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FATCA: A ticking time bomb for the economy

Posted on by Posted in Issues regarding US persons abroad 93 Comments

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

93 thoughts on “FATCA: A ticking time bomb for the economy”

  1.  from http://www.risk.net/operational-risk-and-regulation/feature/2207380/fatca-igas-causing-concern-in-us

    ‘The signing of the first reciprocal IGA under Fatca is causing concern among US banks‘

    …….”The US Foreign Account Tax Compliance ACT (Fatca) continues to make waves. With the signing in September of the first of the reciprocal intergovernmental agreements (IGAs) covering compliance with Fatca – between the UK and the US – the industry is starting to ask exactly what these IGAs mean.
    In the US in particular domestic institutions will now find themselves
    on the receiving end of Fatca’s more onerous provisions. The potential
    for complications for US institutions trying to comply with potentially
    tens, if not hundreds, of intergovernmental agreements means that US
    institutions are starting to make serious noise about this
    all-encompassing tax law    .”………..

  2. I recently read the following article, September 26, 10:58pm ” US tax policies delay $2bn Chinese loan” in the Financial Times (http://www.ft.com/intl/cms/s/0/d07d1d1e-0574-11e2-bce8-00144feabdc0.html).

    Admittedly, I do not follow the question too closely, but this is the first dramatic and verifiable instance I have seen illustrating the potential risks to the American economy inherent in FATCA’s implementation.

    I apologize if this is in the wrong place and format. If it is really of interest, perhaps someone could make adjustments as necessary.*

  3. Will he or won’t he address FATCA? Florida wants to know:

    http://www.bizjournals.com/southflorida/print-edition/2012/10/12/will-election-affect-offshore-tax.html?ana=lnk

    …”The Business Journal asked Jeff Bechdel,
    Romney’s Florida communications director, if a Romney administration
    would continue to investigate and prosecute offshore tax evasion.
    Bechdel’s only response was a 10-word statement: “Gov. Romney supports
    the enforcement of all duly enacted laws.””….

    and,

    http://www.bizjournals.com/southflorida/blog/2012/10/mitt-romney-and-foreign-bank-tax-evasion.html

  5. Mitt’s been Newtered by Obama regarding foreign accounts.  The only chance there  would have been if one of his surrogates were to have discussed how ridiculous the media attacks on his accounts have been and to discuss the collateral damage that Obama has delivered to US emigrants and immigrants.  They could have done it via media or via supporting Senators or Reps and could have turned around the attacks to their advantage.  And they didn’t.  And now the election is upon us.

  8. This may be posted elsewhere, but: ‘ Singapore Bank to Uncle Sam – Stick it where the sun don’t shine’ – Simon Black, October 23, 2012

    http://www.businessinsider.com/singapore-bank-to-uncle-sam-stick-it-where-the-sun-dont-shine-2012-10

    …”Understandably, foreign banks have been in turmoil over the last two
    years as a result of all this legislation. Nobody wants to crawl in bed
    with the US government, and some banks have taken action by shuttering
    US citizens’ accounts. Americans are even being dumped from foreign
    corporate boards.

    Yet just yesterday, DBS Bank in Singapore stood up to the US government,
    indicating that they would not be registering with US authorities for
    at least for one Dodd Frank provision pertaining to swaps. Nordea Bank
    in Sweden made a similar statement.

    This is an interesting turn of events which could evidence a bigger trend.”……

  10. http://www.mahanyertl.com/mahanyertl/congressman-rips-fatca/2652/

    “

    Congressman Rips FATCA

    by Brian Mahany

    The Foreign Account Tax Compliance Act (FATCA) doesn’t have many
    friends these days. Tens of thousands of taxpayers – mostly foreign born
    Americans, dual nationals, green card holders and Americans living
    abroad – were caught completely unaware of the foreign reporting
    requirements. Despite a PR campaign by the IRS, many still are unaware.
    Unfortunately, the penalties for an unreported account can include 50%
    of the high balance of the account for each year it wasn’t disclosed.

    Foreign banks and hedge funds hate the law too. It is extremely
    burdensome and costly. In fact, many foreign banks have decided to
    simply close the accounts of their American clients rather than go
    through the expense and hassle of complying.”………

    …..”

