The six-month extension on the Foreign Account Tax Compliance Act (FATCA) starts on July 1, and both sides have switched into rhetorical high gear over the controversial law, with opponents comparing it to a bombing campaign and proponents dismissing all criticism as coming from financiers defending tax cheats (note: as an American living abroad, I’m not disinterested).
Worst case scenarios are hard to believe
To be sure, some of the hysterics don’t pass the laugh test. Some people have warned that the regulations are so onerous that financial institutions are going to divest from America en masse, but that would mean never holding a US-based bond or stock and losing access to much of the world’s financial system (non-compliance is punished by IRS withholding of 30% of all US-sourced payments). It’s a non-starter, and The Economist reports that 77,000 financial institutions have already agreed to pass information to the IRS. There have also been stories floating around of American citizens being turned down for bank accounts because of their citizenship, but financial institutions have to comply with FATCA regardless of whether they actually have any US citizens as clients so it’s hard to see how one follows the other.
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FATCA imposes big costs for little gain
The better criticism is that FATCA imposes regulatory costs on foreign banks without accomplishing very much. The US government loses something like $100 billion in revenue every year because of tax cheats, but this only underscores how poorly devised FATCA is as a remedy. Congress estimates that it will eventually bring in an additional $800 million in tax revenue every year, less than one percent of what’s out there. The bill never underwent a formal cost-benefit analysis by the House Ways and Means committee, so not everyone accepts the revenue estimates but either way, it’s not exactly the death knell of tax evasion that it was meant to be.
Estimates of how much FATCA compliance will cost vary widely, but it will probably be less than the $800 million that Congress hopes to get out of it, and the costs will be borne almost entirely by foreign financial institutions. The new law is also expansive in scope, requiring reporting on all US persons including citizens, green card holders, non-citizen family members, and possibly more, no one’s completely sure who all is included at this point. Throw in the difficulty of complying with both FATCA and some nation’s strong privacy laws, and you can understand why financial institutions hate the law.