Blowback from U.S. Role as Global Tax Cop

Over the last two years, I've written extensively about a U.S. law enacted in 2010. It's called the "Foreign Account Tax Compliance Act," or FATCA.

In a nutshell, FATCA demands that virtually every non-U.S. financial entity and any foreign company with 10% or more beneficial ownership by U.S. persons:

  • Register with the IRS,
  • Identify any U.S. persons dealing with them, and
  • Enter into a broad-based information reporting agreement with the IRS.

The law imposes a 30% withholding tax on most types of U.S-source income and capital payments originating in the United States to any non-compliant foreign financial entity (FFI) or non-financial foreign entity (NFFE). Originally this tax was slated to come into effect on Jan. 1, 2013, but no withholding on U.S.-source income will be required prior to Jan. 1, 2014.

The easiest way for a FFI or NFFE to comply with FATCA is simply certify that it has no U.S. clients. This opportunity is specifically written into the law, a fact that has led thousands of foreign entities to terminate their relationships with U.S. customers.

FFIs and NFFEs who wish to maintain U.S. client relationships must negotiate a maze of constantly shifting compliance requirements. Congressional analysts estimate that FATCA will raise $8.7 billion over the next 10 years. However, foreign entities seeking to become FATCA compliant will spend many times that amount. Large multinational banks report they will spend $100 million or more each to become FATCA-compliant. Many smaller institutions simply don't have the financial resources to ever become compliant, and have no option but to end all U.S. client relationships.

In addition, FATCA requires U.S. taxpayers to report foreign accounts and assets with an aggregate value exceeding $50,000. The reporting thresholds are higher for U.S. taxpayers filing jointly or residing abroad. Required reporting (in effect beginning with 2011 tax returns) includes:

  • Any financial account maintained by an FFI;
  • Any stock or security issued by a non-U.S. person;
  • Any financial interest or contract held for investment that has a non-U.S. issuer or counterparty; and
  • Any interest in a foreign entity.

For those readers not familiar with FATCA, here are some posts to review:

While those championing FATCA (beginning with President Obama) would never admit it, FATCA also has grave implications for the United States, and for U.S. citizens investing or living abroad. Here's what I foresee in the months ahead, unless Congress repeals or indefinitely delays implementation of FATCA:

  • Foreign inbound U.S. investments will collapse. Foreign direct investment in the United States has declined nearly one-third since 2008. How many wealthy investors will want to invest in the United States when they learn that 30% of the gross proceeds of their U.S. investments might be confiscated upon repatriation?
  • FFIs and NFFEs will consider anyone with even the most remote connection to the United States as a "U.S. taxpayer."  Mere possession of an identity document showing a U.S. birthplace may suffice to demonstrate U.S. status, absent proof of loss of U.S. citizenship. See this video for details of how banks are being trained to identify–and possibly exclude–U.S. customers.
  • Foreign governments will retaliate against U.S. citizens. The United States is one of only two countries that forces non-resident citizens to pay tax on their worldwide income. While FATCA didn't impose that duty, the law's reporting provisions mean this obligation will be much more vigorously enforced by the IRS. This in turn violates the sovereignty of the more than 200 foreign countries that impose residence-based taxation. In other words, because of their continuing tax and reporting obligations to the United States, U.S. citizens living in other countries are threats to the economic stability and tax base of those countries. Eventually, immigration authorities will recognize that U.S. citizens seeking residence in other countries have inherently divided loyalties forced upon them by U.S. tax policies. Many countries already prohibit certain nationalities from applying for residence or even visitor's visas. When FATCA is fully implemented, U.S. citizens may well join these exclusion lists.

These consequences, both real and postulated, are completely unintended. For instance, in reviewing the Technical Explanation of the “Foreign Account Tax Compliance Act of 2009,” prepared by the Prepared by the Staff of the

Joint Committee on Taxation, I found no statements expressing any concern whatsoever that foreign investors might simply stop making investments in the United States, or that foreign countries might retaliate against U.S. citizens living there.

That's "blowback"—"the unintended adverse results of a political action or situation"—for you.

If you're a U.S. citizen, there's really only one way out. To end U.S. taxation of your worldwide income, you must acquire a second nationality and passport and subsequently give up your U.S. citizenship and passport. Once you've done so, to avoid potential future confiscation of your assets, you must also divest yourself of all U.S. investments and subsequently deal only with FFIs and NFFEs that forbid all relationships with U.S. taxpayers.

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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