    Now, even Congress is starting to wake up.  Congressman David
    Reichert (Washington), a member of the powerful House Ways and Means
    Committee, sent a letter last month to IRS Commissioner Douglas Shulman.
    In his letter he noted the rising concerns from all sides. “I have
    watched closely the evolution of FATCA over the past months. I have
    talked with constituents, had discussions with international companies
    who are looking to comply with the new law, and had conversations with
    many who both wonder how successful these new policies will be in
    achieving their intended consequences and what the scale and nature of
    the inevitable unintended consequences may be,” said Reichert.

    While much of the complaining has been from taxpayers and foreign
    banks, Reichert questioned how FATCA might hurt the sale of U.S.
    Treasury securities. Much of our treasury bonds are sold to foreigners.
    Will fears of reciprocal taxation and improper withholding get buyers
    away? Banks that don’t comply are subject to a stiff tax by the IRS.
    Reichert worries that some foreign banks may simply avoid buying
    Treasury bonds for fear that a FATCA mistake may subject them to tax.”………………………

  11. See: http://triblive.com/news/allegheny/2825138-74/tax-united-states-secrecy-money-countries-havens-accounts-foreigners-haven#axzz2DSLVojUJ

    “Fritz Ermarth, former chairman of the National Intelligence Council, described to Congress how the mobs stole from Russia: “Not much of it stays in Cyprus or other tax havens. Much of it, probably most of it, has come into the biggest, safest, most-accessible and profitable investment target in the world, the United States.”
    …………..

    “Yet the United States tends to overlook its
    penchant for secrecy as regulators try to force other countries to cough up tax cheats, a “do as I say, not as I do” approach.”……….

    “Alex Sanchez, president of the Florida Bankers Association. Secrecy was meant “to encourage the flight of capital to the United States. … It’s good for the United States.”

    “Sanchez contends it’s not the business of the IRS or American banking officials to help other countries catch criminals. “I’m not the world’s policeman,” he said.”

  12. @badger

    Thanks for digging that one up. I am finally back in residence in NZ tonight, and starting to catch up.

    I was especially struck by that quote by Alex Sanchez.  I have emailed him before in response to an Op Ed he did in the Miami Herald.  He did not acknowledge it or response. 

    I chuckled at the comment that he is not the world’s policeman, but apparently he doesn’t understand that the International Revenue Service has decided that they are, and his banks suffer! 🙂  

    Here is what I said.

    Dear Mr Sanchez,

    I read with interest your Op-ed piece on the coming IRS regulations that was posted on the Miami Herald on Thursday, May 24th titled New IRS rule scares foreign depositors

    As President of the Florida Bankers Association, I sympathize with your predicament, however, I do note that you have really only told half a story about what is going on. However, that is probably out of necessity, as a full story would be hard for your audience to digest.  

    I am writing just to say, that I support your effort to stop this misguided regulation.  I don’t know what your opposition strategy is, or how extensive your lobbying efforts, but I wonder if you have ever considered reaching out to organizations like American Citizens Abroad, Democrats Abroad , Republicans Abroad, orAssociation of American Residents Overseas? I think there are some good synergies that might be possible in opposition to these misguided regulations.  I do not represent them any of them, (however, I am an ACA member) but do think you have some common ground that could be exploited.

    Americans Abroad, generally speaking are being just as severely impacted by Congressional/IRS policy actions related to bank reporting, as you are in Florida. Maybe even more so, as they are on the receiving end of a IRS jihad against Homeland offshore tax cheats. This is having the unintended consequence of denying them banking services in the countries where they live. With FATCA implementation close at hand, they are becoming pariahs that banks don’t want to touch anymore. You, on the other hand, will be impacted severely, but differently, and will at least have the outlet of passing on the costs of capital flight and IRS reporting administration to your U.S. homeland customers.

    I have been aware of this IRS regulatory effort since last year, but it really came to the fore front when the “he said / she said” opposing Op-eds between Senator Rubio and Treasury’s Emily McMahon was written back in March. I have been following it closely since then, and posted a blog called Dualing Editorials at Isaac Brock Society. 

    I followed up in April, with another post called. DATCA is not Dead.  This was a follow on, when the IRS rolled out the final regulations you write about. I guess you don’t get any public hearings to discuss, oppose or create press attention, like the  Foreign Financial Institutions (FFIs) just did on FATCA.   (By the way, DATCA is my short hand term for the IRS regulations that you are now facing.)

