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‘DATCA Lite’ Could Destabilize Banks, Spark Economic Crisis

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As we have been saying for a long time, ‘DATCA lite’  (FATCA IGA reciprocity) has the potential to be financially destabilizing.  It, along with GATCA, was birthed from FATCA.  DATCA and GATCA are the direct progeny of the 2010 Hire Act.  Given the stealth nature of the FATCA amendment, is very hard to make a case that this was the intention of Congress, but it is now the ‘Rosemary’s Baby‘ reality that we are dealing with.

See this new article by Alex Newman.

Obama Tax Scheme Could Destabilize Banks, Spark Economic Crisis

 A crucial component of the widely criticized new addition to the U.S. tax regime known as FATCA, passed by Democrats and signed by Obama in 2010 as part of a “jobs” bill, could result in massive capital flight from American banks and economic devastation if efforts to stop it are unsuccessful, experts and policymakers are warning. With the U.S. economy still teetering, some analysts are even suggesting that allegedly unlawful IRS mandates purporting to force American financial institutions to report foreign account holders to their governments could be the straw that breaks the proverbial camel’s back.

For a complete history of DATCA evolution and its opposition in Congress, read more here.

Of important note, is this addition I just made.  It is the analysis  from 2004 which merits your attention.

Mercatus Center at George Mason University

AN ECONOMIC ANALYSIS OF THE PROPOSED IRS RULE GOVERNING THE REPORTING OF DEPOSIT INTEREST PAID TO NONRESIDENT ALIENS

Treasury had tried before  FATCA IGAs (going back to 2002) to impose a DATCA regime, but didn’t happen until it had an Administration in power to its liking.  I didn’t realize this history, until this pdf analysis was sent to me recently. It just goes to show, that bad ideas have a long gestation period, and vigilance against them can NEVER be relaxed.

UBS offshore Tax evasion scandal and the birth of FATCA obviously (at least to me) were the “Shock Doctrine” moments that gave the Treasury its opportunity again, to impose DATCA lite unilaterally by their interpretation of ‘regulatory authority’ without regard to the will of Congress.

One of the criticisms lodged against using Federal Register page counts as a proxy for regulatory burden holds that many pages can be consumed in the process of deregulation, while only a handful of pages may be required to impose a particularly costly rule. The latter instance is clearly illustrated by the IRS’s proposed rule to require the reporting of deposit interest paid to nonresident alien (NRA) depositors of U.S. depositories. I hold this conclusion despite the IRS’s unsupported assertion in the scant (4 page) documentation of its proposed rule that the “proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866.” (p. 50387).

Although proposed in 2002, and the comment period has long since passed, the NRA deposit interest reporting rule has not been finalized; however, the possibility that it may be implemented provides the motivation for this study. The analysis that follows confines itself to the likely economic consequences of the rule, and leaves the legal and political analysis of the rule to others.2 For ease of exposition, I summarize my analysis of the rule’s potential economic effects into primary effects, secondary effects, and other likely consequences.

I will update my timeline of DATCA to include this as an earlier start date, as my start date only begins at my moment of awareness of what was happening.

7 thoughts on “‘DATCA Lite’ Could Destabilize Banks, Spark Economic Crisis”

  1. Unfortunately if DATCA goes, this may not necessary get rid of FATCA for us. There is an interesting article from risk.com ‘Universal Fatca runs into political obstacles.’ It notes that even if DATCA runs into trouble, FATCA may still stand because the U.S. always intended to use its unique position in the world financial system to impose FATCA unilaterally on other countries.

  2. RE: A crucial component of the widely criticized new addition to the U.S. tax regime known as FATCA,

    Finally someone is figuring it out!!! But will anyone listen? Get all your US$ (if you have any) exchanged NOW; the folks in the US have no idea what is going to hit them soon enough!

  4. Patric Hale has given his permission to reproduce his excellent response to Alex Newman’s article:

    Dear Alex,

    As a founding director of American Citizens Abroad from way back in 1977, I’d like to thank you for your hard-hitting but entirely accurate article about the FATCA debacle and particularly the costs to the US economy, an issue that Sen. Levin – the Grand FATCA Inquisitor – never considered at all.

    As you can imagine, I’ve been active in this entire discussion for well over the past 4 years, both inside the USA and outside. I lived in Europe for over 28 years, mostly working in the financial media, but also as SVP for CNN International. I’ve seen the devastation of promethean law-makers stemming back to William Proxmire who regularly seem to relish in bashing all overseas Americans, devastating our expat communities, disrupting our trade and indeed handing it over to our competitors because of their supercilious “boogeyman” adventures of trying to swat at the shadows of the ever mythical “tax evaders”.

