It is not often that the U.S. Internal Revenue Service (IRS) bows to reason and changes its collective mind on a given tax enforcement issue, even a little bit.
Last week, in one of those rare instances, the IRS announced that the original January 1, 2013 effective date for the Foreign Account Tax Compliance Act (FATCA) has been dropped.
Under the new IRS schedule, offshore private banks, which face the most onerous IRS requirements under FATCA, will not have to provide details on U.S. clients with accounts with more than $50,000 until the middle of 2014. Lower value accounts at private banks do not need to be reported until the end of 2014. Certain other accounts do not have to be reported until 2015.
What FATCA means for you and me, is that foreign financial institutions – including banks, investment brokerages and insurance companies – are going to be awash in new reporting regulations if they agree to continue to welcome American clients once FATCA becomes law. Adhering to these regulations will cost these companies many millions of dollars. They will have to expand greatly their compliance departments to stay on top of the U.S. government’s complicated tax and reporting rules.
So if you ran a business, would you cater to the clients that cost you more to serve and bring with them more risk of litigation? Or would you say, “Thanks, but no thanks” and focus your business elsewhere? It seems pretty simple. And, that is the exact decision thousands of foreign institutions are about to make if FATCA passes.
Why FATCA Is Detrimental to the U.S. Economy
No doubt what brought about this delay were the firestorm of anti-FATCA American public opinion and a chorus of vociferous protests, not only from the international financial and banking industry, but also from foreign government officials.
Canadian treasury officials have been attacking FATCA for months, calling it unworkable, far too costly and an unprecedented U.S. intrusion on national sovereignty. Terry Campbell, Canadian Bankers Association head, charged that the act was “conscripting financial institutions around the world to be arms of U.S. tax authorities.”
Typical of these foreign complaints was last Thursday’s statement that if FATCA was imposed on The Bahamas, it would likely mean that offshore financial center dropping most of its American clients.
The Financial Times noted that offshore banks complained they were being deputized as U.S. IRS agents under orders to identify U.S.-linked accounts worth more than $50,000. If they refuse to comply, they would face a choice of paying a punitive 30% withholding tax on payments received from the U.S. or withdrawing completely from U.S. markets.
In a chilling account in his blog, Dan Mitchell, senior fellow at the Cato Institute, points out, “…since the burden largely is falling on foreigners, there’s no groundswell among voters to repeal the law, even though it will impose far more damage on the American economy.”
What many people overlook is that FATCA threatens to cripple foreign investment in the U.S. at a time when our economy needs everyone and their brother investing and doing business here.
This is a serious situation. I believe that FATCA could make it so cumbersome to do business in the U.S. that many foreign companies will bypass us entirely. Need I tell you how detrimental that would be to our country’s already fragile fiscal condition?[]
What this Law Means for Offshore Investors
I know from your comments that FATCA has been a source of great worry for Americans who rightfully fear a 30% tax on their offshore financial activity. It also has deterred others from “going offshore” – no doubt exactly the outcome that the IRS wants – to keep us all at home where we can be watched and controlled.
In my view, what is needed now is to take advantage of this temporary victory by mounting a massive campaign to convince the U.S. Congress to repeal FATCA completely.
We are conferring with the Center for Freedom and Prosperity and other like groups about forming an international coalition. We will keep you informed.
In the meantime I strongly urge you to join the repeal FATCA movement.
Write and email your U.S. senators and your congressmen and encourage others to do so, especially those you know who are in banking and financial professions. A sample letter prepared by Americans Citizens Abroad can be found here and although it is much too long, it does provide the arguments against FATCA.
As a cynic at heart, I know that some of you will question the efficacy of citizen action these days, but remember in this battle we are joined by a group U.S. politicians always try to please – banks.
Bob Bauman, JD
Chairman, Freedom Alliance
P.S. Staying on top of the U.S. government’s ever-expanding international tax regulations and reporting requirements is no small task. That’s why we’ve assembled a team of experts consisting of world-renowned asset protection attorneys, tax specialists and bankers. They will keep you up to date on the latest information so you can see how it affects your future plans, and, accordingly, take actions on the opportunities that are right for you. For access to our proprietary research, click here.
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