It seems that many FATCA critics feared – and the U.S. Treasury Department hoped – that July 1, 2014, (the date when the “Foreign Account Tax Compliance Act” provisions on foreign financial entities went live) would amount to some kind of finish line. After that, FATCA would be set in stone, and any effort to slow down its enforcement and work for its repeal would be futile. Interest in FATCA would wane. Everyone would quiet down and accept the inevitable . . .
It seems the exact opposite is the case. Keep in mind, that except for the Treasury Department itself, a handful of Congressional supporters, and a self-interested compliance industry (with their docile media), most people in the United States – and most people in Washington, including, incredibly, in Congress – still respond to mention of the word “FATCA” with “Huh – what’s that?”
If anything, arrival of FATCA’s go-live date seems to have generated a rush of new, critical exposure of this “hare-brained scheme” (in the characterization of Death of Money author Jim Rickards). Below find excerpts and links to some of the highlights.
Treasury’s Lack of Authority for ‘Intergovernmental Agreements’ Exposed
Especially note the first item below. Recently, Florida Congressman Bill Posey (who last year shut the door on phony claims that the United States would share FATCA-equivalent information with foreign governments signing on to enforce FATCA against their own citizens) wrote to Treasury to ask, among other issues raised, what legal authority the Department had for entering into non-treaty “intergovernmental agreements” (IGAs) with foreign governments. The Department responded with a terse list of statutory sections (as posted on Jack Townsend’s “Federal Tax Crimes” blog):
The United States relies, among other things, on the following authorities to enter into and implement the IGAs: 22 USC Section 2656; Internal Revenue Code Sections 1471, 1474(f), 6011, and 6103(k)(4) and Subtitle F, Chapter 61, Subchapter A, Part III, Subpart B (Information Concerning Transactions with Other Persons).
Well, that certainly looks like impressive legal authority! Or it does -- only if no one bothers to read the actual language in the cited sections.
Unfortunately for the Department, Professor Allison Christians (H. Heward Stikeman Chair in Tax Law, McGill University Faculty of Law, Montreal, Quebec) did. Long story short, she writes (emphasis added):
None of these sources of law contain any authorization to enter into or implement the IGAs. It is patently clear that no such authorization has been made by Congress, and that the IGAs are sole executive agreements entered into by the executive branch on its own under its “plenary executive authority”. As such, the agreements are constitutionally suspect because they do not accord with the delineated treaty power set forth in Article II.
For example, the cited section “26 U.S. Code §1474(f)” (which is part of FATCA), only authorizes the Treasury Secretary to “prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of, and prevent the avoidance of, this chapter.” Professor Christians responds: “There is no authority expressed in this provision for the Secretary to enter into agreements with other governments. Does IRS suggest that an IGA constitutes ‘regulations’ or ‘other guidance’? Under what interpretation of that characterization does the Treasury interpret the promulgation of either regulations or other guidance as an authorization to negotiate an agreement with a foreign government?” Obviously, no such interpretation is possible. The claimed authority just isn’t there.
And so, point by point, Professor Christians demolishes each of the supposed authorizations cited . . .
However, this is not just a question of the Department’s deficiency of legal authority for the IGAs, as serious as that is. Even more disturbing is the dishonesty of answering Mr. Posey in that fashion. Consider:
- First, the Department has revealed that it is aware it lacks statutory authority for the IGAs.
- Second, in pretending that such authority exists, the Department evidently concedes that such authority is necessary, and that “plenary executive authority” to which Professor Christians refers – but which the Department did not cite – is insufficient to support these faux treaties. Or put another way, they know they don’t have such authority but are aware they need it.
- Third, in making its response available for public posting, it appears Treasury sought to discredit Congressman Posey’s effort to hold the Department accountable for pressing forward with these legally deficient IGAs. In seeking to do so, the Department has only discredited itself and proved Congressman Posey right to be suspicious.
Treasury’s response to Mr. Posey also betrays another tidbit that could be characterized as an admission against interest. Addressing the question of suspending the IGA process until adequate legal authority is shown, the Department states:
If countries decide not to pursue IGAs for the reasons stated above, foreign financial institutions in those jurisdictions may be legally unable to report information on their U.S. account holders, and the United States would not be able to obtain the information that it needs to ensure that U.S. persons comply with U.S. tax laws.
Substituting the inappropriate use of “United States” in place of “the Treasury Department” (since these are sole executive agreements, not treaties or statutorily authorized agreements) and substituting “enforce FATCA” for “comply with U.S. tax laws” (since FATCA is a pure information dragnet and contains not a single provision targeting or enforcing tax evasion activity), the Department here is confirming what RepealFATCA.com has long argued: FATCA as enacted is unworkable, and non-U.S. government cooperation in the form of IGAs is essential to its survival: in short, no IGAs, no FATCA.
