The Foreign Account Tax Compliance Act
February 15, 2012
[From: Sovereign Man Newsletter]
The Foreign Account Tax Compliance act, or FATCA, is one of the most arrogant pieces of legislation ever conceived. President Obama signed the Act into law in 2010, and there are a some key provisions that are important to understand.
Reporting Requirements of US Tax Serfs holding Foreign Financial Assets
According to the IRS, "FATCA requires certain U.S. taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a new form (Form 8938) that must be attached to the taxpayer'Äôs annual tax return."
In other words, the law extends the existing reporting and disclosure requirements for US citizens and residents holding certain assets abroad.
Reporting Requirements of Foreign Financial Institutions
This is the part that's really arrogant. The US government is requiring any foreign organization it deems to be a financial institution to enter into an information-sharing agreement with the IRS. They're effectively trying to regulate what foreign companies do on foreign soil. Seriously arrogant.
The analogy I always use is that it's like the government of Saudi Arabia forbidding US grocery store chains from selling pork to Saudi citizens who happen to be on US soil.
Here's the kicker. Foreign banks who thumb their nose at the US government and do not enter into the information sharing agreement face a steep penalty: a 30% tax will be withheld on US-source income that goes to, or through, their bank.
So let's say XYZ Bank in some offshore jurisdiction doesn't enter into the agreement. The next time a payment goes from JP Morgan to any account holder at XYZ Bank, JP Morgan will withhold 30% of it.
The implications of this legislation are extraordinary. The old saying, "That which is about to fall... deserves to be pushed," comes to mind. The global banking system is already so broken and wounded. FATCA is going to finish it off.
I'm starting to believe that it was designed to be this way. Even the most casual read of the legislation leads one to conclude that it was intentionally written to be ambiguous and unenforceable.
For example, the law requires that US tax serfs must report foreign financial accounts held at foreign financial institutions (FFI). What is an FFI? A bank? Brokerage? Gold dealer? Trust company? It's not clear.
The law defines 'foreign financial institution' using the term 'foreign financial account,' and vice versa. It's like someone who has no concept of baseball asking, "What is a first baseman?" And responding, "The guy next to the second baseman..."
"OK, so what is a second baseman...?"
"The guy next to the first baseman."
Such ambiguities are so obvious that there are only two possibilities. Either the people drafting the legislation are complete idiots, or the ambiguities are intentional for the sake of giving executive agencies wide latitude.
I believe it is the latter... which makes FATCA even more insidious. Ambiguity in legislative language means that the enforcement agencies charged with executing the laws have a lot of leeway in how they interpret the rules and formulate their own policies.
If the law doesn't specifically state what a foreign financial institution is, then the IRS gets to come up with that definition (and penalties for noncompliance) on its own.
It's also clear at this point that FATCA was intentionally designed to be unenforceable. Think about it-- every single 'foreign financial institution' (whatever that is...) on the planet has to enter into an information-sharing agreement with the IRS? How is that REMOTELY realistic? It's not.
What's more, every foreign financial institution that DOES enter into an agreement has to further agree to withhold a 30% tax on payments to other foreign financial institutions that do NOT enter into the agreement.
Again, not even remotely possible. There are millions of foreign wire payments made every single day. Banks are supposed to be able to know which of the beneficiary banks entered into an agreement and which didn't... and the US government is going to supervise the whole thing?
Fat chance. This, brought to you by the folks who couldn't get bottled water to New Orleans during the Hurricane Katrina fiasco, and the banks who were robosigning hundreds of thousands of contracts without any oversight.
So why would they pass a law that has no real hope of being appropriately implemented? Two reasons.
The first is fear. Fear is a powerful weapon, and if the US scares the crap out of foreign banks, most banks will simply close their doors to US tax serfs... thus limiting the offshore options. This has already happened, Switzerland is a notable example.
The second is to expand the scope of Big Brother. A few days ago, the Treasury Department issued a joint statement with the governments of the UK, France, Germany, Italy, and Spain on government information sharing agreements, which would preclude banks from having to sign up individually with the IRS. Other countries are expected to join the pact. [see below]
In other words, Congress passes a law that's impossible to implement. Foreign banks get really nervous and petition their governments for a solution. Governments agree and enter into a mass government-to-government agreement by which ALL information is shared with everyone.
Banks are off the hook. Governments get all the information they want. And it's becoming obvious that this was the intention all along. Ah, so.
Financial privacy, meet speeding bullet.
