For the more than a decade the Internal Revenue Service has been chasing after potential U.S. tax evaders by forcing foreign jurisdictions and banks to become deputy tax collectors. From the Know-Your-Customer regulations to the Qualified Intermediary regime, non-U.S. banks have mostly complied with the IRS’s bullying. But as the excerpted article below discusses, U.S. tax collectors may have bitten off too much with the passage of the Foreign Account Tax Compliance Act (FATCA), which dramatically modified the U.S. withholding tax and information reporting regimes for U.S. persons, non-U.S. banks and other financial institutions. A new 30-percent withholding tax was mandated on payments to foreign financial institutions (FFIs) that do not comply with disclosure requirements for U.S.-based account holders.
Imposing draconian reporting requirements on the rest of the world does not serve American interests. FATCA will make it more difficult for Americans to raise foreign capital, prevent law-abiding Americans from investing in the institutions of their choice, and potentially spark reciprocal action by other governments against U.S. banks. (These and other problems CF&P has with the new law are spelled out in a September 2010 letter I sent to Stephen E. Shay, Deputy Assistant Secretary for International Affairs, U.S. Treasury Department.)
In his Forbes.com blog entry, George Clarke warns that non-U.S. banks and institutions may finally have enough of Uncle Sam’s bullying:
…For those readers who have recently emerged from a North Korean nuclear bunker for a smoke break, the U.S. has been cracking down on Swiss and other foreign bank accounts held (and undeclared) by its citizenry. A general problem with that crackdown is that it depends for its success on knowing which U.S. taxpayers have those accounts (the IRS does not have unlimited resources and cannot audit everyone). And the foreign banks – who derive income from the services they provide to this group of U.S. (non)taxpayers – may not disclose them unless they have to (as UBS did when its own existence was put on the negotiating table). FATCA posits a simple premise: banks will trade the “carrot” of access to U.S. stock and securities markets in exchange for ratting out these accountholders. The “stick” in this equation is a withholding tax on income earned from our markets should the bank decide not to sign up.
While FATCA is simple, its ramifications are anything but. As one set of observers view the world, U.S. stock and securities are not worth subjecting oneself to the rigors of American extra-territorialism. This is particularly the case where there is money to be made catering to those U.S. taxpayers who would continue to ignore U.S. tax laws. More pro-American voices admit the annoyance of expanding U.S. mandates against other nation’s institutions but view U.S. capital markets as too important to lose for a relatively small clientele of non-disclosed U.S. business. They also note that where America leads – at least historically – others will follow; so the days of offshore money may be as numbered as the accounts containing it. The differences in these viewpoints implicate nothing less than American exceptionalism. Do we still have enough sway in the world economy to cash the check written by FATCA; to offer up our capital markets in exchange for the tax evaders? Watch closely, as the number of banks signing up to FATCA will tell us how strongly the beacon still burns (at least as far as capital is concerned).
September 1, 2010, Letter on FATCA sent to Stephen E. Shay, Deputy Assistant Secretary for International Affairs, U.S. Treasury Department
http://www.freedomandprosperity.org/fatca/shay-2010-09-01.pdf
