Sunday, March 23, 2014

FATCA: Why New Tax Haven Laws are a Disaster in the Making

by Robert Morris

Here's a guest post with some further insight on a controversial piece of legislation called FATCA. Robert Morris explains why this law on tax havens is a really really bad idea. 

First off, I would like to thank Nomad Politics for bringing up this issue, and also for reaching out to seek an opposing viewpoint to its FATCA coverage. This is the kind of open-mindedness that we could all use more of.

In that spirit, let's start by laying out a positive aspect of FATCA, the Foreign Account Tax Compliance Act.

Some Facts about FATCA
This US law was largely introduced in response to a Swiss banking scandal. A significant number of Swiss banks were revealed to have been colluding with US citizens to hide their earnings from the US government. FATCA has, in fact, severely disrupted the Swiss banking industry. Switzerland’s “too big too fail” banks, like UBS, have settled with the US government for sums that are eye-watering, but will not severely disrupt their business. Medium-size and smaller Swiss banks are being forced to pay proportionally much larger sums, whether or not they knew their clients were from the US. Many are going out of business. The small Swiss banks that survive this reckoning will certainly think twice before they ever deal with US clients again.

Judging from the fact that my anti-FATCA video has been viewed by about a 50th of the entire population of the Cayman Islands, the legislation has been having the desired effect in other tax haven jurisdictions as well. We should admit that in this one respect, FATCA has been having the desired consequence. Tax avoidance by Americans has become more difficult, and that is a good thing.

This one positive result, however should not distract the public from FATCA’s truly mind-boggling scope. FATCA is a sledgehammer that is being used where a toothpick was necessary. FATCA does not just go after Switzerland and Cayman. It fundamentally re-orders the business of banking for every country, and in every country.

Briefly, every bank in the world is now required to report any US bank accounts to the US government. FATCA requires that every bank in the world enter into a 50-page English language contract with the United States Internal Revenue Service. These agreements and their associated on-line reporting system will change according to the whims of the IRS and the Treasury Department. The regulations governing this system are over 400 pages long, and have been subject to almost monthly revisions. Implementation starts in July of 2014, and will quickly become the subject of US and international litigation.

When FATCA was snuck countries in the world have entered into separate agreements with the Treasury Department that vary widely. Every bank in the world now needs full-time professionals, or high-priced English language consultants, to keep abreast of changes to the US tax code.

Devil in the Details 
If any bank, anywhere, fails to do this, they will be subject to a 30% withholding tax on any business that they or any of their clients do with the United States. This sets up a massive barrier to entry for any developing world bank that wants to step into the world of international finance. Many banks will be unable to leap this barrier, leaving their international business, and eventually their local market business to be swallowed up by the usual set of behemoth international banks.

One diabolical facet of the FATCA legislation is the fact that foreign banks who comply with FATCA are then responsible for imposing withholding taxes on other banks in their local market. The biggest bank in a given country will probably have the funds and the English language savvy necessary to hire American consultants. It can then use FATCA compliance as a bludgeon against all its smaller local rivals. FATCA helps us export the consolidated “too big to fail” model of banking that has served us so well.

FATCA also spits in the face of our developed world allies as well, making it clearer than ever that we view them as little more than vassal states. FATCA requires any country that adheres to re-write or craft exceptions to its banking and privacy laws. If they don’t adhere, their banks are effectively shut out of the international banking system.

In my opinion, FATCA is one of the most arrogant, imperialist, and racist things that the US government has done in the past couple decades. My essay on the topic, (which can be found here) lays this case out in much more detail.

Had there been any discussion of this at the level of the US Congress, cooler heads might have prevailed. Please don’t get the impression that this is a well thought-out piece of legislation.  This is the first time the United States has tried to re-write the world’s banking laws, and the implementation has predictably been a disaster. 
When FATCA was snuck into law in 2010, as a little discussed add-on to the HIRE Act, there was no mention of international agreements. They are a response to the outcry that followed Europe’s initial reading of the FATCA legislation. The US treasury department has spent the past two years signing these agreements with foreign governments. Many of the agreements promise that information on foreign accounts in US banks will be shared with foreign governments, with no discussion or approval from Congress. This approval is unlikely to be forthcoming.

White Hat Republicans?
Which is where the Republicans come in. Last month they added opposition to FATCA to the party’s platform, which inspired Nomad Politics’ initial coverage of this issue. Don’t worry, they aren’t being good guys on this. They did not decide to oppose the legislation out of sympathy with blue collar Canadian Americans, or an acknowledgement that the US should not be writing laws for other countries. The Republicans have gotten involved because the Treasury Department did more than they expected with the intergovernmental agreements. The many US banking lobbies initially decided FATCA was not something they cared about because it excluded all US banks from oversight. The Treasury department has changed that. 