    Indeed, as the push-back that was inevitable has started, suddenly we are seeing an escalation of the “silly money” being touted around by Levin and his cohorts (or is that co-conspirators?) that are simply without any logic or substance at all. It has been quoted – and mindlessly repeated throughout the media – of a supposed $100 billion in “lost revenue”. Last week that went up to $150 billion. This is complete nonsense and entirely made up as the rationale for instituting the most diabolical scheme for fiscal imperialism that any country has ever tried to impose on another – let alone the whole world. While the Obama administration is pointing fingers at Putin for the “land grab” of Crimea, what it is doing through the combination of threatening EVERY COUNTRY IN THE WORLD with expropriation – or at least sequestration – of foreign bank’s assets in America unless they act as IRS fiscal Gestapo puts Putin’s acts to shame several times over!

    Back briefly to the $100 billion – considering this: After the UBS arm twist with the 4,500 American names, and the Overseas Voluntary Disclosure Program of the IRS, they netted $6 billion in new revenues from some 38,000 individuals who came forward. Of this, they reported, $4 billion was from interest, fines, and penalties, leaving only $2 billion in actually “lost tax revenue”. So where does Levin & Co. think there are $98 billion more? This is simply ludicrous! Even worse is when you realize that the $2 billion actually represents a “windfall” to the IRS, NOT a revenue stream at all!. The Joint Committee on Taxation “scored” FATCA in Dec 2010 in its annual report at bringing in not more than $800 million in “new revenue”; they are likely to be even more disappointed because of the number of overseas Americans who are simply having to readjust their lives because of this ill-conceived intrusion.

    As you know, more Americans are now having to choose between trying to live a normal life with a regular bank account by giving up their US citizenship, or be “fined” for doing nothing wrong, if only by having to pay accountants thousands of dollars to fill out US tax forms when they owe no money in taxes at all! Indeed, the ugly irony here is that the IRS’ only real source of revenue will come by them imposing $10,000 fines on expats for clerical errors because there will hardly be “lost revenue” at all.

    Despite my having moved back to the USA 16 years ago, my ties overseas remain strong since my wife is Dutch.. In addition, I maintain my contacts in the expat community and at no time in the 40+ years involved with them has anything disrupted them as much as this. I also have a god-son of English friends who was born in NYC, so is American by birth, even though he returned when he was one year-old. All of the intervening 24 years he has been proud to call himself American, as I have been proud as his godfather. I’ve had to nonetheless advise him to relinquish his US passport because of what FATCA will be doing to him and his future. No American should have to be placed in this position!
    In the meantime, I watched Grand FATCA Inquisitor Levin recently at his “hearings” with the IRS on FATCA as he berated them for not being aggressive enough (!) in imposing this ridiculous scheme, even shouting at the IRS officials why they don’t put the screws to the Swiss to play by our rules, “or else.” There is a collective sigh of relief by all expats knowing that he is retiring at the end of this year.

    In the meantime, the implications of the IGAs, as you expertly described them, on the US banking industry is only now being felt. I am also glad you highlighted the deal with Putin in red – can you imagine what his fellow KGB (or whatever they’ve renamed them) will do with that kind of information?

    I’ve personally had a private conversation with Rep. Jim Himes of CT where I live about this. He is not only on the House subcommittee on capital markets (ex-Goldman exec), but on the House Select Committee for Intelligence, too. You may want to reach out to his office and pursue this story through the “US capital markets” angle. The first time the US Treasury sequesters any money from an international bank because of FATCA is the first time you will see a real exodus of assets AND a drop in foreign interest in US Treasury debt markets. Indeed, I would suggest you pursue this angle with the Treasury – try to get someone there to acknowledge that they will – in fact – sequester banks fund for non-compliance with FATCA. The more Treasury has to defend this untenable position, the quicker this turkey will die before Thanksgiving and sanity can return to the Earth.

    Thank you again for your pursuit of this issue. You are doing a great service to the 7 million Americans who just happen to work and live outside of the USA and do not deserve to have “their” government abuse them like this. Keep up the good work.

    Kind regards,

    Patric Hale

  7. @Publius

    I personally can’t wait for the withholding games to begin on July 1st, the day the world finally begins to wake-up to the FATCA monster. Train wreck indeed!

    I predict that within days of FATCA’s implementation, there will be sheer chaos across the globe as the 30% withholding stick begins to flail. It will pit compliant FFI’s against non-compliant FFI’s, breeding anger and resentment every which way, but ultimately targeting the abomination’s main culprit – the USA. Fun times ahead! Break out the popcorn!

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