Among the many recent revelations about American surveillance operations was the fact that, according to
Der Spiegel,
the U.S. intelligence apparatus “not only conducted online surveillance
of European citizens, but also appears to have specifically targeted
buildings housing European Union institutions,” Few, if any, of those
commenting of late on such affairs mentioned that numerous nations
across the globe actually acknowledged the U.S. government’s
anti-privacy offensive months before by accepting its Foreign Account
Tax Compliance Act (FATCA).
The FATCA legislation attempts to
combat bank privacy on many levels and for many reasons including the
American state’s desire for more effective tax collecting. According to
U.S. tax law, every American taxpayer is obligated to fill out tax forms
and pay taxes for their income attained not only on U.S. soil but
overseas as well. The Internal Revenue Service (IRS) does not
distinguish where the taxpayer lives, since U.S. taxation is based on
either residency or citizenship.
Therefore America
remains one of the two states worldwide that tax their non-residing
citizens. The other is Eritrea, a country not known for an exemplary
human rights record.
It is therefore no wonder
offshore tax evasion is a substantial problem for the federal
government. Senator Carl Levin, chairman of the Permanent Subcommittee
on Investigations in Senate, revealed in a statement that tax-dodging
schemes cost the Federal Treasury $100 billion a year. More than six
(out of seven) million American taxpayers living overseas never
fulfilled their tax obligations. Neither the Qualified Intermediary (QI)
program, nor direct diplomatic efforts concerning tax havens succeeded,
which led to an amendment of FATCA in 2010.
In general, the law
forms an additional chapter to the Internal Revenue Code and obligates
all Foreign Financial Institutions (FFI) to provide the IRS with
information on their clients that are U.S. persons, thus combating tax
evasion. FFIs that do not conform to their reporting duties are bound to
pay 30 percent tax on any “withholdable” payments owed them in the U.S
(U.S. payers are obliged to withhold 30 percent of the gross payments to
delinquent FFIs). These include virtually any payment of U.S. source
income: payment of interest, dividends, salaries, wages, rents,
annuities, licensing fees, profits, gross proceeds from the sale or
disposition of U.S. property and even interest paid by foreign branches
of U.S. banks. Since the act’s definition of Foreign Financial
Institution is substantially broad, every bank, broker, insurance
company, private equity fund or hedge fund either identifies and reports
to the IRS on their U.S. clients or is robbed of 30 percent of income
on American soil. (An FFI is defined as any foreign (non-U.S.) entity
that either “accepts deposits in the ordinary course of banking or
similar business; or as a substantial portion of its business, holds
financial assets for the account of others; or is engaged ... in
business of investing, reinvesting, or trading securities, partnership
interests, commodities, or any interest in such securities, partnership
interests, or commodities.”) The IRS has started an internet portal
where FFIs can register online and agree to cooperate. The law is
effective since January 2013, however withholding does not start until
January 2014.
According to FATCA, FFIs might be exempted from the 30 percent tax and recognized as
FATCA-compliant
if they identify all of their clients that are U.S. taxpayers and
inform the IRS of the account holders’ names, TINs, addresses; the
accounts’ balances, receipts, and withdrawals. Identification of the
pre-existing high value accounts (that is: accounts with funds exceeding
$1 million) are to be electronically scanned for so-called “U.S.
indicia” and then manually verified (enhanced review) by the
relationship manager who might have an actual knowledge about the
account holder. Other pre-existing accounts are required to be
electronically scanned only and accounts under
de-minimis
threshold of $50,000 ($250,000 for non-natural persons) are exempted
from the search. If individuals meet the U.S. indicia, the participating
FFI obtains the relevant tax forms from the account holder. Those who
refuse are to be declared
recalcitrant account holders, their
accounts will be closed, and the tax will be deducted from their funds.
U.S. indicia are: U.S. citizenship or lawful permanent resident (green
card) status; a U.S. birthplace; a U.S. residence address or a U.S.
correspondence address (including a U.S. P.O. box); standing
instructions to transfer funds to an account maintained in the United
States, or directions regularly received from a U.S. address; an “in
care of” address or a “hold mail” address that is the sole address with
respect to the client; a power of attorney or signatory authority
granted to a person with a U.S. address.
Not surprisingly, FATCA
has been controversial from the very beginning. Canadian Finance
Minister Jim Flaherty said the law creates unnecessary paperwork and
accused the U.S. of looking for tax havens where they do not exist.
