Paul L. Caron

Saturday, April 27, 2013

Why FATCA Will Not Stand

Frederic Alain Behrens (J.D. 2013, Wisconsin), Comment, Using a Sledgehammer to Crack a Nut: Why FATCA Will Not Stand, 2013 Wis. L. Rev. 205:

The Foreign Account Tax Compliance Act (FATCA) became law in 2010 and is an important development in combatting income tax evasion. Under FATCA, American individual and corporate taxpayers must provide comprehensive information to the Internal Revenue Service (IRS) regarding foreign bank accounts. In addition, a more controversial part of FATCA requires foreign banks to report directly to the IRS certain information about financial accounts held by American taxpayers.

These drastic changes in American tax policy are alarming to the international financial community. International banks are forced to implement expensive compliance programs to satisfy the information reporting requirements. An increasing number of foreign financial institutions will no longer want any involvement with American citizens or investments. Furthermore, Americans living abroad might be forced to denounce their American citizenship in order to gain access to insurance and basic banking options.

In response to the unilateral imposition of FATCA, foreign governments and banks may lobby for its repeal. This Comment examines factors in the global movement to repeal FATCA and suggests several workable solutions that would be agreeable to the United States and foreign nations. Specifically, this Comment suggests how investment income withholding and increased IRS enforcement actions are a better solution to prevent income tax evasion.

Scholarship, Tax | Permalink

TrackBack URL for this entry:

Listed below are links to weblogs that reference Why FATCA Will Not Stand:


You don't really believe this will be repealed at this late date, do you?

Posted by: Patrick Donahoe | May 5, 2013 6:23:25 AM

Peter Utterstrom

Why is the leader of the Green Party of Canada refusing to jump on the FATCA bandwagon.

IRS Tax Collection: Evasion of the US or Invasion of Canada?
The Green Party of Canada is calling on the government of Canada to stand on guard against the demands of the United States (US) for extraterritorial enforcement of an American law: the Foreign Account Tax Compliance Act (FATCA). The Government of Canada must protect our citizens and residents from FATCA’s invasive violations of individual privacy, and refuse to make Canadian consumers and taxpayers pay the significant costs to enforce a unilateral American mandate that does not benefit Canada in any way.

The United States government wishes to ignore the fact of Canadian citizenship in pursuing people who were born in the US or to an American parent but who are Canadian citizens, as well as others with US “indicia” (Canadians with an American spouse or other family member, with whom they may hold assets jointly; Canadians who may have lived or worked in the US and acquired a Social Security Number, and so forth).

For example, the US recently required such Canadians to file with the IRS annual federal income tax returns on their financial accounts in Canada, including TFSAs, RESPs, and RDSPs, which are considered foreign trusts under US law. They face exorbitant penalties for failing to report the balances of these accounts even if they have no tax owing.

While no one disputes the need to combat international tax evasion, serious concerns have been raised by the Canadian Civil Liberties Association and others about FATCA's impact on the rights of Canadian citizens and residents. There are also concerns about the costs FATCA would impose on Canadian institutions and consumers, as well as about the bigger question of why a US law should be enforced in Canada at all.

Posted by: Tim | Apr 29, 2013 10:11:35 AM

Dave Peck:

How do you get around there are 1 million people in Canada of US origin out of 32 million total in which 19 million voted in the last Canadian election. That 1 million US people in Canada is pretty influential voting block. Plus included all the other people in Canada plus spouses and family members who immigrated to Canada from other countries. You could easily be talking 10 million people in a country where only 19 million vote.

Several prominent Canadian tax profs such as Art Cockfield and Allison Christians have also advised the government to refuse to sign any IGA. In addition prominent Canadian constitutional lawyers such as Joseph Arvay and Peter Hogg have threatened litigation against the government if they enter into an IGA.

The only way I see FATCA in Canada is saleable is if Canada itself imposed citizenship based taxation and the US was willing to reciprocally report on the three million Canadian citizens living in the US. I don't think it is out of realm of possibility some other country in Europe would like to impose citizenship based taxation but the two scenarios above have just about no chance of ever happening.

Posted by: Tim | Apr 29, 2013 6:54:26 AM

I was informed by a friend of Fredric Behrens comments and my response - copy pasted below was:

Hi. I'm not so sure that he's right. The opposing view is that many other countries are treading on to the same path. Exchange of i formation re the country's residents is something no politician can resist. The issue is more whether the rest of the world can make China and Russia climb on the wagon. On one hand they - if anyone - want to control its residents, on the other hand the leaders are corrupt and do not want transparency re their own foreign accounts. That will be the key to the success or failure of FATCA.

Adding on the further comment that I am quite certain the Mr Putin and his likes will find internal ways of not revealing their own offshore accounts and thus are more likely than not to jump on the bandwagon. It is simply to tempting - alas also for the "honest" politicians.

Posted by: Peter Utterstrom | Apr 29, 2013 2:07:47 AM

Really? I would have thought that citizenship based taxation is one reason why FATCA will fail. Once dual citizens living abroad start getting pulverized in to grist by the FATCA machine and US renunciations surge, someone will take notice!

Posted by: suzanne | Apr 28, 2013 8:18:11 PM

What about China? It is possible that China will not sign an IGA with the US on FATCA. It seems that the Treasury is expecting every gov't to get on the FATCA train. There has been significant reluctance for Asian countries to sign IGAs. Could China's refusal start something? This would be a big weakness in complete worldwide FATCA compliance.

Posted by: Ben P | Apr 28, 2013 4:15:33 PM

FATCA is here to stay. There is no chance it will be repealed. It will likely grow as more countries sign on to an IGA. More countries will demand reciprocity from the U.S. Like it or not, foreign and domestic banks will comply. FATCA and Form 8938 are burdensome, but they are a logical evolution in a global economy. The only way FATCA could be derailed would be if the U.S. were to move to a territorial tax system, but that's unlikely given the political environment, which favors the current world-wide tax system. The inconvenient truth is that foreign governments privately support FATCA. The other cross-border transaction reporting forms are also here to stay, with the possible exception of Form 8621. The Service recognizes the difficulties in administrating sections 1293-1298, as evidenced by the carve-out rule for PFICs in the OVDP and the absence of a credible enforcement mechanism.

Posted by: Dave Peck | Apr 28, 2013 2:55:17 PM

The time any governments or banks should have lobbied the US government to repeal FATCA has long since passed, when they had the door slammed in their faces last May during the FATCA hearings in DC.
Instead of persevering, foreign banks are instead lobbying their own governments to take the ridiculous route of signing IGA's. Our best hope in derailing FATCA is the lawsuit the Florida and Texas Bankers associations have launched against Treasury and the IRS, stating that they have no right to allow reciprocity through the IGA's.

Posted by: suzanne | Apr 27, 2013 8:37:37 PM