In 2010, Congress passed the Foreign Account Tax Compliance Act. At the time, there was very little press coverage or debate about the so-called FATCA. First of all, it was an add-on to an employment bill. Second of all, it was designed to eradicate offshore tax evasion. During the recession of that time, anything that was part of a jobs bill and brought in revenue was not going to be scrutinized too carefully. After all, politicians want to be able to say that they are bringing in all of the revenue that the nation deserves and tax loophole closing is generally popular.
So, now we have FATCA. Passed four years ago, it finally is “official” as of July of 2014.
Surprise, surprise…the era of FATCA brings with it incredible complications involving money, questions of citizenship, diplomacy and even Vladimir Putin.
So, what is FATCA, what does it do and what are the intended and unintended consequences?
FATCA is designed to tax every American person’s earnings, regardless of where they have earned that money, whether in downtown Detroit or downtown Dubai. Notice that the previous sentence said “American person” and not “American citizen”. FATCA is applicable for citizens or for those who are holding a green card.
The teeth in FATCA is that the United States is now using international banks and financial institutions to be the agents of compliance in this revenue producing scheme. Foreign banks and financial institutions are now required by American law to report assets held by Americans and to act as agents of the IRS, withholding the taxes owed. If the financial institutions do not comply, their US accounts would be subject to stiff penalties. So far, many of the world’s financial players are agreeing to these rules.
Complying with FATCA is reportedly onerous for foreign institutions in terms of the amount of paperwork required. There are between 6 and 7 million Americans who live abroad and anecdotal evidence indicates that it is getting harder for them to get loans or even for new Americans to be hired because of the FATCA paperwork hurdle. Some non-anecdotal evidence: the number of Americans who are renouncing their citizenship has increased four-fold since FATCA was announced.
The diplomacy issues that FATCA has brought about are significant. Several of our allies have pretty serious banking privacy laws (think Switzerland) and these nations’ desires to be good allies with the US are at odds with their own nations’ long traditions of banking secrecy.
Our Canadian allies are also quite concerned with the implications of FATCA. “FATCA has raised a number of concerns in Canada — among both dual Canada-U.S. citizens and Canadian financial institutions. One key concern was that the reporting obligations in respect of accounts in Canada would compel Canadian financial institutions to report information on account holders who are U.S. residents and U.S. citizens (including U.S. citizens who are residents or citizens of Canada) directly to the IRS, thus potentially violating Canadian privacy laws,” said a representative of the Canadian federal government.
The diplomatic situation in Russia is even more complicated. Russia really had no mechanism to assess and withhold taxes from Americans living there. Negotiations were underway between Russia and the US to create cooperation at the governmental level, but the negotiations stalled with Russia’s annexation of Crimea in March.
Legislation was approved by the Duma (the Russian Parliament) in July, but President Vladimir Putin waited until the eleventh hour to sign it, seemingly holding the legislation hostage during the crisis in Ukraine. The legislation ultimately gave permission for Russian banks to provide information to foreign tax authorities but only if the taxpayer gives explicit permission. As you can guess, Russian banks aren’t so keen on retaining their American clients and have begun to drop them, phasing out business and personal banking agreements.