A Note on RepealFATCA.com’s FOIA Request
On October 7, 2013, RepealFATCA.com submitted a Freedom of Information Act (FOIA) request to the Treasury Department on a matter of direct relevance to the foregoing discussion of IGA authority. Requested were all departmental records “in connection with negotiation of ‘intergovernmental agreements’ (IGAs) by the U.S. Department of the Treasury (hereinafter, ‘Treasury’) with the governments of Canada, Switzerland, and the United Kingdom.” An October 24, 2013, response letter stated the request would receive “expedited treatment.”
We’re still waiting . . .
Despite numerous follow-up contacts with the FOIA unit at Treasury, especially in recent weeks, RepealFATCA.com has yet to receive the requested information, which might shed some light on the IGA process and the legal authority for it (or lack thereof). RepealFATCA.com readers may feel free to contact the FOIA unit at Treasury (Note: The link is out of date; the new director is Ryan Law) in support of compliance with the request.
Please see titles, links, and excerpts to “RepealFATCA.com Roundup” items, below.
- Allison Christians: “IRS claims statutory authority for FATCA agreements where no such authority exists,” Tax, Society & Culture blog, July 4, 2014.
- Nigel Green: “Is FATCA a ‘Hammer Blow’ for the U.S. Economy?” ValueWalk, July 2, 2014; and “Imperialistic FATCA is here – and it’s a dark day for U.S. expats and firms operating globally,” nigel.green.com, July 1, 2014.
- Richard Dyson: “British public footing a £1bn bill - to aid the US taxman,” The Telegraph, July 4, 2014.
- Jim Rickards: “The Collapse of the International Monetary System and the Petrodollar, Part II,” Doug Casey’s INTERNATIONAL MAN, undated.
- The Economist: “FATCA’s flaws: America’s new law on tax compliance is heavy-handed, inequitable and hypocritical,” June 28, 2014; and “Dropping the bomb: America’s fierce campaign against tax cheats is doing more harm than good,” June 26, 2014.
- Dan Mitchell: “Is FATCA the Worst Part of the Internal Revenue Code?” danieljmitchell.wordpress.com, July 5, 2014.
- Richard Rahn: “An act of economic strangulation: Obama’s new tax rules for foreign accounts will punish Americans,” Washington Times, June 30, 2014.
More information on each of the headlines above is provided below, with links to full texts:
1. Allison Christians: “IRS claims statutory authority for FATCA agreements where no such authority exists,” Tax, Society & Culture blog, July 4, 2014.
In addition to the excerpts above, note:
IRS and Treasury should therefore just admit that the IGAs are simply “sole” executive agreements—not authorized by Congress but entered into by the executive branch under its sole discretion. [ . . . ]
Since the US side of the IGAs is to deliver very modest undertakings that Treasury also believes can be done without congressional approval (namely, extending the longstanding s. 6049-based information exchange with Canada to other countries), this is probably true; all IGA promises to alter the law in the future should be seen as what they are, unenforceable promises that are beyond Treasury’s control and so won’t be delivered.
Therefore honesty is still the best policy for Treasury. Instead of citing non-existent statutory authority that is easily refuted by simple reading, Treasury should own what it is doing outright. These are sole executive agreements, they lack statutory approval, they undertake very little on the part of the United States, but they are an effective way of pretending to be cooperative so that other countries can save face as they submit to the threat of economic sanctions that is FATCA. There isn’t really any reason why Treasury shouldn’t acknowledge this reality, since it is, strictly speaking, of Congress’ own making.
2. Nigel Green: “Is FATCA a ‘Hammer Blow’ For The U.S. Economy?” ValueWalk, July 2, 2014; and “Imperialistic FATCA is here – and it’s a dark day for U.S. expats and firms operating globally,” nigel.green.com, July 1, 2014.
A “stark warning from Nigel Green of deVere Group, which has $10bn under advice and management”:
“First, a considerable reduction in future foreign investment is now, I suspect, inevitable as sensible overseas investors will, not unreasonably, prefer to put their funds elsewhere due to the heavy penalties of not fully complying with FATCA’s preposterously onerous regulations.
“Second, further capital flight is a real and serious possibility due to the current investment climate characterized by suspicion. According to the Texas Bankers Association, $500 million had already ‘flown’ from the state’s banking system by the early part of this year as a direct result of the IRS rules.”
“And third, U.S. businesses that operate internationally are now routinely rejected from foreign banks and other financial institutions. Having no access to non-U.S. financial institutions in countries where they do business significantly reduces their competitiveness.
“For these reasons, plus a host of others, I believe that history will ultimately teach us that FATCA is a hammer blow for American jobs and the broader U.S. economy.”
[ . . .]
