Its name sounds like an IKEA armchair that you sink into when you get home after a hard day at the office, but FATCA is anything but comforting.
The Foreign Account Tax Compliance Act, or FATCA, is a law passed by Congress in 2010 to “target noncompliance by U.S. taxpayers using foreign accounts” and try to narrow the “tax gap” — defined by the Treasury Department as “the difference between the tax dollars that are owed under the law, and those that are actually collected.” Basically, it wants to clamp down on offshore tax evasion.
It aims to do that by getting foreign banks and other financial institutions to identify Americans who have investments or bank accounts outside the United States, and comparing the information with what Americans file on their annual tax returns.
By July 1 of this year, banks will have to report to the Internal Revenue Service (IRS) any American clients who have $50,000 or more in overseas accounts. Sums under that amount exempt the bank from reporting on the client.
If the bank doesn’t report on an American client’s overseas investments or assets, FATCA puts its secret weapon into action and levies punitive sanctions on the financial institution that failed to comply with U.S. law.
A little confused? It’s understandable.
Banking on Compliance
Germany’s HypoVereinsbank, which is one of the foreign financial institutions that has chosen to comply with FATCA to spare itself and its customers what it says would be a lot of misery, released a short video to explain FATCA and the consequences to consumers and banks who refuse to go along with it.
“U.S. citizens who live abroad have to pay taxes in the United States, but only a few do, and the United States is losing a lot of money because of this,” the narrator says in a sing-song voice in German just as the animated video shows a bag of money being dropped into the Atlantic Ocean and disappearing.
Under the terms of FATCA, “Foreign banks — including banks in Germany — have to identify which of their clients are U.S. citizens…. The banks report the data on their American clients to German tax officials, who then pass it on to the IRS.” The German bank does it that way because Germany is one of about a dozen governments that have struck an intergovernmental agreement with the United States on FATCA. More on that later.
“But why should German banks be worried about U.S. tax laws?” the cheerful narrator in the German bank’s video asks.
Why indeed, you might think.
The reason is simple, explains the German narrator in HypoVereinsbank’s video. It’s those punitive measures.
“Any bank that doesn’t cooperate has to pay a penalty of 30 percent on all revenues from the U.S.A.,” he says.
That’s everything from a money transfer from a great aunt in California to dividends paid out by a U.S. company to interest from U.S. government bonds, the bank says in its video. The banks would doubtless pass this loss onto clients, both local and American, but banks like HypoVereinsbank have spared customers the terror of the 30 percent fine by agreeing to the terms of FATCA, the narrator says as a big, green check mark appears on the screen, next to the word “FATCA.”
HypoVereinsbank should never have had to put a check in the box next to FATCA, though, critics of the U.S. law say.
“We’re making a demand on foreign institutions to follow a law that they have no legal or moral obligation to obey and threatening them with what, in my opinion, are illegal sanctions if they don’t obey,” said Jim Jatras, a former diplomat and U.S. Senate staffer who now works in government relations and media, and edits the RepealFATCA.com website. “That is a gross violation of the norms of international behavior,” he told The Diplomat.
Getting Governments to Sign On
Many foreign financial institutions would be in breach of their own domestic laws on privacy and data protection if they handed over information on their clients to the U.S. tax authorities, FATCA critics contend.
To get around that, the United States has been signing FATCA-related intergovernmental agreements, or IGAs, with foreign governments. Banks in countries that have signed an IGA on FATCA may have simplified “reporting and other compliance burdens,” the IRS says on its website.
“Such financial institutions will not be subject to withholding under FATCA,” it says, using the euphemistic term “withholding” for what the HypoVereinsbank translated into “Strafabzug” — literally, “punitive deduction.”
IGAs are essentially tweaking the laws of a country so that its banks can ignore that country’s privacy and data protection laws and, basically, bow to the wishes of the United States, critics argue, with some calling FATCA an example of U.S. imperialism and the epitome of the “ugly American.”
But there is a problem for the U.S. authorities on the IGA front: They have fallen short of their goal, which was to ink 50 IGAs by the time the law comes into effect for foreign financial institutions on July 1. That date is, in itself, six months later than the original deadline of Jan. 1, 2014, because other countries have not been busting down the door to agree to send Washington information about Americans who live on their soil or invest in their banks and businesses.
Still, it’s likely governments will eventually come on board to avoid running afoul of U.S. law, although the process could take years. Some countries, like Russia and China, have refused to go along with a FATCA agreement unless the United States sends them the same information about their nationals who bank in the United States. In mid-January, a federal court ruled that U.S. banks must report that information to foreign governments to comply with the IGA agreements that have been signed with other countries, striking down the arguments of bankers’ associations who said the requirement would lead to a “capital flight” of foreign accountholders in the U.S.
Fat New Burden?
Besides objecting to being robbed of some of their sovereignty, some banks, both here and abroad, have been put off by the costs of complying with FATCA.
British tax officials have estimated FATCA regulations will cost British banks alone 1.6 billion pounds ($2.5 billion) in one-time expenses and another 90 million pounds annually, Nat Rudarakanchana wrote in the International Business Times in October.
