Joshua Ehrenfeld, attorney at law at US law firm Burr & Forman, said the Foreign Account Tax Compliance Act is a “massive overreach,” that might not have “the right effect” on offshore tax avoidance.
“It will undeniably bring certain people in the light for hiding their money, but not everyone is out there to deliberately avoid tax,” he said. “It could even push people into shadier directions, as there will always be people who cheat the system, regardless of the legal implications.”
He added that a more effective way of handling avoidance would be to simplify the current US current tax system: “The book of US tax law is thousands of pages long and people don’t know how to pay their taxes.”
“It needs to be simplified, and, instead of measures like FATCA, we would be better off making changes to how our citizens pay their tax.”
No obvious reform
He said that there was no obvious way to reform the tax system, but suggested taxing US citizens based on their jurisdiction instead of the current system where US citizens are taxed regardless of where they live or where their money is based.
From today, all foreign financial institutions (FFIs) will be required to disclose all US related information about new and existing clients to the US Internal Revenue Service (IRS), or potentially face a 30% tax on withholdable payments.
However, the witholding tax will not apply to FFIs in countries that have signed a model 1 intergovernmental agreement (IGA), as they must report US information to their local authority rather than directly to the IRS. IGA are agreements which grant countries relaxed deadlines, due diligence and specific provision when complying with FATCA.
Qualifying payments can include items such as interest or dividends from US sources, or sale proceeds from property that can produce US interest or dividends, such as those frequently made by expat US citizens and US businesses operating internationally.
'Cost bonanza'
Ehrenfeld said the US’s eagerness to combat undeclared income is rooted in a 2009 scandal which found billions of dollars of unreported US taxpayer income hidden in Swiss bank accounts by UBS, coupled with a general stigma towards to bankers and the wealthy following the global financial crisis.
“It turned out that there were millions and millions of dollars that were not being reported or accounted for because US citizens were funnelling their money into foreign accounts,” he said. “I think the government knew about it already, but there is a certain brassness in the way they have used FATCA as a solution.”
In what he calls a “cost bonanza”, Ehrenfeld said U.S. businesses and citizens will now find that many foreign banks and entities are unwilling to engage with them, and will have to consider whether any outbound transactions are a FATCA withholding agent that must withhold on outbound payments.
“FATCA is going to raise the cost of banking throughout the world. It doesn’t just affect foreign payees; US businesses now have significant costs and burdens as they engage in global operations.”
'Underrepresented'
He said that standing up to US authorities represents an impossible task for US expats because of their lack of central presence.
“Expats are an underrepresented voice,” he said. “No one listens to them because they are scattered all over the world.
“The US benefits from having a huge group of similar voices situated in one place; if an expat were to complain it would just fall on deaf ears.”
Ehrenfeld added that changes in US government in the run up to the ‘reporting’ stage of FATCA, which begins next year and ends in 2017, will have a great effect on the act’s impact throughout the world.
“I don’t think [FATCA] will be a cornerstone issue in elections, but if the right party comes to power it could help to sort out both FATCA and the US tax system.”