    I noticed in your article, there was no mention of FATCA, but surely you know that DATCA has arisen as the faux reciprocity tool the IRS needs to force FATCA down the throats of the FFIs and governments around the world which hate FATCA as much as you dis-like DATCA.  I assume you are working in joint lobbying efforts with some of the foreign Banking Associations, like Canada or Australia, maybe?  You really have the same problems, governments gone wild in search of new revenues they assume are hidden in your vaults. 

    You, of course, are getting the FATCA fall out (FFO) of Congresses misguided and extra-territorial over reach when it passed  FATCA buried in the Hire Act in 2010.  Did you miss the press releases from back then when they were dreaming up this beauty, or not realize it was headed your way?

    I am of the opinion, that it will be very hard to stop DATCA, (unless you have some legal tricks or Congressional amendments your sleeve) but I salute your effort. I will help with my meager blogging when and where I can, although my focus is broader than your narrow homeland concern. Still, on a stand alone basis, it is bad policy and terrible for capital investments in America.  This is definitely sending the wrong message to investors and financial markets, and heaven knows we don’t need to add any more stress to the system right now!

    Obviously, the most direct route to killing the DATCA demon is to attack its FATCA head. But attempts to appeal FATCA are difficult, as this freight train has gained speed for 2 years now. There are those that are using it, as their stepping stone to create a Global Tax Data exchange. (GATCA)  You are just one of the victims of that effort. I fear we may be watching the creation of a new systemic shock to the financial system if this proceeds on, as those Utopian dreamers plan.

    I did notice, with a certain irony the letter the entire Florida Delegation sent to President Obama appealing for redress.  In it, were a lot of signatures of those in Congress who voted for FATCA in the first place. In fairness, since they don’t read the bills they vote for, maybe they did not know it was there! Now you are living with the FBB (Fatca blow back) results.  You might want to ask them if they would like to reconsider their vote for FATCA, as you are on the receiving end of the unintended consequences just like American’s Abroad are.  

    Btw, your fellow international bankers just had an opportunity to express their opinion of draft regulations on May 15th, at the FATCA public hearings.  (The opportunity you did not have.)  No, I did not notice any stories about it in the Miami Herald either.  Here is a link to the testimony that I posted in a blog called: So where were the journalists at the May 15th FATCA public hearing?  There were no journalist from the Miami Herald there.  Maybe there should have been one?!  They would have heard laments similar to yours, but they get even less attention or sympathy in the media than you do.  

    Good luck with your fight. I am rooting for you. I would encourage you contact any or all of the groups I have mentioned  to see if there are any contacts or angles of attack that might be mutually beneficial. Expats and US banks are being gored by the same Ox.  Surely there is something that can be done jointly to stop this before it is too late. 

    All the best,   

    Just Me

  13. Thanks again, badger, for your find and comments and to Just Me for your online further education efforts. Such good work.

    Interesting that you have corresponded before with Mr. Sanchez and he chose not to respond. How could he not be “educated” though by I can only imagine what your first communication with him was, followed by this further contribution to his learning. I hope that you do hear back from him, Just Me.

    Once again, both, thanks for all you are doing.

    And, Just Me, you spend so much time working for all of us even after your personal ordeal has lessened.

  14. @calgary411

    I am just getting settled back into NZ. Got here last night.  I might try emailing Sanchez again, as a followup, and at least suggest that he contact James Jatras to see if their aren’t some opposition synergies. 🙂  I expect my response will be like the first one!  🙂

  16. USA policy is, Cubans arriving onto U.S.A. soil are given political asylum. To reduce the number of these, U.S. Coast Guard goons capture these persons on the high seas and return them to Cuba. The Cuban has to reach dry land to get asylum. So how about this: The Government of Canada extends tourist visas automatically to every Cuban who wants one. These people arrive in Montreal and take a taxi to Philipsburg. Then they stroll across the international line into Vermont, where they are guaranteed political asylum. Kinda like the days when West Berlin automatically welcomed East Germans who made it across the Wall, and West Berlin policy applied to citizens of any other country behind the Iron Curtain, so the Soviets brought in refugees from Third World client states and released them at the Wall so West Berlin would have to take in these persons also.

    Most Cubans would rather live in Miami than in Havana. So, Democrats, if you don’t want millions of Cubans moving to Florida, becoming U.S. citizens and voting Republican as the vast majority do, you better repeal CBT.

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