Senior Editor, SovereignMan.com
US Enlists 5 EU Nations In Offshore Tax Crackdown
By Lynnley Browning
Wed Feb 8, 2012
* UK, France, Germany, Italy, Spain part of new framework
* Treasury says governments would collect info from banks
* Eases burden on banks, puts pressure on EU governments
* Most FATCA rules expected to take effect in 2013
Feb 8 (Reuters) - The U.S. Treasury Department on Wednesday enlisted five EU nations to help crack down on offshore tax evasion by Americans and ease the burdens the effort has imposed on many banks and financial institutions.
After complaints from the global financial industry about costs and legal issues, Treasury announced a new multilateral approach to implementing the Foreign Account Tax Compliance Act, or FATCA.
Enacted by the U.S. Congress in 2010, FATCA is intended to help the U.S. Internal Revenue Service gather information about Americans' accounts with more than $50,000 in assets in foreign banks and other institutions.
Scheduled to take effect in 2013, the new law as drafted calls for banks and financial institutions worldwide to gather the information and directly disclose it to the United States' Internal Revenue Service (IRS) tax collection agency.
Under Treasury's proposed "new government-to-government framework for implementing FATCA," the governments of France, Germany, Italy, Spain and the United Kingdom will work together to create a means to collect the information from their banks and send it to the United States.
Treasury said that once these five "FATCA partner" countries finalized the framework, banks in those countries would not have to enter into separate data disclosure agreements with the IRS.
In addition, in a reciprocating agreement, Treasury said the United States would collect and share information with the five participating EU countries about accounts held by their citizens in U.S. financial institutions.
For nations not invited to become "FATCA partners" with the United States, banks and financial institutions in those countries must still cooperate on their own with the IRS.
Noticeably absent from the new framework were major international banking nations such as Canada, Switzerland and the Netherlands, not to mention tax haven jurisdictions such as Ireland, the Cayman Islands and Bermuda.
LIST OF 'FATCA PARTNERS' MAY GROW
A Treasury official said in a conference call with reporters that more countries may join the "FATCA partners" list.
"We've had numerous conversations with other governments beyond the five that are cited," the official said.
Asked about Canada's exclusion from the list of five countries, a senior government official with knowledge of the matter told Reuters that the United States "was open to exploring a similar arrangement with Canada."
Canadian Finance Minister Jim Flaherty said the ministry had raised "serious concerns" about FATCA with the United States.
"Today's announcement appears to demonstrate an interest in greater joint government collaboration to address such concerns. We will continue to work with our American counterparts towards
an approach acceptable to both our countries," he said.
Michael Mundaca, a co-director at Big Four accounting firm Ernst & Young and formerly the U.S. assistant secretary for tax policy, said: "It will be interesting to see how other countries and especially other financial centers react."
Becoming a "FATCA partner" means being able to ensure adoption of suitable disclosure laws, no easy task in countries with bank secrecy and client confidentiality laws; getting banks to collect and disclose data to their own national authorities; and then transmitting that data to the United States.
The new multilateral framework addresses secrecy issues in some countries that prevent banks from directly disclosing client data to the United States, Treasury said.
TEMPLATE FOR OTHER DEALS
Opting for a multilateral approach "acknowledges the detrimental impact to the United States of the 'go it alone' mechanism that was ... inherent in the FATCA regime," said Scott Michel, a tax lawyer at the firm of Caplin & Drysdale.
"This agreement ... will obviously provide a template for other agreements," he said, adding that countries declining to strike similar deals may find their own financial institutions will face overly burdensome compliance and reporting costs.
As originally drafted, FATCA will require that foreign financial institutions either collect and turn over data on U.S. clients with accounts of at least $50,000, or withhold 30 percent of the interest, dividend and investment payments due those clients and send the money to the IRS.
Foreign institutions and entities that refuse or fail to comply would face bills for taxes due, a penalty of 40 percent of the amount in question and heightened scrutiny by the IRS.
Financial institutions and intermediaries had objected that forcing banks to track pass-through payments on syndicated loans, swaps, foreign currency trades and routine money transfers was unduly burdensome.
Pass-through payments are payments that flow through separate legal entities on their way to the recipient.
Those affected by FATCA include commercial, private and investment banks and shells and trusts; broker-dealers; insurers; mutual, hedge and private-equity funds; domiciliary companies; limited liability companies, partnerships; and other intermediaries and withholding agents.
Treasury said it would allow foreign financial institutions to rely on information they have already collected under anti-money laundering and "know your customer" rules to determine whether they have U.S. taxpayers as clients and thus must collect and disclose information about them under FATCA.