Should Lex Americana be universal? FATCA turns foreign banks into tax informants

georges u

Over the last decades, a number of initiatives taken by various US administrations on both sides of the aisle have raised concerns about the actual legality of the extraterritoriality attached to laws imposed by the United States of America on other jurisdictions around the world, often using “persuasion” rather than legal due process.

In my first course on International Private Law at the Catholic University of Louvain, we were taught that tax laws could not extend beyond the borders of the taxation authorities. The territoriality of tax laws is confirmed by the literature.   The double taxation treaties confirm this principle to which the United States is the most significant exception.

As we write this post, Switzerland is confronted with an “emergency” law submitted to its Parliament to accommodate Uncle Sam’s disclosure requirements. The justification is unambiguous: if you don’t do it, we will ban your banks from operating in the United States.  The Swiss lower house refused the emergency required by the Government to deal with the agreement with the US tax authorities. A Swiss government plan to protect the country’s banks from U.S. criminal charges has been thrown into doubt by a Swiss parliamentary committee’s rejection of the proposed bill on Tuesday.

The US applies Universal tax Law

To the best of my knowledge, the United States is the only country that taxes its nationals on a worldwide basis, at least individual taxpayers. The Ways and means Committee of the US Congress recently questioned the idea that the United States can tax its citizens worldwide.

Our “worldwide” system of taxation is a remnant from the Cold War: While it has been 25 years since we reformed the tax code, it has been almost 50 years since we undertook a bottom-up review of our international tax laws. In other words, our international tax rules were written when the United States accounted for 50 percent of the global economy and had no serious competition from others, a far cry from today’s fiercely competitive global economy.

Interestingly, it is probably the strongest incentive for US firms operating abroad to recruit local staff rather than US tax residents. The cost of hiring US taxpayers abroad is sometimes as high as twice the cost of hiring locally.

Foreign Account Tax Compliance Act (FATCA)

For the IRS, it is an important development in U.S. efforts to improve tax compliance involving foreign financial assets and offshore accounts.  FATCA includes two major features:

  1. It requires US taxpayers to declare the existence of their foreign accounts, wherever they are in the world, if they reach $ 50,000 for singles and $ 100,000 for married couples. This is consistent with the universal tax principle.  This is in addition for the Report of Foreign Bank and Financial Accounts (FBAR) that requires a reporting to the US Treasury under the Bank Secrecy Act.
  2.  The IRS, armed with its whip, requires foreign banks to provide information on such accounts if the accountholder is a US national or a US resident. The negotiations are managed country by country by IRS officials. It is therefore a use of the US political muscle and ability to threaten foreign financial institutions to withdraw their license to operate in the United States. The FATCA rules essentially require a “foreign financial institution” (“FFI”) to enter into, and to comply with, a reporting and withholding agreement (“FFI Agreement”) with the IRS with respect to US account holders. An FFI that enters into an FFI Agreement is referred to as a “Participating FFI.” An FFI that does not enter into an FFI Agreement (referred to as a “Non-Participating FFI”) would be subject to a 30% gross withholding tax on withholdable payments, unless it is otherwise exempted from the FATCA regime.  

FATCA raises fundamental questions of privacy, but also raises questions about how it can be properly executed. Why, as a Belgian-born, dual-citizen, grandfather, am I no longer allowed to use or send money from my Belgian account for my granddaughter in Paris by using Internet banking? Why is my account subject to all kinds of FATCA restrictions while I am not required to disclose the account because its amount is below the IRS thresholds? Why can I not view the balance of my account on line?

Effectively, those accounts become useless, and it is equivalent to inciting US tax persons to close those accounts, pushing them to less regulated and transparent jurisdictions if they need capital abroad, whether it is for their business or their household.

Is the IRS targeting some categories of taxpayers because it is hungry for American money abroad?  Of course not:  it does not intend to tax corporate revenues abroad. This debate is now largely open. This is just against the individual US taxpayers. This discrimination is even more surprising that it has become blatantly obvious during the Apple hearing that the money that sits in foreign jurisdictions is much more important, and that it escapes taxation.

The US is basically using its political power with the support of foreign banks who have become tax collectors for Uncle Sam. I even received in my mail a US W9 form from my bank in Brussels. The IRS is effectively recruiting tax informants who, at their cost and expenses, need to provide ways and means to comply and change their systems.

