posted 01-21-2014 08:45 PM                  

WASHINGTON (Reuters) - The Republican Party is expected to approve a resolution this week, calling for repeal of an Obama administration law that is designed to crack down on offshore tax dodging.

In what would be the party's first appeal to scrap the law -

the Foreign Account Tax Compliance Act (FATCA) - a panel was slated to vote at the Republican National Committee's (RNC) winter meetings in Washington, likely approving the resolution on Friday, according to party members driving the repeal effort.

If adopted, the anti-FATCA resolution would reflect the party's political priorities for the time being but would not change its presidential campaign platform, according to the RNC.

Approved in 2010 after a tax-avoidance scandal involving a Swiss bank, FATCA requires most foreign banks and investment funds to report to the U.S. Internal Revenue Service information about U.S. customers' accounts worth $50,000 or more.

Criticized by banks, libertarians and some Americans living abroad as a costly and unneeded government overreach, FATCA is on the books, but its effective date has been delayed repeatedly, with enforcement now set to start on July 1.

Repeal seems unlikely, but more political heat from Republicans could further complicate and delay implementation, said financial industry lobbyists.

Moreover, Republicans are eager to use FATCA as a campaign and fundraising issue against Democrats ahead of the congressional mid-term elections in November, RNC members said.

"I see FATCA just like Obamacare," said Solomon Yue, an RNC official from Oregon who is leading the party's FATCA repeal effort. "It will attract American overseas donors."

Defending the law, Treasury Department spokeswoman Erin Donar said in a statement: "FATCA continues to gain momentum and international support as we work with partners around the world to fight offshore tax evasion."

Republican Senator Rand Paul last year introduced legislation to repeal parts of FATCA, citing privacy concerns.

Daniel Mitchell, a senior fellow at the Cato Institute, a libertarian think tank, said: "It's hard to imagine an issue this obscure playing a visible role in elections ... It is making overseas Americans far more sympathetic to (Republicans) and could have an impact on fundraising."

posted 01-21-2014 10:23 PM                  

Controversy

Certain aspects of FATCA have been a source of controversy in the financial and general press. The controversy primarily relates to five central issues:

1) Cost. Although numbers are still somewhat speculative, estimates of the additional revenue raised seem to be heavily outweighed by the cost of implementing the legislation. The Association of Certified Financial Crime Specialists (ACFCS) claims FATCA is expected to raise revenues of approximately US$800 million per year for the US Treasury; however, the costs of implementation are more difficult to estimate, and estimates between hundreds of millions and over US$10 billion have been published. ACFCS also claims it is extremely likely that the cost of implementing FATCA (which will be borne by the foreign financial institutions) will far outweigh the revenues raised by the US Treasury, even excluding the additional costs to the US Internal Revenue Service for the staffing and resources needed to process the data produced. Unusually, FATCA was not subject to a cost/benefit analysis by the Committee on Ways and Means.

2) Capital flight. The primary mechanism for enforcing the compliance of foreign financial institutions is a punitive withholding levy on US assets. This may create a strong incentive for foreign financial institutions to divest (or not invest) in US assets, resulting in capital flight.

3) Foreign relations. Forcing foreign financial institutions and foreign governments to collect data on U.S. citizens at their own expense and transmit it to the IRS has been called divisive. Canada's Finance Minister Jim Flaherty has raised an issue with this "far reaching and extraterritorial implications" which would require Canadian banks to become extensions of the IRS and would jeopardize Canadians' privacy rights. There are also reports of many foreign banks refusing to open accounts for Americans, making it harder for Americans to live and work abroad.

4) Extraterritoriality. The legislation enables U.S. authorities to impose regulatory costs, and potentially penalties, on foreign financial institutions who otherwise have few if any dealings with the United States. The U.S. has sought to ameliorate that criticism by offering reciprocity to potential countries who sign Intergovernmental Agreements, but the idea of the US Government providing information on its citizens to foreign governments has also proved controversial. The law's interference in the relationship between individual Americans or dual nationals and non-American banks led Georges Ugeux to term it "bullying and selfish."