American Citizens Abroad (ACA) predicted that FATCA would have a
devastating impact on the U.S. economy, U.S. financial markets, and
American businesses operating abroad, while European media pinpointed
that the main effect of FATCA’s introduction would be the dumping of
clients with U.S. citizenship by European banks. Nevertheless the
biggest problem is that FATCA affects not only U.S. persons but many
entities abroad also. The costs of full compliance were estimated (in
case of big banks in Poland) to reach almost 15 million Euro. The act
was also heavily criticized for making foreign institutions “arms of US
tax authorities.”
Resistance to the act from foreign states has
nevertheless been muted. From as early as 2010 Japanese bankers
expressed no intention of complying to the regulations and yet they did.
On June 11, 2013 the Japanese government signed the Statement of Mutual
Cooperation and Understanding between the U.S. Department of the
Treasury and the Authorities of Japan to Improve International Tax
Compliance and to Facilitate Implementation of FATCA. With the United
Kingdom, Denmark, Mexico, Ireland, Switzerland, Norway, Spain, Germany
and Japan as intergovernmental agreements (IGA) signatories and others
coming, it is fair to say that January 1, 2013 is the day banking
secrecy ceased to exist. Even Ueli Maurer, the Swiss president, admitted
that “honouring the United States’ Foreign Account Tax Compliance Act
led to the lifting of banking secrecy for US customers of Swiss banks.”
We
did not have to wait long for a similar initiative from the European
Union. According to the latest news, the European Commission seeks to
expand automatic information exchange between EU Member States. EU Tax
Commissioner Mr. Algirdas Šemeta revealed on June 13, 2013 a proposal
for a Council Directive, which aims at eradication of tax evasion in
Europe. The automatic exchange of information between member states is
going to create a system called AEOI, the most comprehensive treasury
and fiscal control in the world. Even Luxemburg and Austria, countries
traditionally skeptical about collective anti-tax evasion initiatives,
are expected to join the AEOI.
It seems that there is little
understanding that it was banking secrecy that helped to resist
twentieth-century dictatorships and that high tax rates — not money
havens — are responsible for tax evasion, as Prince Hans-Adam of
Lichtenstein has pinpointed. Clearly the amount of information collected
for the purpose of future tax investigation is enormous, leaving little
place for human privacy and dignity. Most importantly, it raises a
question as to who gave participating states a right to gather
information on people that are not their citizens.
Cezary Blaszczyk is a graduate of the Faculty of Law at Warsaw University. See Cezary Blaszczyk's
article archives.
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Here's The Law That's Driving Record Numbers Of Americans To Renounce Their Citizenship
A record number of Americans are giving up their U.S. citizenship.
The Wall Street Journal reports that 1,130 Americans renounced their citizenship in the second quarter of 2013, more than did so in all of 2012.
To my surprise, the list of new ex-Americans is
publicly available; I didn't recognize any of the names on a quick scan.
According
to the Journal, the surge in expatriations seems to be driven by the
upcoming implementation of the Foreign Account Tax Compliance Act
(FATCA), a 2010 law that forces foreign financial institutions to
disclose more information to the IRS about Americans' accounts and
investments. Starting in 2014, foreign financial institutions will have
to tell the IRS about income accruing to American clients (or businesses
owned by Americans), and they'll have to withhold American income tax
as appropriate.
In other words, it's going to become a lot harder to hide your income with a Swiss bank account.
The
IRS can't directly tell foreign banks what data to turn over. But it
has a pretty big stick — it can impose a 30% withholding tax on payments
from the U.S.
to foreign financial institutions unless
they cooperate. As a result, many foreign banks and foreign countries
have been entering into agreements with the IRS to comply with FATCA.
If
you're an American living in the U.S. and your strategy for hiding
income abroad isn't working anymore, you may have few options but to pay
up. But if you live abroad, you have another choice available: Renounce
your U.S. citizenship so you're not liable for American income tax.
That's
one driver of the surge in renunciations. Another likely factor is the
increase in capital gains and income tax rates in 2013, meaning that
wealthy American expatriates can get a bigger tax saving by renouncing
citizenship than they used to.
But a third factor is that FATCA creates compliance headaches apart from the actual tax bills it leads to. As the WSJ describes:
Some
U.S. citizens say they are exasperated by a growing raft of paperwork
that forces U.S. citizens living abroad to declare the minutiae of their
financial holdings and other assets. That has increased the attraction
of becoming a citizen in places such as Hong Kong, where the individual
tax rate is capped at 15%.
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