The Foreign Account Tax Compliance Act (FATCA) went into effect this week, and if you have any doubts about how complex it is, bear in mind that it involves 80,000 financial institutions spread across nearly 100 jurisdictions according to the US Treasury, and there are still plenty of countries negotiating terms with the IRS. To help people sort out all the new rules, Treasury has brought together resources for individuals, financial institutions, and foreign governments, but none of it really addresses the laws critics.
Rules give foreign institutions a reason to invest elsewhere
First of all, the page which links to both Treasury and IRS documents) still specifies that FATCA applies to “U.S. citizens, U.S. individual residents, and a very limited number of nonresident individuals,” but it’s not at all clear who that last category might contain. That can be annoying for foreign individuals who do regular business in the US and don’t want to have issues with the IRS, but it’s also a regulatory puzzle for the tens of thousands of financial institutions trying to comply with the new rules. For US citizens who either live abroad (disclaimer: I’m one of them) or who own foreign assets, it’s only become that much more difficult to do your own taxes, making tax season that much more frustrating.
The claim that foreign investments are going to be pulled out of the US like so much hot money isn’t credible, but in the long-term both individual and institutional investors will have to weigh their involvement in the US economy and whether the savings from avoiding FATCA compliance outweigh the benefits of buying Treasury bonds. At least some of them will take their money elsewhere.
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There has also been some anecdotal evidence of US citizens and businesses being turned away from foreign banks, but unless those banks are also purging their rolls of US accounts the stories admittedly don’t make much sense.
FATCA advocates expect it to address less than 1% of tax evasion
Advocates of the new law act like these are minor inconveniences compared to the $100 billion in estimated annual US tax evasion, but FATCA is only going to bring in $800 million per year in additional revenue, and even that figure hasn’t been formally evaluated. Treasury claims that the costs of FATCA are low, but that’s only because they aren’t being borne by the US government. The costs to individuals and financial institutions are significant, and the laws sponsors don’t even claim that it will prevent one percent of US tax evasion.