5) Citizenship renounciations. Time magazine has reported a sevenfold increase in Americans renouncing U.S. citizenship between 2008 and 2011, and has attributed this at least in part to FATCA. According to the The New American a record number of americans have given up U.S. citizenship in 2012 "amid IRS Abuse" and "facing an increasingly out-of-control federal government in Washington, D.C" . According to the BBC, the act is one of the reasons for a surge of Americans renouncing their citizenship – a rise from 189 people in the second quarter of 2012 to 1,131 people in Q2/2013. Another surge in renunciations in 2013 to record levels has been reported in the news media, with FATCA cited as a factor in the decision of many of the renunciants.
American citizens living abroad. According to the Canadian Broadcasting Corporation many Americans living abroad may face large fines as a result of this legislation. According to the story a forty-years old developmentally man, and a Canadian man married to an American will become some of the victims of this law. According to Time (magazine) American citizens living abroad are unable to open foreign bank accounts .

IRS not ready According to the NYTimes it is unclear whether the IRS is ready to handle millions of new complicated filings per year.

Doubts have been expressed as to workability of FATCA due to its complexity,and the legislative timetable for implementation has already been pushed back twice.

American Citizens Abroad, a Geneva-based organization representing the interests of six million Americans residing outside the United States, opposes the legislation and has launched a campaign to repeal FATCA. The group argues that "FATCA legislation is predicated on the faulty assumption that foreigners throughout the world with no predisposition to favor the U.S. will react positively to its attempts to convert them into unpaid IRS agents", and in addition to the issues above stresses the increased risk of identity theft, and the risk of a two-tier banking system developing to the partial exclusion of the U.S.

posted 01-21-2014 10:25 PM                  

FATCA, then, has a broad reach that includes all U.S. citizens – even U.S. citizens who have lived in Canada since they were babies but haven’t renounced their American citizenship. The legislation also ensnares Canadian spouses of U.S. citizens who share a bank account, for example. And then there are people like me: though unlikely, it is conceivable that Canadians who have lived and worked in the U.S. might catch the attention of their bank, whose job it is to identify customers who may potentially be classified as U.S. persons.

The Canadian Bankers Association also warns that people who spend a substantial amount of time in the U.S. each year might fall into the definition of “U.S. person.” Many of our clients are snowbirds who therefore may be caught by this legislation; more information on snowbirds and the implications of spending a large number of days south of the border can be found here.

The impact of FATCA remains to be seen, but it is safe to say that the legislation raises issues about privacy and cost. The legislation is complex, and financial institutions will bear the brunt of the cost of compliance with it, but the penalty for non-compliance will be felt by financial institutions’ customers as well; the penalty for non-compliance with FATCA is a withholding tax of 30% on all U.S.-source income.

What constitutes non-compliance with FATCA? First, non-U.S. persons like me who might get flagged by their banks and are subsequently asked to show proof that they indeed are not U.S. persons may be subject to the withholding tax mentioned above if they refuse to show such proof. U.S. persons may have to provide consent to their financial institutions for the disclosure of their information; if they don’t, they may also be subject to the 30% withholding tax, have their current accounts closed or be unable to open new accounts.

Some U.S. persons do have another choice, though: they can give up their citizenship, like Tina Turner (who is just a little more closely connected to Hollywood than I am) recently did, when she relinquished her U.S. citizenship in order to become Swiss. (However, whether Turner became Swiss for tax reasons is debatable since she has actually lived in Switzerland for many years and her husband is German.)

Regardless, renouncing citizenship is a serious decision for anyone, a decision that requires careful consideration and discussion with cross-border experts who can assist American expats in the complex world of international tax and immigration law. FATCA is now just one more law for everyone to consider.