and another territory on america’s manifest destiny run away freight train??
Most of the income tax law has little to do with collecting revenue to operate the government. The current tax law was crafted to fit the Marxist Model to destroy the middle class, which he detested and he said so in the Communist Manifesto, second Chapter. Our constitution prohibited taxation of income and would have to be amended in order to help destroy the middle class. They had fanned out over the world to try to accomplish their goal of ”distribute the wealth by hate of the rich”. They have almost accomplished their goal and even if Socialism has failed wherever tried, they are hell bent on making it our economic system.
Would be even better if one could prove that FATCA costs more to implement than it brings in.
Clearly FATCA does cost non-US banks and non-US-taxpayers much much more to implement than it brings in to the US.
Which is perhaps the point of it. That plus the fact that it encourages US expats to emerge from the foreign shadows and start reporting their non-US assets (US estate tax, for the use of)
“Most of the income tax law has little to do with collecting revenue to operate the government. ”
You got that right, Tiddlywinks.
Great article. Completely accurate.
I hope part II will make the point that the $8.7B was to come from Financial Institution’s withholding and that the IGAs negated this. The tax revenue from FATCA is closer to $0 than is generally believed.
The OVDP has raised $11.1B according to this source:
https://www.irs.gov/newsroom/irs-to-end-offshore-voluntary-disclosure-program-taxpayers-with-undisclosed-foreign-assets-urged-to-come-forward-now
I agree that revenue raised via the OVDP should not be confused with the $8.7B that was to come from Financial Institution’s FATCA withholding.
“The questions remains with all the yammer—why did the “sovereign” nations all bend over, spread their collective cheeks and sign FATCA?? these ‘nations’ failed their citizens and sold them out–are these “nations” simply us lap dogs and another territory on america’s manifest destiny run away freight train??”
On the face of it, these nations threw a section of their society to the IRS to protect the banks, simple as that. Cowardly bastards.
That said, I can’t help wondering if all is as it seems here and what the agenda might really be.
Hayon Perryman:
“the $8.7B was to come from Financial Institution’s withholding and that the IGAs negated this. ”
And gave other countries (significantly, the EU countries, but also Russia and India and China) access to information on US capital flow to and from their country. Speedily expanded by the OECD and the EU into a worldwide money-finding machine. All paid for by the banks – or rather the banks’ customers.
What’s not to like?
Tax evasion is probably wildly overestimated everywhere in the world. It is, on paper, a lot of free money that can then be dreamily spent on anything else (tax cuts or social programs, for instance) that sounds good to one’s electorate. Just a propaganda tool. The fun part is watching how these programs often don’t work (or at least don’t increase government revenue), most notably FATCA.
Individual freedom must be weighed against the burdens of law enforcement at all costs, something the Founding Fathers understood. In the imperfect world we live in they preferred to let many people go free rather than burden the innocent with persecution.
FATCA lives in the opposite spirit: punish lots of innocent people for daring to be born in the USA or daring to move away or daring to open a bank account elsewhere. Along the way a few tax evaders may be deterred, even caught, but with no true budgetary benefit.
“The fun part is watching how these programs often don’t work (or at least don’t increase government revenue), most notably FATCA.”
FATCA’s probably working for someone though. We just don’t quite know who or how.
There is no way it can work until Non-US Financial Institutions collect and Report US TINs. Without TINs US authorities cannot match the data to taxpayers.
This (reporting TINs) will probably be the case from 2020.
The IRS cannot enforce FATCA directly in IGA tax jurisdictions. In IGA tax jurisdictions this falls to Host Country Tax Authorities (HCTA). Why would HCTA want to enforce US FATCA? Well, they probably would not be motivated to do so unless it (enforcement) is easy.
It has just become easy: the IRS can share what it learned from the OVDP with the J5:
https://www.irs.gov/compliance/joint-chiefs-of-global-tax-enforcement
“There is no way it can work until Non-US Financial Institutions collect and Report US TINs. ”
It’s not working to catch tax evaders – couldn’t agree more. But it’s working for someone.
Presumably, it must be working for the donors. Or selected donors.
@plaxy donors?
“This (reporting TINs) will probably be the case from 2020.”
Oooo, scary scary.
Personally I’d like nothing better than to see the IGA 1 governments confronted with the contradiction implicit in their acceptance of US claims that all US citizens are forever tax-resident in the US and all money touched by a USC is therefore US-source money and the US is entitled to first taxing rights.
But unfortunately I seriously doubt that sny such awkward considerations will be allowed to surface. The idea that IGA 1 countries could force their USCs to hand over their SSNs is just fantasy. How – a spot of waterboarding? Or rendition to Guantanamo?
“@plaxy donors?”
Wealthy donors to US political parties. What PACs like RO exist to cultivate.
FATCA is hard to defend as is Citizenship based taxation.
I think FATCA is about appropriating autonomy under threat of sanction, with the tax bit a scam to push it through. “Why” everyone rolled remains to be seen, but it’s worrisome & likely very nefarious. Get ready for your yoke.
In other news, the US tried to extort other nations who wanted to continue to promote breast-feeding because: 70 billion dollar formula industry.
The US is becoming a world threat to EVERYONE, in every way. Do what we say, “or else”.
“Get ready for your yoke.”
Or get rid of your yoke, if you can scrape up $2350.
@plaxy
I meant: if the USA is able to simply threaten extortion and then later any form of military might to take what it wants (and it seems it wants EVERYTHING), then we’ll ALL be wearing those yokes. FATCA will be the least of our troubles.
Jane:
“…if the USA is able to simply threaten extortion and then later any form of military might to take what it wants “
But it isn’t.
The residence-countries are reporting all their residents’ cross-border accounts – not just USC accounts. It’s not because the US makes them do it.
@Haydon
Nice to see you here!
We know about J5. I don’t see a specific reference to sharing OVDP info.
Does S. 6103 not apply? Just asking…..
Hopefully Trumps antics today at NATO will push Europeans to reconsider US domination of all things. I am not holding my breath, though.