As noted previously, one of the key advantages of proponents of the Foreign Account Tax Compliance Act (“FATCA”) have had going for them is that almost no one in the United States knows much about FATCA. That’s why the “worst law most Americans have never heard of” continues to make headway, slow and uncertain though it is, despite its numerous fatal defects.
This “under the radar” advantage makes it all the easier for the U.S. Treasury Department to sell the supposed “inevitability” of complying with it to foreign governments and institutions, who wrong assume FATCA is a “done deal” in the United States.
Some recent developments put that advantage in doubt.
IRS Taxpayer Advocate Report
First, from perhaps an unlikely source – within the Internal Revenue Service (IRS) itself – a report was released at year’s end by the Taxpayer Advocate Service (“Your Voice at the IRS”). Entitled “REPORTING REQUIREMENTS: The Foreign Account Tax Compliance Act Has the Potential to be Burdensome, Overly Broad, and Detrimental to Taxpayer Rights,” the report is a professionally understated but damning indictment of FATCA’s defects. Among the key findings:
Punishing the innocent, not the guilty: “The National Taxpayer Advocate is concerned that the program may not be able distinguish ‘benign actors’ who make innocent mistakes from ‘bad actors’ who are trying to hide their income. Taxpayers could face consequences because of lax procedures or standards by foreign financial institutions in collecting and transmitting account data. The IRS also has been slow in acting upon recommendations well-informed stakeholders.”
[RepealFATCA.com comment: Of course it’s far worse than that. Real tax evaders – that is, people who are consciously, criminally violating the law, who are not targeted in even a single provision of the FATCA statute – will certainly find ways to hide from it. Those caught in the FATCA net overwhelmingly will be those “accidental Americans” and others who had no reason to think they were evaders, who will face crushing fines and compliance costs even while owing no taxes. In addition, the privacy rights of millions of innocents will be indiscriminately violated for no legitimate public purpose.]
No net financial benefit to FATCA: “By most measures, FATCA-related costs equal or exceed projected FATCA revenue. The Congressional Joint Committee on Taxation estimates FATCA will generate additional tax revenue of approximately $8.7 billion over the next ten years. By way of comparison, industry sources believe that overall private sector implementation costs could equal or exceed the amount that FATCA is projected to raise. The IRS costs associated with long-term development and implementation of the FATCA regime have not been systematically quantified.41 Similarly, the compliance costs and penalty exposure burdens on individual taxpayers are difficult to estimate, while, in addition to the compliance costs, business entities face possible application of the 30 percent withholding tax against non-compliant FFIs and potential liability against agents who do not undertake proper withholding.” [At p. 243, notes omitted]
[RepealFATCA.com comment: This by itself should be considered sufficient reason for FATCA to be repealed. If a law supposedly designed to ferret out tax evasion inflicts more costs than the revenue it supposedly recovers, what good is it? Actually, it’s far worse than the TAS report would suggest, based on a woefully low assessment of compliance costs by one of the firms selling FATCA compliance. (See the TAS report, note 40, for the source.) More realistically, the estimated worldwide cost of FATCA compliance is closer $1 to 2 trillion – compared to a meager “recovery” of revenues hidden offshore of less than $1 billion per year (enough to fund the U.S. federal government for about two hours).]
In its conclusion, the TAS report makes some recommendation to make FATCA regime less onerous: “FATCA carries with it the potential for substantial resource burdens and significant due process concerns that will arise to the extent that the regime is not correctly and effectively implemented in practice as well as properly conceived in theory.” What perhaps the authors might have wanted to say, but which would have been beyond their mandate, is that FATCA is not “properly conceived,” even “in theory,” and that the only reasonable response is to scrap it. Nonetheless, the report is an admirable work, and well worth reading.
