The FATCA cat is truly out of the bag now.
For those just joining the conversation FATCA (Foreign Account Taxation Compliance Act) is a law that was voted in 2010 by the U.S. Congress as part of the HIRE Act. It requires foreign banks to report the account information of all U.S. persons (U.S. citizens and Green Card holders) to the American IRS and imposes draconian fines on foreign entities for non-compliance. The legislation is "extra-territorial" which means that the U.S. is imposing American law on the people of other countries. If one give it a moment's thought, it might occur to a few that this is probably not a good idea and it begs the question: If Americans can extend the reach of their laws beyond its borders, what's to prevent other countries from doing the same thing? How would Americans feels if they had to comply on U.S. soil with a law voted in the French National Assembly?
In addition to the blatant affront to national sovereignty, this law is spawning all kinds of unintended consequences. U.S. Persons (citizens and Green Card holders) outside the U.S. and anyone with a U.S. connection (a child at a U.S. university for example) are starting to find it very difficult to do basic banking in their countries of residence. Banks are businesses and when they see a customer who is going to cost them money, their reaction is to "fire the customer." Entrepreneurs are finding it harder to form ventures in other countries since the foreign partners see no reason to subject themselves to the bureaucracy of the U.S. tax authority just because they have included U.S. citizens as partners.
These are serious consequences but they are not getting much attention in the U.S. The media has done a terrible job of reporting on this and most articles in the American mainstream media are riddled with factual errors. The "frame" around the law is that this is a necessary evil to catch tax evaders and most folks don't look beyond that, nor do they particularly care about the sorrows and hard times of expatriates (emigrants) and immigrants. It's not their ox being gored, so to speak, and migrants, wherever they are from, are not the most popular group around.
So what would it take to get Americans to sit up and pay attention to FATCA?
Well, here's a brilliant idea coming from the rest of the world in response to the U.S.: Reciprocity.
What other countries are saying is simply this: If the U.S. wants us to report on U.S. customers in our countries then we want U.S. banks to report to us about account holders from our country. The UK, Mexico, France, Germany and others want something for their trouble - information about their citizens in the U.S. in exchange. When you consider that the U.S. is a country of immigration this has all sorts of interesting implications. It is estimated that there are around 1 million Americans in Mexico. Pew says there are nearly 13 million Mexicans in the US. That means that under a full reciprocity agreement there will potentially be a lot more information flowing south as opposed to north.
The volume is unbalanced but the underlying principle seems fair to me. However, when the possibility of this sort of mutual information exchange was raised back in July of 2012 it raised a perfect storm of protest in the United States. The same politicians who voted for FATCA suddenly find that they didn't like the idea one bit if it meant an impact on U.S. banks.
Here we are in February of 2013 and reciprocity is baaaaccccck. Check out this excellent Reuters' article (link passed along by Just Me), Exclusive: Foreigners' accounts in U.S. banks eyed in tax crackdown.
Seems that some countries are hard negotiators (France and Germany are cited in the article) and they want the full meal deal before they sign an inter-governmental agreement with the U.S. (called an IGA) to implement FATCA. The problem is that there is nothing in U.S. domestic law that would require U.S. banks to give out any information to a foreign government beyond interest payments.
Nothing that can't be fixed, right? According to the article that is exactly what the Obama administration plans to do: introduce domestic legislation that would require U.S. banks to do what it already promised in some of the country agreements "to pursue equivalent levels of reciprocal automatic exchange in the future. " Sounds like the future is right here, right now.
What does this mean? It means that Americans will no longer be able to ignore FATCA as something that's happening "out there" in the world and is of little concern to the average American. The Obama administration will have to publicly introduce legislation for full information reciprocity with foreign governments, fight for it in Congress, and make a case to the American people for why this is a good idea. Oh, what a difference it makes when it's no longer OPM (other people's money). Last time I looked average Americans have bank accounts and of course the costs of implementing these information exchanges with other countries will be borne by the U.S. consumer. It's fantasy land to think otherwise.
Hard to see though how the Obama administration could possibly do anything else unless they give up on FATCA entirely. Without the cooperation of other countries, FATCA is a toothless law. I agree with James Jatras that this is "the worst law most Americans have never heard of" but if it's going to happen then it is right and just that the pain be shared by all parties, Americans and non-Americans alike.
Time to put your money where your mouth is, homeland Americans. You want information about overseas accounts to chase down your "evil tax evaders" then you need to understand that there is a price tag associated with that and that regular people are going to have to pay it for FATCA to be a success. If you think that money out of your pocket is an unreasonable request in this grand scheme to fight tax evasion but you still consider FATCA a splendid idea for the citizens and banks of other countries then you are the worst sort of hypocrite.