Not surprisingly, one by one, banks refuse to open accounts for US residents or nationals. A friend of mine was refused the opening of a bank account last week in Tokyo. It has become simply too cumbersome and too onerous for them to spend millions to become tax collectors for Uncle Sam.  The cost burden for the UK is not insignificant: HMRC estimates the cost for UK business over the first 5 years to be £1.1bn-£2bn ($ 1.7-3.2 bn), running thereafter at an annual cost of £50m-£90m. ($80- 150 m) HMRC’ estimates its own one-off IT and staff project costs at approximately £5m, with ongoing annual costs of £1.4m ($ 2m) from 2016.

This will affect Americans working outside of the United States who are not going to be able to use local banking facilities. It’s a strange version of a self imposed Yankees go home. The study published by Shearman & Sterling on the subject is a glimpse into that complexity.

Towards a European FATCA?

The opposition to FATCA is growing in Europe and, after pretending that it did not matter, some European Governments, in particular Germany and France, are now looking at a European version of FATCA.

Europe is looking for ways to create an EU version of FATCA. If it were effectively imposed it would make sure that no European taxpayer can use US banks for investment purpose, and that US banks will report all revenues of European taxpayers to the authorities of the taxpayer. This would threaten a substantial part of the international private banking or brokerage operations of US financial institutions, a multi-billion business for large US banks.

The European Parliament has started studying the project.

Rethinking US international tax laws.

I am not an international law expert, but I would strongly argue for a delay to FATCA and the opening of serious discussions at the OECD to figure out an acceptable way to ensure equity between countries.  Why would the US be the only tax authorities to benefit from information provided foreign tax authorities?

I would not dare to even suggest how this could be achieved. In the meantime the movement to repeal FATCA is growing. Should all countries decide that their citizens will be taxed on a worldwide basis, as the United States does, working abroad will become increasingly onerous and create absolute confusion?  The core of this debate is only emerging: Either the system is based on territoriality, or it is based on nationality. Having it both ways won’t work.

The United States has to ask itself the question of whether its actions are legitimate and question its objectives and the ways it goes about achieving them. This is especially pertinent at a time when the United States seems to reserve a right to eavesdrop upon foreign nationals.

Is US foreign policy using all its weaponry, including the FCPA and FATCA to impose a Lex Americana (i.e., American law regime) upon the rest of the world? Shouldn’t the US first look more closely at its own taxation system and corruption? International tax law is in urgent need of modernization with a focus on equity and fairness rather than threat and blackmail.

Could the IRS have been an apprentice sorcerer? Might it have opened the Pandora box? The next few months will certainly provide further interesting developments. But it is questionable, to say the least, to see Uncle Sam recruiting for free tax informants around the world. Is it the price for the Pax Americana?

27 Comments

  1. Clive

    Great article.

    As someone who has been following the FATCA story for at least 2 years, you repeatedly hit the mark on the serious problems inherent in FATCA. It ‘s a pity that so few are aware of FATCA and it’s potential negative effects on the U.S. economy, the world financial system and Americans who choose to live outside the U.S.

  2. John

    Citizenship based taxation is harming not only American expats, it is also harming US trade. Nobody can sell US products abroad better than Americans.

    The precedent for taxing expats was set by Abraham Lincoln to punish refugees who fled during the civil war.

    The time has come to abolish citizenship based taxation. The number of renunciations of US citizenship among expats is growing every day.

  3. American Citizens Abroad would like to hear from you about the banking difficulties you’ve experienced while living abroad:

    “ACA and other action groups are gathering personal experience statements about these problems which will be submitted to key Members of Congress and top Government officials in Washington and possibly selected for insertion into the Congressional Record, news reports and/or other media accessible to the public.”

    http://americansabroad.org/issues/taxation/share-your-banking-or-tax-story/

  4. Patric Hale

    George, the situation is even more grave than you have portrayed it. The IRS is becoming a global fiscal Gestapo that would have only made Heinrich Himmler drool. They’re already effectively forced Switzerland to abandoned its bank privacy laws that have protected them since the founding of the Confederation. Swiss was forced to give up their fiscal sovereignty simply because their banks want access to the US financial markets.

    Facing considerable push back from the EU, the IRS have now overstepped their legal bonds and are promising to exchange data with the member states of the EU on information about their nationals in the USA. Of course, since only the USA has a citizen-based taxation basis, what effective difference does this make? Except it is expressly prohibited by US law, but this hasn’t stopped the IRS from offering it (though they say they will merely “support” it in Congress).

    The problem with ALL of this is the FATCA law was quite literally slipped in the middle of the night into the HIRE Act in Dec 2010, meant to add jobs, by Carl Levin. It had no committee hearing, gave no member of Congress a heads-up on it, was never debated on the floor – and still today most members of Congress have never heard of it. (You remember that all Gestapo acts take place in the middle of the night when no one is awake or looking).