Things Heating Up, Up in the “True North Strong and Free”
It is significant that growing political controversy in Canada over FATCA even made it into the IRS Taxpayer Advocate’s report:
The approach adopted by FATCA . . . has given rise to discussions of sovereignty issues, as well as concerns regarding economic repercussions. For example, Murray Rankin, the Canadian equivalent of a “Shadow Minister” for National Revenue, recently reiterated his party’s concerns regarding FATCA:
New Democrats are concerned with the prospect of a foreign nation unilaterally imposing obligations on Canadian banks to disclose personal information. The Canadian Government has a responsibility to protect Canada’s tax base, and while we understand the United States’ desire to protect their own tax base, this should not come at the cost of the rights of individuals residing in our own country. Cracking down on tax cheats should occur through international cooperation rather than unilateral action.
[At note 38: Letter from Murray Rankin, Member of Parliament for Victoria, Official Opposition Critic for National Revenue, to Canadian Minister of Finance James M. Flaherty (Sept. 25, 2013), available at http://maplesandbox.ca/wp-
As noted earlier, Canada is a “must-have” country for the Treasury Department to force into the FATCA corral. If they can’t get Ottawa to sign on the dotted line to abrogate Canadian citizens’ rights under the Charter of Rights and other protections (as masterfully analyzed in a letter from noted constitutional scholar, Peter Hogg, former Dean of Osgoode Hall Law School), under so-called “intergovernmental agreements” (IGAs), prospects for forcing other countries to submit fall off sharply. Indeed, since IGAs are essential to FATCA’s enforceability prospects (even though they are not authorized or even mentioned in the statute), refusal of Canada – our most important trading partner and biggest foreign energy source – to go along could put “paid” to FATCA all by itself.
That’s why the furious blitz of Canadian media coverage this past week exposing the misery FATCA would inflict on millions of Canadian citizens and residents is so significant. Among the items worth noting:
Canadian banks to be compelled to share clients' info with U.S. (CBC News)
FATCA under fire from tax experts & Canadian citizens (CBC Radio)
U.S. tax law called ridiculous (CBC News)
U.S. FATCA tax law catches 'accidental Americans' (CBC News)
How will the new U.S. tax law affect Canadians? (CTV News)
U.S. FATCA tax law catches unsuspecting Canadians in its crosshairs (CBC News)
Just to give one example, consider the case of Carol Tapanila and her son (at the last link, above):
A Calgary woman's developmentally disabled son is caught in a U.S. tax quagmire that she fears may cost him the money she spent years setting aside for his financial future.
"He's entrapped," said Carol Tapanila, the 70-year-old mother. "There's no way out. He is entrapped into U.S. citizenship."
Her 40-year-old son was born in a Calgary hospital, but automatically received U.S. citizenship because both his parents were American. That simple fact may soon create financial woes for the Tapanila family. [ . . . ]
For Tapanila, the financial burden has already been costly. She spent thousands of dollars seeking legal advice on how to renounce her son's U.S. citizenship. Under the law, a parent, guardian and trustee cannot renounce on someone's behalf.
She refuses to file U.S. taxes for her son, fearful that it would chip away at the funds she's stashed in a Registered Disability Savings Plan (RDSP) and a Tax Free Savings Account (TFSA).
"I see no common sense in it," she says. "Put me in jail. I don't care. But I'm not going to do that."
RDSPs as well as TFSAs are considered "offshore trusts" by U.S. tax authorities. That makes any gains from these plans — which include contributions from Tapanila and matching ones from the government — taxable by the IRS.
Unconscionably, some elements of the Canadian financial industry are advocating Canada’s submission to FATCA. As stated by an industry spokesman (from the same story above):
“We have to comply with FATCA,” said Marion Wrobel, vice-president of policy and operations at the Canadian Bankers Association. “While we don't like it and we've lobbied against it, FATCA is going to be a reality.”
CBA’s assertion of having “lobbied against” FATCA has been thoroughly debunked. (See: “Canadians Confront the Banks and the Yanks: Open Letter Urges President of Canadian Bankers Association to Oppose FATCA, ‘Abandon Policy of Capitulation’ to U.S. Demands’”) Certainly neither CBA nor any other industry group has exerted any effort even remotely comparable to say, advocacy for the Keystone XL pipeline, which is the object of active lobbying in Washington, both pro and con.
