FATCA: US Declares War

The US has a bright new gift for the world as it rings in the new year: declaring economic war on the world.

Welcome to HSBC.
Americans not welcome.
Photo by Kansir

Yes, that's hyperbole, but only because the rest of the world is collectively telling the US to f*** off and telling many American expats that they can no longer have bank accounts.

So here's what's going on: the Foreign Account Tax Compliance Act, known as FATCA, requires every foreign financial institution in the world to institute the following:

1. undertake certain identification and due diligence procedures with respect to its accountholders;
2. report annually to the IRS on its accountholders who are U.S. persons or foreign entities with substantial U.S. ownership; and
3. withhold and pay over to the IRS 30-percent of any payments of U.S. source income, as well as gross proceeds from the sale of securities that generate U.S. source income, made to (a) non-participating FFIs, (b) individual accountholders failing to provide sufficient information to determine whether or not they are a U.S. person, or (c) foreign entity accountholders failing to provide sufficient information about the identity of its substantial U.S. owners.

Got that? Every bank in the world must now submit to US law and become an extension of the IRS. If they do not comply, they're to be subject to 30% withholding of all US-derived money and must file a return with the IRS to claim the money back.

The New York Times has one of the better articles on this situation. Here's a nightmare paragraph:

Noncompliance would be punished with a withholding charge of up to 30 percent on any income and capital payments the company gets from the United States. Under the law, for example, if Deutsche Bank, having agreed to register with the United States authorities in compliance with the law, were to transfer $25 million to a noncompliant Polish bank, Deutsche Bank would be required to withhold part of that sum, transferring it to the I.R.S. The Polish recipient would then have the option of challenging that withholding by filing an American tax return, claiming the money, despite not being an American citizen.

In practice, tax experts say costs like that might drive the Polish bank out of business.

Just to be clear: the Polish bank might have no US customers and do no business at all in the US, but still be driven out of business for failure to comply with US law (complying might well be in violation of domestic laws).

Let's put this another way: what if Iran demanded all US banks to turn over to Iran bank information on all Iranians with US accounts. The US would (quite rightly) tell Iran "no". Now imagine if all 200+ countries in the world demanded that all of the other 200+ countries in the world instruct their banks to report to every other country's tax authorities. The world banking system would collapse, but the US is still demanding special treatment. (I would really love to know the names of the politicians behind this idiocy, but despite all of the information out there, this is one piece of information I cannot find.)

Japanese and Australian banks have already announced that they won't cooperate, while under EU law, it's illegal for our 27 member states to turn this information over to a foreign government. Banks in many other countries will be in a similar predicament: obey their countries laws and face 30% withholding on any US-derived funds.

Or your can just read what the International Council of Securities Associations has to say about FATCA (pdf, emphasis mine):

[We] suggest that a more appropriate approach would be the development of a global framework that would allow the US and other governments to obtain information regarding income paid to citizens of their countries by foreign financial institutions which is in harmony with each jurisdiction’s existing laws and does not create an excessive compliance burden for financial institutions. This approach, which would be developed through negotiations between governments and not through negotiations and agreements between the IRS and private entities, would be consistent with the G20’s emphasis on building a coherent global framework for financial markets

Actually, read the entire ICSA letter. It very short and calmly points out how US law is so unworkable (and in much of the world, illegal) that it simply can't move forward. Among other items, it points out that the IRS is likely to collect far less in extra taxes than the massive amount it will have to spend in order to monitor every financial institution in the world for compliance.

Given this mess, it should come as no surprise that some tax advisers are suggesting that dual nationals consider giving up their US citizenship.

Side note for people in IT, like me: just imagine how hard it would be to upgrade all of your IT systems to handle verifying and tracking the nationality of all of your customers, along with transmitting this information to the relevant US authorities. This is one of many reasons why foreign banks are refusing to cooperate. Even without the 30% transaction penalties, it's a huge financial burden to implement systems based on the whim of another country's laws.