Monday, January 2, 2012

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.


  1. I know one politician who's behind that piece of idiocy: Barack Obama.

  2. @hneebadger: while he certainly signed the law, I doubt he authored it. Do you have a source?

  3. Senators Carl Levin, and \John Kerry are the other a**h*les involved with this overreach.

    They're get up and tell Congress "see we tried, but those incompetent foreigners won't help us - it's all their fault." Hey Carl and John perhaps try the death penalty that might work!!

  4. @Anonymous: while I'm prepared to believe they're involved, can you provide a link?

  5. Found a page ( that seems to show the evolution of the bill and law. Near the bottom is a link to what is claimed to be the original text of the bill and lists Baucus, Kerry, and Shaheen in the Senate and Rangel, Neal, Stark, Levin, Van Hollen, Meek, Davis, and Sanchez in the House.

  6. @aparker42: yup, that looks right. Thanks!

  7. FACTA was submitted to the House in the 108th Congress as H.R. 2622 and sponsored by Spencer Bachus (R-AL). It had 58 co-sponsors.

    I don't think the LOC Thomas archive is very good at durable links, but this may still work by the time you read it:|/home/LegislativeData.php?n=BSS;c=108|

  8. 1. I don't think that the us citizens are really the target of this.

    2. It might get rejected in the first pass - but it sure does shift the frame.

  9. Ironically, my guess it's mostly US residents who are intentionally hiding money from the IRS and as non residents we are caught in the same trap. Regardless, the IRS seems to want to enforce the law requiring all "US persons" to file. But don't think that it's limited to US citizens, as green card holders and anyone who meets substantial presence tests must also. So the onus will be on the account holder who has "indications" that they are US persons to prove a negative, that they are "innocent". This will prove to be very difficult, costly and time consuming to do and I fear we will soon become the "toxic" Americans to the rest of the world, regarded as tax cheats in the US, and a nuisance everywhere else. Being tax compliant won't change the nuisance factor at all as I'm about to learn. Btw, if the rest of the world's banks "de-market" us where do we put our money? Apparently, we can't put it in the US because the Patriot Act won't allow for a foreign address on a US bank account!

  10. What will this do to international markets that have traditionally used $US as curreny?(f.ex. the oil-market where there are Islamic traders)

    The Euro is 'wobbly'(to be polite... ) the $US might lose favour... How's the £UK doing these days?
    Will everyone suddenly start trading using NOK instead?
    (Norway currently has no 'large issues' regarding the downturn, we have one of the largest investment funds in the world - so money in the bank - no plans for world conquest, or even to take over Sweden...)

  11. Almost sounds as if they expect, and hope, that compliance is impossible. Wouldn't they gain much more by withholding 30% of US-based income from large foreign banks than by tracking the individual expats that are not filing proper tax returns?

  12. The argument over SOPA, another piece of unworkable legislative idiocy, does demonstrate that the current congressional mood is to just pass the law and then "let God sort it out", i.e. leave the implications to be fought over by others. Seems also to apply to FATCA.

  13. I'm an IT person as well. Effectively this could be an *outstanding* jobs programs for those of us in the EU. Imagine the size and complexity of re-designing all the IT systems for all banks in Europe.

    What I'm watching for and there are indications that this will happen is that foreign government will demand reciprocity - we'll deliver info on your citizen's if you will deliver information on ours. Just imagine a bank in California having to report to, say, 20 different foreign countries (with perhaps 20 different requirements). The US treasury department is trying to do exactly that and the U.S. Congress, responding to the outrage of US banks, is mighty upset about it and is attempting to pass a law to prevent it.

  14. Of course, any government who's not a minion to the US will insist on reciprocity when considering implementing FATCA. What's good for the goose...The whole thing is a clusterf**k. Please post any new "indications" of a foreign government demanding reciprocity. The press here in Canada has been eerily silent on the Canadian governments position since reporting our Finance Minister's "Letter on Americans in Canada" in September. Is there some kind of press gag order in place here? To see his letter:

  15. Oh, and let's not forget that some of these foreigners holding US accounts are also US dual-nationals. Imagine the inherent privacy concerns in releasing information on US citizens to a foreign country, but that is what FATCA is imposing on other countries!

  16. you can see here Curtis that the US wants to pass something that is somewhat reciprocal to FATCA:

  17. And thank you for that link. Yes, it does seem that reciprocity is on the table.

    I suspect (don't know for sure) that the EU and Canada, having publicly expressed their "concern", are now merrily negotiating behind the scenes.

    What do you think?

  18. To add to the intrigue, I have had a meeting and much correspondence with my MP and now (and for some time) he's been incommunicado! In fact, there's been nothing in the press from the Canadian government re FATCA and duals in Canada since Jim Flaherty's "posturing" letter back in September. Government-media black out?
    What really concerns me is how much privacy and sovereignty our country is willing to give up to resolve this debacle. If you read any of the Treasury's responses to the many letter of concern here, you will see that the US expects foreign countries to have to change some of their laws to accommodate FATCA.

  19. US is a country built by immigrants. Many of us came from different lands, and still have strong ties to our home countries. Many of us held assests (real estate) as well as bank accounts jointly with our parents who continue to live in the home country.
    What right does the US have to tax money which was never sourced from the US, generated internally in the foreign country and used for supporting family in that foreign country?

    The US government cannot live within its means and now wants to go after people who HAVE lived within their means and managed to save money to have a good life for themselves as well as their families. The US is fast losing its pinnacle place in the world and is now resorting to these arm twisting tactics to continue its Hegemony in the world!

    The US citizenship is becoming a liability rather than an asses in this world!