Granted, neither CBA nor anyone else has an obligation to lobby on anything. (Though the fact that this canard repeatedly is raised by CBA concedes the fact that it would be a reasonable option, given FATCA’s increasingly shaky status here in Washington. More on that below.)
But what the financial industry in Canada does have an obligation to do is not to take proactive steps to throw people like Carol Tapanila, her son, and millions of others under the bus, while compromising their own country’s sovereignty. As specious as their claim of having lobbied against FATCA is CBA’s assertion that “FATCA is going to be a reality” – as though that prospect were the product of a natural phenomenon, not of advocacy by elements of the financial and compliance industries to encourage the government of Prime Minister Stephen Harper and Finance Minister Jim Flaherty to submit to FATCA in the form of signing an IGA. This is simply a self-fulfilling prophecy to justify capitulation to Treasury’s demands.
Will Canadians stand for it? Stay tuned . . .
Americans Finally Waking Up to FATCA
Perhaps the strongest argument against preemptive capitulation to FATCA by Canada and other countries, it the fact that only now is FATCA beginning to generate significant attention in the only place the problem can be solved: in Washington. Among the latest items of note:
The RNC and Rand Paul: As reported yesterday in the Washington Times, the Republican National Committee (RNC) is poised to consider next week a resolution from Republicans Overseas that the GOP adopt FATCA repeal as an official party position. See “RNC to join Rand Paul’s fight to protect privacy of Americans overseas: New initiative could help GOP woo 2016 voters abroad” (excerpts):
The RNC, at its Jan. 22-25 meeting at the Renaissance Hotel in Washington, is expected to pass a resolution calling for repeal of the [FATCA] law.
A repeal petition is the brainchild of RNC members who have taken the lead in forming the Republican Overseas organization.
“For many years, the Democrat Party used its overseas group, Democrats Abroad, as a political weapon against our candidates in elections,” said Arizona RNC member Bruce Ash, chairman of Republicans Overseas. [ . . . ]
Mr. Ash said the legal provision in FATCA violates overseas Americans’ right to privacy by “seizing 30 percent of their bank deposits without due process, and by causing foreign banks to deny financial services to overseas Americans as clients in order to avoid incurring the extra costs of complying with the U.S. law.”
Mr. Ash said the foreign banks face “increased costs associated with IRS reporting requirements. As a result, those Americans are forced to choose between their citizenship and their right to privacy and livelihood.” [ . . . ]
Mr. Yue’s repeal resolution has attracted 26 co-sponsors, including the entire nine-member RNC Resolutions Committee. The early support almost guarantees passage by the 168-member RNC. In a sign of business community support, the World Council of Credit Union, with 200,000,000 members and 56,000 credit unions in 101 countries, has endorsed the resolution.
For the Credit Unions of North America endorsement, see “Call for FATCA Repeal Could Gain Momentum.” Rand Paul is the sponsor of S. 887. See: “Senator Rand Paul Introduces Bill to Repeal FATCA!” and “U.S. Credit Unions Endorse Sen. Rand Paul’s Bill to Repeal FATCA, Spotlight Multi-Billion Dollar, Unauthorized Mandates on American Industry”.
For more on the RNC initiative, see “RNC members tackle Foreign Account Tax Compliance Act, or FATCA”. For more on conservative criticism of FATCA, see “New U.S. Tax Regime is "Devastating," Experts Say” (excerpts):
The Republican National Committee is also working on a resolution calling for the repeal of FATCA. In Congress, there appears to be a growing awareness of the problem, too. Sen. Rand Paul (R-Ky.), for example, introduced legislation in 2013 to repeal the scheme altogether. “FATCA is a textbook example of a bad law that doesn't achieve its stated purpose but does manage to unleash a host of unanticipated destructive consequences,” he explained.
