The Foreign Account Compliance Act (FATCA) was originally instituted in 2010 as an effort to fight tax evasion by US citizens holding investments in “offshore” accounts. FATCA is also trying to force foreign financial institutions to report directly to the IRS regarding any accounts held by US citizens – a move that effectively forces foreign countries to do the US’s dirty work at substantial cost to themselves, and, frequently, at the expense of local privacy laws.
FATCA is officially in effect in 2013, and the US will begin penalizing non-compliant financial institutions by 2014.
Compared to the costs of FATCA compliance being pushed on to “offshore” banks, the anticipated revenue for the US is pitifully small (especially in comparison to the deficit many in Washington must hope it will address). Even within the US, the IRS is woefully unequipped to deal with the massive influx of data from the world’s financial institutions.
For fairly little gain, FATCA also carries a whole host of unintended consequences:
Foreign banks may refuse accounts to people with ties to the US, a process that has already begun in many places. In June, the Swiss bank UBS announced that it would stop offering services to US citizens because of the cost of compliance with FATCA. As a result, many expats living in Switzerland spent the summer scrambling to move their assets into bank accounts still willing to work with them – this includes fully compliant citizens!
The additional effort and cost to non-US banks is considerable. In anticipation of FATCA’s effective date, financial institutions that have not been tracking their customers’ status with regards to the US will have to perform a complete review of their client base. Once this is complete, they will have to absorbed the increased administrative costs of tracking their US clients and reporting back to the IRS, essentially becoming tax collectors for the US without compensation.
Mutual funds will become problematic and FATCA will discourage investment in the US. The presence of even a single US investor could endanger an whole fund. To these issues, the Japanese Bankers Association has said: “In the event that the implementation of FATCA is not practically feasible for the Japanese financial services industry, it would result in substantial confusion to the industry and could ultimately lead the Japanese financial institutions to withdraw their investments from U.S. financial assets.”
The decrease in investments coming into the US could make the job situation there even worse than it already is.
It penalizes expats. Not only are we subject to excessively harsh penalties for incorrect filing or simply not knowing that filing was necessary, but it’s also making it very difficult for expats to get through their day-to-day lives by encouraging their local banks to refuse their business.
Finally, we must consider the effects of FATCA on our countries of residence as many expats become subject to heavy penalties all at once, resulting in a significant transfer of wealth from our resident economies to the US.
The Association of Americans Resident Overseas (AARO) has produced a list of recommendations for the US to mitigate this situation:
- Exclude US citizens who are bona fide residents abroad from FATCA reporting.
- Increase the threshold for an individual’s reporting to $200,000, not $50,000, as FATCA reporting includes life insurance contracts and pension funds as well as bank accounts, or maintain the $50,000 threshold, but exclude reporting requirement on life insurance policies and pension funds.
- Increase the reporting requirement threshold for foreign corporations and partnerships to 50% ownership by a US person, not 10%.
- Institute an independent cost/benefit audit of FATCA’s impact on the IRS, Treasury, and the US economy.
When I first saw the acronym FATCA, I thought of how unfortunate, and yet how accurate, it was that it’s only one letter away from spelling ‘Fatcat.’