    This is causing enormous harm to the 6 million overseas Americans, many of whom are quite literally having to become financially divorced from their non-American spouses in order simply to function normally. We’ve had people literally lose their homes as banks have canceled their mortgages because they don’t want to deal with this fiscal imperialism of the USA.

    In the meantime, this issue has been taken up by the G-8 under the guise of stopping “tax evasion” which has become the fiscal equivalent of the “war on terror” requiring a nuclear bomb to kill mosquitos! Here are some of the numbers on this:

    The global GDP is $67 trillion. The BIS 2012 Annual Report stated that the world’s top banks have total assets of $32 trillion. Their analysis of all offshore “tax havens” have combined assets of $2 trillion with the Cayman Is., the largest, with $900 billion. But the bloodhounds in America have spun this into an argument that there is an “estimate of $24-32 trillion in offshore funds” to justify these fiscal Gestapo tactics. As the BIS figures show, this would include the entire global banking system!

    Finally, as you know through your long career in international finance, not all money in tax havens are either (1) illegal or illicit; (2) tax-free; (3) liable to be taxed by the USA – all other countries using the residence based tax systems simply have no claim at all on it. Indeed, the amount of money that is really liable for taxation is perhaps a few billions and hardly the absurd levels claimed by the IRS. But, then, they are trying to justify a crusade against an imaginary “enemy” for equally imaginary and absurd claims of vast amounts of revenue for the US Treasury. It has turned into a jihad against overseas Americans and the ugliest American imperialism in our nation’s history!

    Here is how absurd this is: The Joint Committee on Taxation scored FATCA as bringing in only $800 million a year in added revenue. In the meantime the International Banking Association estimates that the costs for compliance will run between $20-40 BILLION!

    That would be bad enough if there weren’t an even bigger absurdity: The biggest loss of revenue to the Treasury, as it turns out, comes from … wait for it … THE IRS ITSELF!! That’s right – the Inspector General of the IRS has testified to Congress that the IRS currently sends out over $20 billion in fraudulent tax claims each year! Contrast that to the assault on the global banking industry forcing them to implement FATCA for a lousy $1 billion in added revenue and you have to seriously wonder who is minding the IRS. As we’ve seen from the Cincinnati scandal clearly no one is – they are all off chasing shadows instead.

    Please continue to bring this subject up with your vast network of friends in the global financial markets. As we have now seen from the NSA operations from Snowden, if the IRS succeeds in getting first the EU countries and the OECD countries to implement this data exchange, you can be sure that the NSA will then have complete access to every citizen’s bank details within the OECD and there will be little anyone can do about it.

    Patric Hale
    Director
    American Citizens Abroad
    (We know each other from Euromoney)

  5. Pingback: Should Lex Americana Be Universal? | Maple Sandbox

    • James Otis

      US legal persons domiciled abroad are treated favorably.

      Natural persons who live abroad are punished for doing so.

      American Exceptionalism at its finest!

  6. WhiteKat

    Americans abroad are the ‘New Jews’. Their crime: Born in USA, but no longer living there.

    The 6-7 million ‘US persons’ abroad are mostly just average law-abiding people paying taxes to the country they live in. Many left the USA decades ago. Most have no idea the USA considers them taxpayers especially if they left as young children. USA is the ONLY country (except Eritrea) that taxes its citizens no matter where in the world they reside, and no matter where that income is earned.

    Until recently, US was not enforcing its policy of taxing citizens abroad, nor did it attempt to educate them about the requirement to file annual tax returns and FBARs (foreign bank account reports). All bank accounts that a ‘US person’ abroad has in the country they live in is considered ‘foreign’ and automatically suspected to be a hidden, off-shore account, thus subject to life-altering penalties for non-reporting.

    With FATCA, non-US banks are forced to seek out those who were ‘Born in the USA’ and send details of all their accounts to the IRS. Since the majority of ‘US persons’ abroad (even those who’ve been filing US tax returns) haven’t been reporting their so-called ”foreign’ accounts, IRS will have a field day assessing penalties.

    In fact when the IRS is done with them, it may as well just send them all to the gas chambers because most of them won’t feel like they have much left to live for.