“FATCA's harmful impacts cover the spectrum,” continued Sen. Paul, saying the scheme would cost the U.S. economy hundreds of billions of dollars, and must be repealed. “It is a violation of Americans' constitutional protections, oversteps the limits of executive power, disregards the mutual respect of sovereignty among nations and drains money from the federal treasury under the guise of replenishing it, and discourages overseas investment in the United States.”
Opponents of FATCA celebrated Sen. Paul’s efforts, with some noting that they expect the scheme to crumble eventually anyway. “FATCA’s demise is now a question of ‘when,’ not ‘if,’” said former U.S. diplomat James George Jatras, who managesRepealFATCA.com, adding that the wind in Washington was blowing against the scheme. “American and non-U.S. firms that stand to lose millions complying with FATCA need to make their voices heard. FATCA repeal needs to be part of any deal on tax reform.” Even some Democrats have expressed concerns recently.
The U.S. Chamber: One of the most potent business influences in Washington is the U.S. Chamber, which so far appears not to have taken much notice of FATCA. That might be about to change. See: “The Next Obamacare? FATCA Roll Out Flounders”(excerpts):
Stop me if you’ve heard this one: Controversial legislation that imposes expensive and intrusive mandates on U.S. citizens and businesses, signed by President Obama in 2010, is bogged down by website difficulties and delayed provisions, leading opponents to call for the misbegotten law’s repeal. [ . . . ]
The Internal Revenue Service (IRS), which is responsible for the law’s implementation and enforcement, has faced serious technological difficulties in launching the FATCA online registration portal, where foreign financial institutions are required to register and report information on their account holders. The IRS estimates that between 200,000 and 400,000 financial institutions will register.
The initial Foreign Financial Institution Registration System (FRS) was developed and near deployment in 2012 at a cost of $8.6 million—then summarily terminated in November 2012 due to regulatory changes and policy issues arising amid the law’s implementation, the Wall Street Journal reports.
A modified and expanded registration site launched in August. The new release entailed an additional cost of $8 million, according to a September report from the IRS Treasury Inspector General for Tax Administration (TIGTA). The TIGTA report suggests the new FRS is improved, but still faces potential problems. The TIGTA audit found that the redesigned FRS suffers from “poor management controls,” including inadequate planning, potential security flaws, and cost overruns, which “puts the system at risk of not functioning as intended once it is moved into production.”
The portal’s questionable security safeguards are particularly troubling, given that the site will be used to share sensitive information on account holders. James Jatras, a Washington, D.C., attorney who spearheads a movement torepeal the tax law notes that financial institutions and their clients should be concerned about how their data will be protected and used.
“There is nothing about the security protection of the data in the regulations,” Jatras tells Thomson Reuters in an assessment of how FATCA’s implementation woes are affecting stakeholders. “FATCA data is not treated as private and the data will be passed on to the intelligence agencies. If I was the [National Security Agency], I would love to get information on American accounts elsewhere, and what other account information looks like.”
While the growing anti-FATCA movement in the U.S. is picking up initial support mainly from a conservative or libertarian direction, mostly in the GOP, it would be a mistake to see this in partisan terms. There are good grounds Right, Left, and Center for opposing FATCA. Certainly, partisanship can play a constructive role, if one party picks up on an issue and challenges its opposition to respond. But that can cut across preconceived ideological lines. For example, while FATCA opponents in the U.S. are mainly on the Right, in Canada the criticism is mainly from progressive parties: New Democrats, Liberals, and Greens.
The question is whether the “other side” reacts by circling the wagons, or if they try to blunt the attack by co-opting it – steal the issue and turn it to your advantage. To give an example, as noted above, Republicans Overseas is taking the lead on pushing FATCA repeal into the political arena. Will Democrats Abroad continue to sit on their hands, or even tacitly support FATCA to the detriment of their members – or will they stand up for them?
To all readers of RepealFATCA.com:
Wishing you a happy, prosperous, and FATCA-free 2014!
James George Jatras
Notice: The foregoing may be posted, republished, or quoted with attribution.
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