In many of the intergovernmental agreements (IGA) that they have been signing they have agreed to share US information with foreign banks. Now the banks are interested. It is only now, when it has become clear that US banks might have some burdens imposed on them, that the Republican party is choosing to act.

My prediction is that the Republicans will be unable to cancel FATCA. The simple narrative of “we’re going after tax cheats!” is just too powerful. At the end of the day, Republicans love the idea of world-wide imperial power just as much as the Democrats do. FATCA will probably survive. What I think the Republicans will manage to do, however, is take any reciprocity out of the international agreements that the Treasury Department has been signing. FATCA will go forward as initially designed, with the US forcibly collecting information from everyone in the world, and sending information back to nobody. The United States will go from being the largest tax haven in the world, as it currently is, to the only tax haven in the world.

This removal of the last shred of self-respect we left to foreign signatories of international agreements will probably be swallowed. But it will be remembered. This leads me to the first of what I believe will be the historical consequences of FATCA.

Readers of Nomad Politics are no doubt familiar with the concept of “Blowback”. The idea is that the actions of the US military will have consequences for the American public down the line in terms of terrorism or other forms of attack.

I don’t think newly unemployed Swiss bankers are going to start strapping on bomb vests. They will remember though. They’ll end up in some other industry, but they will remember. Foreign governments will swallow their embarrassment over what they were forced to sign and will move on, but they will remember. Every time someone has to fill out a bank account opening form, anywhere in the world, and asks why she has to swear she is not a US citizen, she will have US dominance shoved in her face.

As FATCA shows, the US is still the top dog. Nobody without hegemonic power would be able to pull off something this offensive. This dominance is slipping away year by year. Even as the US gets richer, it loses standing in proportion to the rest of the world’s wealth. A day will come when the US doesn’t get to automatically get its way when discussing financial issues. It may not be the Euro or the Renminbi, but someday there will be another reserve currency. 

When that day comes, the rest of the world will remember how the US used its hegemonic power. The reckoning will not come in a terrorist attack. It will come in a quiet, legal, way that most Americans won’t even notice.  Nobody will die. But it will certainly make the whole country poorer.  FATCA hastens the arrival of the day when the US no longer runs the show, because FATCA shows that we don’t respect anything other than our interests.

A Poorer, Dumber America
We don’t need to talk in terms of decades-future reckonings to deal with FATCA’s costs to the United States. It is already hitting our wallets, and it will soon be hitting our collective knowledge.

The negotiation of most large international financings now includes a detailed discussion of who bears the risk of FATCA legislation. People will still want money from large American banks for decades to come. As we move farther down the scale though, individual businessmen (laid off Swiss bankers, perhaps?) have already started asking themselves questions. “Can I sell my goods to Europe instead of the US so I can avoid this payment uncertainty? If I let an American investor into my business, will that make me vulnerable to this FATCA garbage?” This effect will not be immediately obvious, but it will make a mark.

The future of the world is global. Massive corporations, small investors, and individual employees are all stepping out onto the global stage. The large money contracts are all made at the top end by banks and oil companies. The US will not suffer in those sectors for some time. But the thousands, or millions of smaller transactions are just as important for innovation, and building an understanding of the world beyond a nation’s borders. Banana Republic Russia has big banks and oil companies. It is the thousands of smaller companies that make the US a world class economy. FATCA hurts those companies.

The US is the only developed country that taxes its citizens abroad. People make much of the fact that the US does not start taxing its ex-pat citizens on the first $92,000 of income. Folks making that much should have the wherewithal to pay taxes to two countries, the argument goes. They might be able to, but they won’t for long. They will simply move back to the US, where they don’t have to deal with double taxation. Americans will found businesses at home instead of abroad. The opportunities of a globalized world will start to go to other countries.

Americans won’t want to build careers or businesses overseas. They will do a semester abroad, or maybe do a drunken year teaching English in their early 20s. As an ex-pat myself, I have often noted that international travel is wasted on the young. A college student barely knows his own country, how can he learn about another? As a country we will do less and less business with the world outside, and know less and less about it. This may seem a bit over-dramatic, but it is already happening.

Robert Morris is a member of the New York Bar, and has practiced corporate law for three years.  He has opinions on everything. He’s starting a for-profit hyper-partisan think tank called the More Freedom Foundation that puts out videos every Tuesday  and an e-mail newsletter no more than twice a month   Twitter at @RobboLaw