Caribbean Central American Action’s
36th Annual Conference on the Caribbean and Central America
~New Orleans, Louisiana~
Focus on Finance:
Foreign Account Tax Compliance Act (FATCA)
November 29, 2012
“It is Not Too Late to Stop FATCA”
Andrew F. Quinlan
Center for Freedom and Prosperity
Thank you for having me here to talk about FATCA today. Though I wish we didn’t need to be here under these circumstances.
I was asked to talk today about the implications of the most recent delays in implementing FATCA. To do so, I want to put the law in a larger context, as part of a battle which my organization has been fighting for over a decade. Once the context is clear, I’ll then discuss what’s going on with FATCA today and possibilities for the future.
To begin with I want to highlight how truly maddening this legislation is. The United States already has one of the highest tax compliance rates in the world. Nevertheless, the political class has decided that they must chase every last potential tax dollar no matter the cost.
At the time it was passed, the government estimated that FATCA would raise around $8 billion over ten years. That’s almost enough to pay for a single day of spending by the federal government at current levels. Almost. And knowing the government as I do, that’s probably optimistic.
So to provide enough money to fund the US government for less than a single day, the entire world is expected to bear the significant burdens of this law. That is not the action of a good neighbor, and it does little to suggest that the US government is capable of acting as a good faith negotiator when it comes to international concerns over their belligerent and arrogant demands.
To make matters worse, the law really shoots the US in the foot. Not only are burdens being placed on foreign institutions, but US citizens are taking a hit as well. Americans living overseas are being dropped from their banks, which are also in some cases eliminating their US holdings. I haven’t seen an estimate for the loss of foreign investment in the US, but I’d wager it will be higher than the predicted revenue gains. Simply put, FATCA is as bad for the US as it is for the rest of the world.
I imagine many of you are asking right now, “How in the world could this have happened?” I’ll attempt to explain.
Larger, developed nations went astray when politicians began to look at private capital the way a pig looks at a trough. This provided an opening for financial centers to prosper by attracting capital through policies that offered quality services and respected privacy rights. Rather than learn from this experience and reform, politicians in the developed nations took the opposite approach and began to devise ways to prevent capital from fleeing, rather than adopting new policies designed to attract it.
Their goal was direct or indirect tax harmonization, or the exporting of bad policies onto all nations in an effort to eliminate any competitive advantages. This has been pursued primarily through the OECD, a process marked by the bullying of low-tax and smaller jurisdictions and the constant moving of goalposts. The Center for Freedom and Prosperity has extensively documented their activities, and I could easily fill an entire speech on that topic alone, but you can visit our website for more details.
The increasingly dire financial situation within so many developed nations has added a sense of urgency to the aforementioned efforts.
That’s the political backdrop, but there’s also a strong ideological component. There are special interests committed to funneling taxpayer dollars to their own pockets, or toward the various causes they champion. The more taxpayer dollars there are to spend, the better off they are.
And since politicians live in a fantasy land where it’s possible to avoid doing the hard work of putting their financial houses in order, the ideological groups are easily able to seduce them with promises of large piles of untapped cash that politicians merely need to reach for and tax.
The context surrounding FATCA is important to keep in mind when considering options for how to respond to the law. I’ll get into that more shortly, but first I want to go over some of the recent developments.
The two big pieces of news recently were that FATCA implementation was being delayed – again – and that the US Treasury Department is engaged in discussions with over 50 nations to sign intergovernmental agreements. I believe these two items are also related.
The delay itself is both more and less than it seems. It’s less significant than it might appear in the sense that it doesn’t change the pressure on institutions to prepare for FATCA’s implementation. The heart of the law is not likely to change through the regulatory process. Treasury could still water it down at the margins, but the truth is that the law was designed to be onerous, and that’s how its supporters want it to remain.
I attended a discussion a few months ago where Jack Blum, who is a former staffer for Senator John Kerry and Chairman of the pro-FATCA group Tax Justice Network-USA, said that FATCA is a “draconian law,” and then in the next breath called it a “very positive development.” As far as these groups are concerned, FATCA is sticking it to overseas banks who are hiding tax dollars from their rightful owner – the US government. That’s how the folks behind FATCA see it. They aren’t interested in reducing the burden on foreign institutions because they see them as the enemy of fiscal solvency within the US, and a barrier to the dream of unlimited tax revenue.
At the same time the delay does reveal something very important, which is that the task handed to the Treasury Department by Congress is nearly impossible to achieve unless foreign governments preemptively surrender their sovereignty. Treasury has to keep pushing the implementation dates back because they simply can’t enforce at present what is a horribly written law.
Treasury is hoping that governments around the world will solve this problem for them by agreeing to collective enforcement mechanisms. This is why they are not only aggressively pursuing intergovernmental agreements, but are also trumpeting the fact in order to create an air of inevitability and to put further pressure on governments to get on board. The more everyone believes that there is nothing they can do to stop FATCA, the truer it becomes.
Up until recently, chatter about FATCA was coming almost entirely from those who had the most interest in pursuing it. The compliance industry in particular has been repeatedly telling everyone that “FATCA is coming, there is nothing you can do about it, and oh, by the way, pay us a lot of money so that we can bring you into compliance.” The last thing they would want to do is encourage you to oppose what will fund their collective retirements. But now we’re starting to see more outcry from opposition groups and legislators.
Part of this change is due to Treasury’s approach. In order to coerce governments into signing agreements, Treasury has begun promising reciprocal information flows in the future. They have no authority within the FATCA law to do so, and are beginning to attract attention from members of Congress concerned about the possibility that Treasury might claim additional unilateral authority to mandate similar reporting requirements on domestic institutions.
Four US Senators sent a letter to Secretary Geithner a few months ago, questioning Treasury’s authority to make the sort of promises they are using to seduce foreign governments into compliance agreements. Treasury’s response not surprisingly dodged as many of the questions as possible and failed to address the substantive concerns. In particular, Treasury has been unable to fully explain how much of the promises for reciprocation they believe they already have the authority to enact unilaterally, and how much would require new legislation.
At a time when governments are being asked to give and give and give, it’s important to keep in mind that what Treasury is promising to deliver in return may not be legally or politically possible within the US.
It’s also important to understand that many members of Congress likely had no clue what they were voting for when FATCA was passed. It was included as a side item and funding mechanism for an unrelated bill supposedly designed to create jobs. When you put all this together, it means that Congressional reversal is still possible, particularly if domestic institutions are brought into the cross-hairs. Congress may not care about the burdens placed on foreign institutions, or even on Americans living abroad, but they will care about imposing similar costs on American banks and their customers – otherwise known as voters.
Here’s my advice: You obviously have to do what is necessary to prepare yourselves for compliance, but foreign governments shouldn’t surrender preemptively to US fiscal imperialism. It’s understandable that individual institutions want to pass on the burden of negotiating agreements with the IRS to their governments, but signing these intergovernmental agreements will be giving Treasury power to enforce this very bad law that they would not otherwise have.
Perhaps the wise approach is to negotiate with Treasury, but to make demands for fair treatment that they are unlikely to provide, or that the American people would never abide. But while those negotiations are going on, don’t neglect the possibility of removing FATCA entirely. Look for domestic US interests opposed to the law – or that might be opposed should its burdens be reciprocated, and see what they can do to put pressure on the US government. Consider forming alliances with some of these interests, and look for ways to eliminate FATCA, instead of simply tolerating it. As bad as this law is, I know from experience that just accepting it will lead to even worse legislation in the future.