  7. Em R.

    This is a well researched and measured article and I applaud Mr. Ugeux for his effort to present FATCA in its true light. It would be difficult to improve on his piece (it hits all the right spots) and the comments here are right on the mark. There is little I could add except to say that I am Canadian (born, raised, educated, employed and retired in Canada) and FATCA affects me. (I’ll not offer any more information than that because it will put up a red flag in the USA’s all-seeing, all-knowing, ever-threatening worldwide spy system known as the NSA.) At the root of this FATCA evil is the fact that the USA still clings to citizenship based taxation (CBT). It is the only country in the world that does this except for tiny Eritrea which has a simple 2% diaspora tax and was hypocritically condemned for it by the USA. Sadly, as is too often the case, our Canadian government joined in the condemnation of Eritrea (US poodle that it is). ACA (American Citizens Abroad) has wisely and profusely recommended that the USA switch to residence based taxation (RBT) but they are attempting to turn one heckuva huge ship around there. The USA, wrapped in its flag, entrenched in its exceptionalism and confident in its economic and military might is rarely persuaded by any amount of logic and reason to do the right thing. It’s up to sovereign nations to take a stand against FATCA which is yet another data scoop, an asset grabber and ultimately a tool used to control any US citizen/person who dares to live beyond its borders.

  8. AtticusinCanada

    This is a very well written article but, as ACA has pointed out it doesn’t go far enough in pointing out what is wrong with FATCA. Low and middle income expats in Canada would owe zero taxes to the U.S. However, the huge fines on FBAR reporting on zero tax owed are still a very big concern. The reporting requirements that will be imposed on our banks also include our foreign spouses and children. There is the rub. Many a Canadian spouse is saying “NO!” They pay taxes gladly to Canada where they live and work. They are not American. If they share an account with an American spouse the bank will report that checking acct. to a foreign nation regardless if the American on the account made any of the money in it or not. This reporting is account numbers, balances, all transactions and can include LOCAL checking accts, credit cards, any account you share with an “U.S. person.”

    I’m among a group of spouses having to renounce U.S. citizenship since my Canadian husband makes all of our income here in Canada and he will NOT go along with this intrusion and over reach by the United States. What American living inside the U.S. would have a bank turn over their data to a nation they are not a citizen of? Yet this is what FATCA is requiring of foreign banks. People in our situation can renounce, divorce or take the American spouses name off of everything they have or own. This is happening to people who would not even owe the U.S. any taxes at all!

    FATCA is a horrible over reach which violates the laws and constitutions of other nations. The U.S. has “graciously” said to those nations where their law is in violation of the Charter, constitution or law of those nations they will “allow” those nations to CHANGE THEIR LAWS to be “in compliance” with the U.S. How nice of the U.S. to “allow” other nations to change their laws to please you. Would the U.S. stand for this from any other country in the world? What hubris this is to demand such a thing of every bank in the world and every country in the world.

    There is zero to little value for other countries because most countries do not tax on citizenship, only on residency.

    All this harm to average Americans and our foreign spouses and children for zero gain to any country other than the U.S.?

    If you are forced to renounce to protect your foreign family then you get to live in fear of Senator Jack Reed who keeps introducing bills to never allow a “covered expat” back into U.S. again if they are deemed to have renounced for “tax purposes” The reason this is a horrible thing for those who wouldn’t be “covered” is the idea that if they will go that far, how long before they bar everyone who renounced who was FORCED into this position.

    FATCA is a trap. Those it most harms are not the people it was intended to go after. When written it was supposed to go after people living INSIDE the U.S. borders who were “off shoring” large sums of money, criminals, drug lords. Instead it has been used to go after every single American living outside the country and our foreign families. Huge fines on FBARS which no one EVER told us about not even the IRS on zero taxes owed. It’s a penalty grab on law abiding, innocent expats abroad. An imperial over reach, bullying other nations into going along with something whether or not it violates the laws of those countries. In high tax countries this makes zero sense.

    The often touted lies about FATCA that is is to catch champagne sipping expats sitting on beaches are beneath contempt when you consider who it is really harming. It is a punishment for those who “dared” not live inside the U.S. for any reason. A large portion of expats live outside the U.S. for family reasons. FATCA doesn’t care. You are to be fined, demeaned in the U.S. press and lied about all while this “law” is forcing you to renounce or report on your foreign family. If you renounce you can count on the U.S. instead of telling the truth as to why this is happening to demean you further.

    FATCA is a disgrace. No one should have to choose between their foreign family or country of birth especially if they wouldn’t owe the U.S. a dime in taxes. Yet this is happening and no one inside the U.S. is telling the truth about this heinous law.

  9. STEVEN J. FROMM, ATTORNEY, LL.M. (TAXATION)

    Yes this is a very troublesome approach and situation. As a tax attorney, I see it more at a personal level and this whole program is very tough on citizens who are not tax cheats but have for some very legitimate reasons bank accounts in other countries.

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