It is claimed by its proponents that this new tax act is designed to catch tax evaders who illegally shelter money offshore. This is a noble aim. But FATCA cannot possibly tackle this important global issue effectively due to its dragnet, untargeted approach.
Instead what it does – because of its plethora of serious unintended adverse consequences – is to brand Americans who choose to live and/or work overseas as financial pariahs. U.S. expats are now routinely rejected from foreign financial institutions (FFIs), such as banks in their country of residence, because FATCA’s costly and onerous regulations mean Americans are now typically deemed more trouble than they are worth.
Similarly, American businesses working in international markets are now often branded with a leprosy-like status. Clearly, this can only be detrimental to their global competiveness and could, in turn, hit American jobs and the long-term growth of the U.S. economy – which would then, of course, have far-reaching consequences beyond the U.S.
All this to ‘recover’ an estimated $1bn per year, which is enough to run the federal government for less than two hours.
3. Richard Dyson: “British public footing a £1bn bill - to aid the US taxman,” The Telegraph, July 4, 2014.
Richard Dyson is Personal Finance Editor of The Telegraph:
Apart from the cost, which all of us must bear, the scope is wide, with hundreds of thousands of individuals expected to be affected. According to the Wealth Management Association, which represents brokers and financial advisers, firms must check for the following among existing customers: someone who is a US resident or citizen; someone with a US address, correspondence address or telephone number; or someone who regularly transfers funds to a US account.
The list could include US-born Britons, the thousands of people who travel frequently to the US or those owning property there.
If anything about your account or personal background suggests US associations, you can expect further questioning. This is what HSBC, for example, says to its British customers: “We are currently reviewing the effect of the legislation in order to identify where we need to report information to the IRS.
“We may be contacting you to request information or documentation. You may receive more than one request for information. It is important that you respond to all requests, even if you believe you have already supplied the requested information.”
That gives a flavour of just how much hassle might be involved for all parties. [ . . .. ]
On May 30, I wrote on this website about investment manager JP Morgan sending requests to 125,000 customers to complete a US “W-8BEN” tax form. These forms, typically required only when investors own US shares, have not to my knowledge ever been mailed out in such a blanket way. JPM, which was cagey on the matter, said it was unrelated to this new legislation. Perhaps, but in the end it is a similar scenario: JPM undertook the exercise at the behest of the IRS.
No one wants tax evasion anywhere. But surely we shouldn’t be footing a £1bn-plus bill for initiatives of benefit to another country?
4. Jim Rickards: “The Collapse of the International Monetary System and the Petrodollar, Part II” Doug Casey’s INTERNATIONAL MAN, undated.
Nick: Recently, Senator Carl Levin was talking about using the Foreign Account Tax Compliant Act, or FATCA, as a way to indirectly sanction Russia. What are you looking for next in terms of what the Russians will do?
Jim: Well, that’s another hare-brained scheme. What does FATCA actually do? FATCA is a new law—it was passed in 2010, but it hasn’t come into effect yet— it’s supposed to come into effect July 1, 2014. But the fact is, basically it orders every country in the world to enter into a tax information-sharing agreement with the United States to the satisfaction of the United States. If you do not do so, if you fail to do so, then any interest payments on your securities to parties in your country will be subject to a withholding tax at the source, and the rate is fairly high. I think it’s 30%. And so now Russia was actually in the process of negotiating such a treaty with the United States, but that negotiation was blown up by the confrontation over Crimea. As of now, Russia has no such agreement with the United States, which means that come July 1, Russia will not be in compliance with the dictates of US law, which means that interest payments on Treasury securities to account holders in major Russian banks such as Sberbank and VTB will be subject to this withholding. So what would you do? Well, you would dump the Treasuries, because you don’t want to sit there and hold the Treasuries, if they’re going to be subject to a withholding tax. So basically it’s a way to force the Russians to dump US Treasuries, which increases US interest rates, which hurts our housing recovery and hurts our stock markets. This is like pointing a gun at your own head and saying, “If anyone moves, I’ll shoot.”
5. The Economist: “FATCA’s flaws: America’s new law on tax compliance is heavy-handed, inequitable and hypocritical,” June 28, 2014; and “Dropping the bomb: America’s fierce campaign against tax cheats is doing more harm than good,” June 26, 2014.
The costs of complying with FATCA are likely to dwarf the extra revenue it raises (see article). The law is also having unfortunate unintended consequences. The 7m Americans living abroad now wear a scarlet letter (presumably an “F”), thanks to FATCA. Many have been rejected by foreign providers of banking services, insurance and mortgages because, given the amount of paperwork needed to satisfy Uncle Sam, American clients are simply too much hassle. Foreign firms are less keen to hire Americans because of the extra tax complications. Not surprisingly, the number of Americans renouncing their citizenship has quadrupled since FATCA was hatched.
