FATCA: Three months on…

02 Oct

Since it was rolled out three months ago yesterday, the Foreign Account Tax Compliance Act, known as FATCA, has encountered some problems.  As predicted.

The Internal Revenue Service (IRS) is reportedly falling short on international tax collections, and a number of weaknesses have been highlighted in Uncle Sam’s collection program as a whole.

A new U.S. government report released this week confirms that the IRS needs to improve collection efforts to ensure that expats comply with their tax obligations. There are, perhaps unsurprisingly, inadequate policies, procedures and training to allow IRS officers to effectively deal with international tax collection cases.  It has also been reported that both international and domestic tax cases are being managed in the same way.

Highly-controversial FATCA, described by critics as ‘the worst law most Americans have never heard of’, requires every foreign financial institution (FFI) in the world to report their American clients’ financial activities directly to the IRS, with the aim of catching tax evaders who may have concealed undeclared income in foreign banks.

In my opinion, FATCA, of which I have been a vocal opponent since it was first mooted in 2010, is fatally flawed and discriminatory. Why? Because non-U.S. financial institutions are rejecting American expatriate clients in their chosen country of residence, as FATCA rules and regulations are deemed too arduous and expensive, should clients possess assets exceeding $50,000.  Before the law came into effect, thousands of American expats made the gut-rending decision to renounce their citizenship, to avoid the adverse effects of FATCA, and this is set to rise as people become more aware of the law’s inimical flaws.

Other major FATCA fallout issues – of which there are a whole host – include the risk of capital flight. According to the Texas Bankers Association, $500 million had already left the state’s banking system by the early part of 2014.

Future foreign investment in the U.S. will also inevitably reduce as investors seek to avoid FATCA’s hostile compliance rules and simply invest somewhere. As I say, the unintended consequences are countless…

There has been a great deal of high-profile support for the repeal of FATCA.  Conservative superlawyer, Jim Bopp, who has been involved in the fight against FATCA, is heading to Europe this month, along with Utah senator, Mike Lee to generate support to have FATCA repealed.  Mr Lee says of FATCA: “This is another example of dysfunctional government policy that is hurting middle-class Americans, treating them unfairly and ultimately doing much more harm than good.”

Mr Bopp, who will be promoting the lawsuit against the Foreign Account Tax Compliance Act he has been developing in the U.S. during a tour of Paris, London, Luxembourg and Geneva, comments: “All Americans have a stake in stopping FATCA, since it is already being pushed by the U.N. for adoption in all countries and could serve as a model for new snooping efforts by the IRS here at home.”

In August this year, the Republican National Committee (RNC) unanimously voted to support the campaign to terminate FATCA, citing very real threats to the U.S. economy, employment and the dollar’s status as reasons to being an end to highly-contentious FATCA.

In addition, Americans living in Canada have been filing lawsuits against FATCA, as the law opposes Canada’s charter of rights and freedoms.  As is stands, there is an agreement between Ottawa and Washington for tax authorities in Canada to gather information from banks and other financial institutions to then pass on to the U.S.

The future of FATCA?

It is my wish that FATCA will indeed be retracted by the White House, but that is looking perhaps unlikely. As such, deVere Group, which has 80,000 mainly expat clients, has some established measures that will mitigate FATCA’s blow.

For instance, expat U.S. taxpayers holding assets in their country of residence can take out an overseas pension contract, which has numerous advantages.  Annual contributions to their pension fund are permitted above $51,000; expats can benefit from investment growth under a tax deferral system. In addition there’s the  opportunity to invest in Passive Foreign Investment Companies (PFICs) without the risk of U.S. tax problems or having to comply with gruelling tax reporting requirements.



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