Tax Planning

Finally, Some Good News about FATCA

FATCA, otherwise known as the Foreign Account Tax Compliance Act, is one of the most arrogant and one-sided laws ever passed by Congress.

I’ve written quite a bit about it in the past, almost always on how it negatively affects the average American trying to do business offshore. Today, though, I actually have some good news to report.

But first, a summary of what this abomination actually does.

The Quick and Dirty Guide to FATCA

FATCA forces what the law calls “foreign financial institutions,” or FFIs, to disclose to the IRS the financial dealings of all “U.S. persons” they deal with, even if doing so would violate the banking and privacy laws of their country.

As of next July, a 30% withholding tax will apply on many money transfers out of the USA to FFIs not willing to work under the regulations. In other words, the non-compliers are effectively blocked from doing business with anyone in the USA—or indeed in US dollars at all. (After all, losing that much on any given transaction would be business suicide.)

The definition of an FFI is very broad, and includes banks, broker/dealers, insurance companies, hedge funds, and private equity funds. A U.S. person is a U.S. citizen, a U.S. tax-resident foreign citizen, or a domestic trust, partnership, corporation, or estate.

One (possibly intentional) consequence of FATCA is that thousands of FFIs all over the world have gotten rid of their U.S. customers.

No U.S. clients equals an easier road to compliance.

Naturally, this has made it especially difficult for the nearly seven million expat U.S. citizens to carry on normal financial relationships in their adopted countries. Our own U.S. citizen overseas clients have had bank accounts closed and mortgages cancelled. They tell me that it’s much more difficult to do business internationally, because their foreign partners don’t want to risk a fight with the IRS.

That’s the bad news. Now for the good news – as good as it will get anyway.

Very soon, I think you’ll have a lot more international investment choices than you have now.

Why the FATCA pig is now wearing lipstick

Most FFIs aren't anxious to go it alone with the IRS. It's like Little Red Riding Hood negotiating with the Big Bad Wolf over what's for breakfast.

FFIs have therefore approached their respective governments and asked for help. A growing number of those governments have prostrated themselves before the IRS, offering to collect the information the IRS demands from their country’s banks and giving it to the IRS on a silver platter.

Around 15 countries so far have signed up for this type of agreement with the IRS. And, believe it or not, that’s the good news for U.S. persons. Here’s why.

Once a foreign government has agreed to turn over information to the IRS on U.S. persons doing business with its country’s FFIs, those FFIs no longer have to deal with the IRS. As a result, they will likely be more willing to deal with U.S. persons.

There’s no guarantee of course, but it’s no secret that banks like profit. If their respective governments will handle the reporting paperwork, why wouldn’t they welcome clients back?

To date, only a handful of countries have signed such an agreement with the IRS: Costa Rica, Denmark, France, Germany, Ireland, Mexico, Norway, Spain, and the U.K. The Cayman Islands, a U.K. dependent territory, has signed a similar agreement. Other U.K. dependent territories and associated states, including Bermuda, Jersey, Guernsey, and the Turks & Caicos Islands, will soon follow suit. Luxembourg and Singapore have also committed to an inter-governmental agreement.

Many other countries, though – among them Switzerland and Japan – have told FFIs they’re on their own dealing with the IRS. That’s not likely to make these institutions feel warm and fuzzy about accepting U.S. clients.

Don’t get me wrong

If it looks as if I’m somehow “celebrating” this side effect of FATCA—I’m not.

I resent the arrogance of our government in forcing foreign countries to enforce U.S. tax laws. And I’m concerned about the unintended consequences of FATCA – especially the prospect for misuse of this information by criminals and terrorists. This treasure trove of information – including account balances, social security numbers, and home addresses – has great appeal to identity thieves, kidnappers, and other bad guys.

For example, there’s already evidence that banking authorities in Lebanon have turned over data to Hezbollah compiled on U.S. depositors in Lebanese banks. Hezbollah, considered a terrorist organization by the EU and USA, funds itself through drug trafficking and money laundering. Thanks to FATCA, it can begin kidnapping U.S. citizens and stealing their identities.

In truth, I sincerely hope that FATCA collapses under its own weight. But we’ll have to wait and see.

In some ways, it comes down to the global financial behemoths like China and India. They have yet to sign such agreements with the IRS (although China is hinting that it will if the U.S. promises “reciprocity”).

If China does falls into place, then I suspect the rest of the world will rapidly move to conclude agreements with the IRS.

Now for some slightly better “good news”

Thankfully, there are still legislators fighting to get rid of this terrible law, Kentucky Senator Rand Paul in particular. In his words, “FATCA endangers an estimated $25 trillion in foreign capital currently invested in the USA.”

So, all hope isn’t lost yet. We’ll just have to wait and see how it plays out and, in the meantime, keep a close eye on the situation and adapt as best we can.

I don’t place much hope in our esteemed leaders in Washington – even if there are a few good ones among them.

But who knows, stranger things have happened.

Mark Nestmann

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