FATCA: Big Brother Goes Global

FATCA: Big Brother Goes Global

Sometimes people ask what I fear most. My answer isn't really what they expect.

It's not riots in central cities, a collapse of food supplies or other essential infrastructure, a terrorist attack, or even the growing U.S. police state.

All of these threats are real, but all of them can be dealt with successfully through intelligent planning. For instance, by keeping a substantial store of food on hand in your home and not residing in or near a big city, you can mitigate the first two threats. And by leaving the United States and setting up residence in a country that actually respects civil liberties, you can reduce your vulnerability to the long arm of Uncle Sam.

No, what concerns me the most is that just like people, governments often imitate each other. And when it comes to tax collection, governments around the world are looking very intently at the United States, still the world's largest economy and by far its most influential country. They see a country that has successfully forced every low-tax jurisdiction in the world to end any real semblance of bank secrecy, at least with respect to tax. Every major low-tax jurisdiction has agreed to turn over banking information on U.S. citizens and permanent residents to the IRS so that the agency can impose taxes and penalties on unreported accounts or income.

If you were the head of state of a country short on cash to pay for the unfunded promises you made to get elected, wouldn't you like to have the same power over your own population? Well, you just might have a new tool to help achieve that goal, thanks to the global spread of a U.S. law called the Foreign Account Tax Compliance Act (FATCA).

By way of background, FATCA, enacted in 2010, imposes a 30% withholding tax on many types of U.S-source income and gross sales proceeds payable to what the law calls “foreign financial institutions” (FFIs) and “non-financial foreign entities” (NFFEs). FATCA’s withholding provisions will be phased in beginning Jan. 1, 2014 and come fully into effect three years later. To avoid this tax, FFIs and NFFEs must function as unpaid IRS informants. FFIs and NFFEs are defined so broadly that FATCA potentially impacts every foreign financial institution or non-financial entity in the world that receives, directly or indirectly, most types of U.S. source income.

For the U.S. government, the incentives of FATCA are obvious. It wants to end what it perceives as offshore tax evasion that supposedly costs the U.S. Treasury more than $100 billion annually in lost revenues. Never mind that this figure is wildly inflated; the mainstream press repeats $100 billion ad nauseum, so it must be true…right?

But FATCA also presents a threat to the United States. The threat is that inbound investment will dry up due to over-aggressive enforcement by IRS and the Treasury of the 30% withholding requirement. That could dramatically reduce foreign purchases of U.S. Treasury debt and crush the U.S. dollar.

The solution to the threat? Simply persuade every other country to enact its own version of FATCA. After all, governments worldwide have ramped up the printing presses and need every possible dollar, peso, or, euro to help pay the bills. That way, the vast majority of investors have no place to invest without paying tax to at least one government.

A global FATCA could provide an international framework obliging any company anywhere in the world that performs any type of financial service for anyone to serve as a tax collector for every government signing on to the agreement. Indeed, when FATCA came into law in 2010, the U.S. Treasury expected exactly this outcome. Of course, it could also mean sharing your most intimate personal and financial details not only with the U.S. government, but also with every other government signing on to the deal. And of course, if this data is not kept completely secure, it will also be used for criminal purposes, including kidnapping, identity theft, etc.

Will it happen? It already is, although perhaps in a slightly different manner than the Treasury envisioned.

On February 8, 2012, the United States signed a joint declaration with five EU nations (France, Germany, Italy, Spain, and the United Kingdom) to initiate an "intergovernmental approach to FATCA implementation." The United States agreed to "collect and exchange on an automatic basis information on accounts held in U.S financial institutions" by residents of these countries. Tax treaties or tax information exchange agreements will be used so that financial institutions can turn over information to their own governments rather than to the IRS directly.

Historically, the major obstacle for this arrangement was the inconvenient fact that the United States doesn’t automatically collect or exchange information on non-resident accounts with any other country, with the exception of Canada. However, the U.S. Treasury is starting to remove this obstacle. On April 17, the Treasury issued final regulations that require U.S. financial institutions to report annually bank deposit interest income of all non-resident individuals to the IRS.

According to the preamble for the final regulations, they are necessary to combat offshore tax evasion for at least three reasons:

  1. To obtain information on U.S. taxpayers from other governments through information exchange agreements, the U.S. government must have information to exchange;
  2. The information will facilitate intergovernmental cooperation on FATCA implementation; and
  3. The regulations will enhance U.S. tax compliance by making it more difficult for U.S. taxpayers with U.S. accounts to claim falsely to be resident in another country.

If you live in a country that taxes your worldwide income, count on something like FATCA coming your way. Soon.

And if you don't want to join in the fun? Then set up residence in a country that doesn't tax worldwide income and that also doesn't face an imminent financial crisis that might force it to change this policy. Countries that come to mind include Hong Kong, Panama, and Singapore.

If you're a U.S. citizen, simply leaving the United States for a lower-tax residence isn't enough. That's because the United States imposes tax not just on the basis of U.S. residence, but also U.S. citizenship. To end U.S. taxation of your worldwide income, you must also give up U.S. citizenship and passport.

The Nestmann Group, Ltd. has helped dozens of U.S. clients through this process of "expatriation." Contact us today for more information.

Copyright © 2012 by Mark Nestmann

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