Moreover, American citizens are not the only victims. The law’s definition of a “US person” includes green-card holders and anyone with a substantial connection to the country, whatever that means. Nobody knows—so yet more confusion, and yet more fees for lawyers and accountants.
Meanwhile, the drug dealers and sophisticated tax evaders who inspired all this will switch into non-financial assets, such as art and property, or hide behind shell companies and trusts. The latter would be easier to penetrate if reliable ownership information were collected, but often it is not—and America is one of the worst laggards (see Delaware, Nevada and all the other money-laundering paradises within its borders).
FATCA’s intrusiveness raises serious privacy issues. Other countries have reluctantly agreed to sign special side-agreements with America that allow their banks to comply without falling foul of domestic privacy laws. America will now have more information about its taxpayers’ foreign wealth than it gathers on their domestic holdings. This has caused surprisingly little fuss. Financial privacy doesn’t seem to resonate with the public in the same way as snooping into phone records.
[ . . . ]
Basil Zirinis of Sullivan & Cromwell, a law firm, began his presentation with a discussion of events in Iraq, where Islamist fighters were advancing on Baghdad. Barack Obama, he claimed, was drawing a red line around the city and, if necessary, would “drop FATCA on them”. …The analogy was tasteless, but also telling. FATCA stands for Foreign Account Tax Compliance Act, an American law passed in 2010 to crack down on the use of offshore banks… It is feared and loathed by moneymen because of its complexity, its global reach and the high cost of compliance. One senior banker denounces it as “breathtakingly extraterritorial”
6. Dan Mitchell: “Is FATCA the Worst Part of the Internal Revenue Code?” danieljmitchell.wordpress.com, July 5, 2014.
Dan Mitchell is a Senior Fellow at the Cato Institute:
Today’s question deals with the part of the tax system is most harmful to the economy, on a per-dollar-collected basis.
If you asked me to make that choice five years ago, I probably would have picked the death tax, though I’ve had some experts tell me that “depreciation” is even worse.
But I think today we have a new champion (so to speak). A little-known law called the Foreign Account Tax Compliance Act almost surely wins the prize. And it’s not just cranky libertarians such as myself that think the law is bad news.
The U.K.-based Economist is one of the most establishment publications in the world, yet even that magazine has concluded that the law “is doing more harm than good.” [ . . . ]
P.S. You probably won’t be surprised to learn that Rand Paul is leading the fight against FATCA and other schemes to give governments more extra-territorial tax powers. [ . .. . ]
Other lawmakers also now understand that the statist campaign against tax competition is bad news for America. Marco Rubio, for instance, deserves credit for trying to stop the Obama Administration from coercing American banks into obeying foreign tax law.
Policy makers should repeal FATCA, of course, but the real problem is that the tax code is biased against capital formation and also has a punitive policy of worldwide taxation.
7. Richard Rahn: “An act of economic strangulation: Obama’s new tax rules for foreign accounts will punish Americans,” Washington Times, June 30, 2014.
Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth:
Finally, the administration is about to implement on July 1 perhaps the most stupid and destructive piece of tax regulation ever devised — the Foreign Account Tax Compliance Act (FATCA). This one regulation by itself may well cause another drop in GDP during the third quarter of this year, owing to both the uncertainty it engenders and the fact that it will drive out significant amounts of foreign capital. This will, in turn, add to U.S. job woes. The Economist magazine stated that the act “is doing more harm than good,” and that “FATCA turns foreign banks and other financial institutions into enforcement arms of America’s Internal Revenue Service (IRS). They must choose between handing over information on clients who are ‘U.S. persons’ or handing 30 percent of all payments they receive from America to Uncle Sam.”
The regulations are vague about which non-bank entities are “financial institutions” — a definition that can be infinitely elastic. As The Economist notes, there is confusion about the definition of a U.S. person. “The definition is broad and includes not only citizens, but current and former green-card holders and non-Americans with various personal and economic ties to the United States.” Last week, a lawyer who must advise his clients on the act showed me 200 pages of “guidance notes” he had received — many of which were undecipherable. An executive with a major global financial services company told me his firm had 70 lawyers working to try to figure out the Foreign Account Tax Compliance Act. The expected revenue from the act to the Treasury is only about $800 million per year (which is probably exaggerated), while the cost to the 77,000 or so financial institutions and millions of individuals who must comply will be many times that amount. Typically, the Obama administration failed to do a cost- benefit analysis of the act (shades of Obamacare).
In addition to being economically destructive and offensive to America’s foreign friends, the Foreign Account Tax Compliance Act is resulting in overseas Americans having their bank accounts closed — owing to the costs and risks to the financial institutions. Owing to its global information-sharing provisions, the act grossly violates the basic human right of reasonable financial privacy for everyone.