Explaining The Wormy Morass Of Obama’s FATCA Tax Evasion Law
Is every item buried in Table S-9 of the President’s budget a big can of worms? The only one I understand is big like a roadside attraction. By my count it’s item 237 out of 373: “Provide for reciprocal reporting of information in connection with the implementation of FATCA.” FATCA refers to the Foreign Account Tax Compliance Act of 2010, a law intended to stem the misuse of offshore accounts to evade US taxes. Add a “T” to the end of the acronym, and you’ll get an idea of who’s in the crosshairs.
Passed in response to disclosures of flagrant abuses, FATCA extends the long arm of the IRS to effectively regulate foreign financial institutions as if they were US banks. Starting this year, most are required to comb through their records in search of US tax-evaders, and generate detailed reports. Many must file those reports directly with the IRS, regardless of whether they have a US location. If that doesn’t raise an eyebrow, imagine the People’s Republic of China requiring the same from Bank of America.
What might possess a Swiss or Cayman bank to bend to IRS diktats? Brute force, that’s what. Fail to “participate” and FATCA ensures that most US payments coming your way will be docked by 30%, right off the top. Call it a cost of not doing business. But wait—the plot thickens. Many countries have privacy laws preventing precisely what FATCA requires: the sharing of accountholder information with third parties, whether or not the recipient is a hegemonic superpower. Accordingly, in March of 2010 financial institutions the world-over were suddenly faced with a looming catch 22: fail to report as FATCA requires and incur its ruinous penalty, report and break local law.
Many were quick to complain to Uncle Sam. How we responded had all the subtlety of an aircraft carrier approaching from the horizon. (Imperially minded Americans, take heart!) We told them to lean on their governments to revise local law. In other words: sovereignty, shmovereignty. Very quickly the point sunk in. Sensing no alternative, banks the world over did as they were told.
Then came a twist that seemed unexpected—for about thirty seconds. Rather than grab for their pitchforks and storm the Capitol, many key nations fell over themselves to cooperate. You heard me – cooperate. They did, however, ask for one little favor in return: that FATCA be made a two way street. As it turns out, many countries are just as eager to nab their own tax cheats as we are. And guess where non-US persons most like to squirrel-away their offshore investments? That’s right, the Land of the Free, where they broadly enjoy freedom from taxation on interest and capital gains, not to mention ample protections of privacy.
Seemingly sympathetic, the US was quick to hold out a carrot – or something that looked like a carrot (again, for about thirty seconds). We developed a suite of standardized model agreements which we offered to enter with interested countries. Known as IGAs, they cure any conflicts with local law. Some of them also provide for a measure of reciprocal reporting. But the measure becomes a mirage upon closer scrutiny. In most cases a simple “blocker” corporation will thwart the reporting of non-US persons nesting some eggs at Goldman Sachs. Not so for the offshore accounts of US persons. Foreign banks must “look through” such blockers to expose US owners. That’s one of FATCA’s big guns, and it’s one we’ve been pleased not to point at our own institutions. (Note that in many countries the term for “corporation” is “anonymous society.” FATCA’s attitude? Anonymous, shmanonymous.)
Notwithstanding the rotten carrot, the stick of FATCA’s penalty made further resistance futile. One by one, countries caved. Here’s where we circle back to the president’s budget. It aims to correct the disparity by providing fully reciprocal reporting to IGA partners. And that little change would make an enormous difference. The resulting regime would closely resemble a system proposed in the nineteen eighties by the OECD – the Organization for Economic Cooperation and Development. It’s long been a pipe dream of internationalists for countries to band together to hunt down tax-cheats, rather than compete with each other to harbor them. (Why a pipe dream? Think about how impregnable Swiss banking secrecy used to seem.)
If FATCA achieves the rule of law among nations, all of its ramrod techniques might be seen in a whole new light, one with a rosier hue. Is FATCA, then, a twenty-first century Marshall Plan? Have we done it again? Behold how one person’s pipe dream is just another day at the office for Captain America!
Well, not so fast. Prepare to dive into the wormy morass.
Like many IGAs, the one signed with the Republic of Honduras in March calls for the parties to work toward achieving fully reciprocal reporting. Without that, Honduran fat cats will continue hiding their money at US banks with impunity, occasionally withdrawing a C-note to light a cigar with. (Remember that characterization; we’re going to challenge it in a minute.)
March was a busy month for the Honduran tax collector, the DEI. Not two weeks before the IGA was signed, government anti-corruption officials raided their flagship unit, the Office in Charge of Big Taxpayers. The press release cited “multiple complaints received from taxpayers of irregularities.” The unit was formed in 2010 on the advice, and with the assistance, of — guess who? — the US Department of the Treasury. Earlier in the month, the DEI’s Director of Internal Revenue was summarily discharged. No reason was given, but the action came in response to a separate corruption scandal.
Neither incident would seem to be an anomaly. According to the US Department of State, Honduran government institutions are “subject to corruption and political influence,” and some officials engage “in corrupt practices with impunity.”
A US taxpayer might have legitimate reasons to hold an offshore account, but there’s probably only one reason to hide it from the IRS: to evade US tax. Meanwhile, a Honduran taxpayer might have a more pressing reason to keep an offshore nest egg: to facilitate fleeing the country on a moment’s notice, should the need arise. Not an unreasonable concern in the world’s most murderous nation. (Just ask a generation of Venezuelan expatriates.) Likewise, there might be more than one reason to hide those offshore assets from the DEI, including the threat of extortion.
It may seem naïve to characterize Hondurans with offshore accounts as innocent victims, rather than fat cats who themselves are part of the problem. Certainly plenty of the latter must exist. But they’re not the ones, it would seem, that are vulnerable to extortion. They’re not the ones filing complaints against the Office in Charge of Big Taxpayers. That’s not the behavior of people who wield impunity, but rather of their victims.
All of this raises some wormy questions. When a government acts like a mafia, is a citizen duty-bound to fund it without reservation? Is she duty bound to declare offshore assets when her reason for squirreling them away in the first place has much to do with her government’s patent corruption? Should the US effectively answer both questions in the affirmative, by ratting her out to her tax collector?
To varying degrees, every IGA that provides reciprocity requires the US Treasury to be an arbiter of corruption in the partner country. Only governments adjudged to have adequate protections in place to prevent abuses are meant to receive information. Accordingly, how Treasury intends to discharge this duty deserves some scrutiny. Does it have the necessary resources and expertise? Will oversight and transparency be part of the process? Will its efforts bear sweeter fruit than they did at the Office in Charge of Big Taxpayers in Tegucigalpa?
For some stakeholders FATCA presents an opportunity, for others an annoyance, for others an affront. For the nation of Switzerland, it is a crisis in the midst of unfolding. Gone is their hallowed tradition of banking secrecy, at least when it comes to US taxpayers (soon to be joined by others). That deal is done. But crises present opportunities, and history is witness to how they are seized by cultures prepared to man up.
Speaking of pipe dreams, here’s mine. I wish the Swiss would become what they once pretended to be: the untouchable defenders of legitimate privacy rights in legitimate banking businesses worldwide. The standard-setters and standard-bearers, only this time no fooling. Zurich may be famous for banking, but Geneva is equally famous as the seat of the UN High Commission for Human Rights, and Bern for political neutrality. Those are assets the Swiss ought to tap. They should use them to build a watch that will tell the world when it’s time to treat Honduras like Denmark for purposes of FATCA. A watch with a crystal back and tamper-proof works. They have no better option, their old gig is up.