Jatras says they would have been wiser spending a fraction of that to press the U.S. government to repeal the law. Others are doing just that.
The World Council of Credit Unions, which represents credit unions on all five continents, and the U.S. Credit Union National Association (CUNA), which represents the overwhelming majority of the nearly 7,000 credit unions in the United States, are among the U.S.-based organizations calling for a repeal of FATCA.
In a letter to Republican Sen. Rand Paul of Kentucky, the head of CUNA, Bill Cheney, expressed concern that “FATCA, if left in place, will impose billions of dollars of compliance costs on U.S. credit unions and banks annually” and that the IGAs being negotiated by the United States would “undermine the constitutional privacy rights of U.S. credit union members and bank customers.”
But the U.S. government counters that its right to collect taxpayer money is being undermined by tax-dodgers. Some estimates say Uncle Sam misses out on $100 billion a year in lost offshore tax revenue. U.S. citizens, who are taxed regardless of where they reside, have always been required to file tax returns and disclose their foreign accounts. FATCA just makes the rules tougher.
But critics say it also makes the processing of filing overseas tougher — and more time-consuming and expensive, forcing Americans to hire tax lawyers to sort out the paperwork.
Joey Musmar, a partner with the CPA firm of MillerMusmar in Virginia, says the onus will really fall on tax filers, rather than banking institutions, to comply with the new law.
“The compliance requirements that [the IRS] already has are tough to begin with. This is not something new. There are a lot of things that have to be declared when you have business interests overseas to begin with. So this is just an added burden with a reporting mechanism where the foreign institutions are going to report on you. So if you are not coming clean, you are going to be reported on, by these institutions. That’s the new dynamic of it,” he explained.
“The flip side of it is that those who don’t do it correctly or forget to file, they are the ones who are going to feel the wrath of the government — especially if they get reported on by a financial institution, because this can be as severe as a criminal investigation of a U.S. taxpayer,” Musmar warned.
But will extra paperwork and the fear of penalties be enough to compel Americans to give up their U.S. citizenship?
The BBC reported a jump in the number of American expatriates renouncing their U.S. citizenship in the second quarter of 2013 compared to the same timeframe last year — 1,131 cases versus 189 — although that still only represents a tiny fraction of the estimated 6 million American expats abroad.
Nevertheless, there are sporadic stories of U.S. citizens, fuming over FATCA, who’ve turned in their passports. Former Swiss-American dual national and U.S. army veteran Daniel Kuttel said he has felt the impact of FATCA firsthand.
Born a dual national, Kuttel moved to Switzerland in 2001 after losing his job in the United States when the dot-com bubble burst. Last year, when he needed to refinance his Swiss mortgage, “each bank that I contacted said that they would not refinance it for me because of FATCA.”
“I would call the banks and say, ‘I’m American and I’m interested in refinancing my mortgage,’ and they’d say that since I’m American, they couldn’t do it. Then I’d tell them that I was also a Swiss citizen, and they’d go and check with management, and it would still be no,” Kuttel told The Washington Diplomat by phone from his home near Zurich.
To avoid losing the roof over his head, Kuttel renounced his U.S. citizenship in October last year. “It was very difficult for me, emotionally,” he said.
Had FACTA not existed, “I might still be a U.S. citizen,” he added.
An IRS spokesman said U.S. tax officials “have heard of” stories such as Kuttel’s but refused to comment further. The Treasury Department referred The Washington Diplomat to a posting on its FATCA blog, where it dismisses cases like Kuttel’s as myths.
Myth one on the blog says that FATCA is “overly costly and burdensome due to complex regulations and difficult to meet reporting requirements.” The retaliatory “fact” is that “Treasury and the IRS have designed our regulations in a way that minimizes administrative burdens and related costs.”
Myth two, according to the site, is that “U.S. citizens living overseas will become outcasts in the international financial world.”
But Treasury flat out rejects that notion. Everyone will be an outcast, regardless of nationality, because “we expect that many, if not most, of the governments implementing FATCA through IGAs will require their financial institutions to identify and report on all non-resident account holders, not just U.S. account holders.” And if everyone is an outcast, there are no outcasts.
Myth three is the one that pertains to Kuttel. “Some claim that Americans living abroad will give up their U.S. citizenship because of liabilities and burdens created by FATCA.”
Treasury doesn’t refute that myth but says that FATCA imposes no new obligations on Americans living abroad because they should’ve been paying their taxes in the United States anyway.
Prior to renouncing his citizenship, Kuttel said he never owed taxes to the IRS. He also insisted that he is not a myth.
Other expatriate Americans, and people who were born in the United States who are considered “U.S. persons” by the IRS and Treasury, have set up a page on the blogging site Tumblr to protest Treasury’s dismissive portrayal of their fight against FATCA.
One of the posts on the “We are not a myth” Tumblr page is from a Canadian wildlife photographer who is married to a “U.S. person.”
“Wife works as part-time retail cashier. You think we’re hiding millions?” he asks. “Get real.”
About the Author
Karin Zeitvogel is a contributing writer for The Washington Diplomat.