US President Barack Obama.
(photo credit: REUTERS)
The looming United States Foreign Account Tax Compliance Act (“FATCA”), intended to prevent tax cheating, is known as “the worst law you’ve never heard of.” But unfamiliar as the name is, the effect of the law is already all-too-familiar to Americans living in Israel. Law-abiding Americans facing US reporting requirements of their Israeli financial accounts, or who have been denied banking or financial services due to American citizenship, have already felt its impact.
The law’s onerous provisions are scheduled to go into effect in the coming year. However, even as this regulatory reckoning approaches, a group of US citizens residing abroad is making progress pushing for repeal.
FATCA was signed into law by President Barack Obama in 2010, receiving little scrutiny before being passed.
There was no cost/benefit analysis of the bill, no regulatory impact study, and no floor debate or amendment process in either the House or the Senate. And it shows.
FATCA was designed to combat offshore tax evasion and to recoup federal tax revenues by requiring US citizens, including those living abroad, to report all financial accounts held outside the country. But FATCA didn’t stop there: it also requires foreign financial institutions to report to the IRS their American clients’ financial transactions, and imposes harsh penalties for noncompliance. It requires a punitive withholding of 30 percent of US funds transferred through foreign financial institutions that fail to satisfy FATCA’s reporting requirements.
Furthermore, its costs far exceed its benefits. The Congressional Joint Committee on Taxation estimates FATCA will raise revenues of approximately $800 million per year for the US Treasury – a rounding error in a $3.8 trillion budget. The costs of implementation, however, are estimated to be $8 billion, including compliance costs to financial institutions and the additional costs to the IRS for the staffing, software and resources needed to process the data produced. There are indications that the IRS, with its hands already full of new Obamacare responsibilities, is not prepared to handle these additional duties.
In addition, in anticipation of increased regulatory and reporting burdens they will face, foreign financial institutions are already denying – and even revoking – financial services to US citizens and to American-owned businesses abroad. American-Israeli accountant and financial planner Ira Hauser reports that several of his American-citizen clients have been denied services in Israel relating to bank accounts, mortgages and brokerage accounts, while others are hassled by their institutions to restrict activity and complete voluminous new paperwork.
The cost estimates above don’t include this additional negative impact on American citizens living overseas, on US businesses or on the export of American goods and services.
The extraterritoriality of the law will lead to foreign-relations friction. Once implemented, FATCA will allow the US government to impose regulatory costs and penalties upon foreign financial institutions even if they otherwise have no dealings with the United States. Forcing foreign financial institutions or governments to collect data on American citizens and transmit it to the IRS – at their own expense, yet – does not go over well in foreign capitals. It has already drawn the ire of Canada’s Finance Minister Jim Flaherty for requiring Canadian banks to become unpaid extensions of the IRS and jeopardizing Canadians’ privacy rights.
The US proposes dealing with the foreign relations issue by compounding the problem, offering reciprocal reporting to countries who sign special intergovernmental agreements. However, even besides the additional complexity and cost created by such agreements, the prospect of the US government providing foreign governments private information on American citizens is disturbing.
FATCA has been implicated in the recent surge in renunciations of US citizenship by Americans abroad. Expatriations have risen from a pre-FATCA trickle to a current level of thousands per year. Many Americans operating overseas businesses and requiring foreign financial services are being forced to choose between citizenship and livelihood.
Still, all is not yet lost. To begin with, FATCA’s implementation has already been delayed twice, due to difficulties organizing regulatory and enforcement structures. It is now scheduled to become effective July 1, 2014.
There is also significant pushback against the legislation that could further delay or even permanently derail its implementation. Republicans Overseas, on behalf of the roughly seven million Americans living abroad, recently initiated a campaign against FATCA that is making waves.
Their online Congressional petition [link: https://abolishfatca.
com/live/] has gone viral in Israel and elsewhere.
And on January 24, 2014, Republicans Overseas succeeded in getting the Republican National Committee to adopt a resolution advocating FATCA’s repeal.
FATCA is a fine example of legislation at its worst: arguably well-intended, but passed by Congress with little scrutiny, poorly thought out, inefficient, unduly burdensome on both citizens and financial institutions, and incurring costs wildly in excess of any expected benefits.
The multinational grass-roots effort by ordinary Americans living abroad to repeal FATCA is gaining traction. If successful, it will be an impressive victory for citizen activism and for common sense.
The author is an American attorney and political commentator living in Israel. He serves as Counsel to Republicans Abroad Israel.