American imperialism takes many forms. In foreign affairs, it has sometimes led us into costly, often unilateral wars that alienate allies and enemies alike. As the richest country in the world, we've been used to getting our way, even at the expense of others.
Tax policy is not normally thought of in imperialist terms. But a new U.S. law, with the innocuous title of the Foreign Account Tax Compliance Act, is being decried around the world as yet another heavy-handed American power grab.
FATCA Collection Provisions
Congress passed the Foreign Account Tax Compliance Act (or FATCA) in 2009 to enlist foreign banks, investment companies and other financial institutions in the task of collecting tax payments owed to the U.S. government by Americans with offshore accounts.
Most of the law's provisions will take effect in 2014, and they will apply to foreign financial institutions that have U.S. clients with accounts of $50,000 or more.
The foreign financial entities are essentially given what's known as a Hobson's choice, where both options presented are bad: either cooperate with the law and thereby compromise their clients' interests, or face severe penalties from the IRS for non-compliance.
Actually, the choices for foreign entities are three in number:
· Collect confidential data about U.S. clients and supply it to the IRS;
· Withhold 30 percent of the interest, dividend or other payment due to their clients and provide that money to the IRS; or
· Face severe penalties of 40 percent of the amount that the IRS seeks assistance in collecting
By any measure, 40 percent is a draconian penalty. It isn't literally the death penalty, which is what Draco imposed in ancient Athens for even minor offenses. But it is still, by any previous standard, unwarranted. That is why some commentators have already likened FATCA to a "neutron bomb" over the global financial system.
The Sword of Damocles
"Neutron bomb" conjures a powerful image, and the characterization comes from tax lawyers at the Swiss-American Chamber of Commerce in Zurich. The implicit threat to the global financial system is that FATCA could have the effect of discouraging foreign investment in U.S. securities. And as we all know painfully well in the wake of the Great Recession, that investment is urgently needed to keep the U.S. economy, and with it the world economy, afloat.
One could certainly use other images as well to describe the effect of the law. To change the metaphor, one might say that FATCA hangs over foreign banks like an ominous dangling sword - call it the sword of Damocles - threatening to cut them if they don't comply.
In the ancient story, Damocles sat on the throne of the king of Syracuse to experience how fortunate it was to be the king. But the king put a huge sword above the throne, hanging only by one thin hair from a horse's tail. This put Damocles in constant, imminent peril.
Unlike Damocles, however, foreign banks and other financial institutions never asked for any particular favors from the sovereign - represented, in the case of FATCA, by the IRS. But they have nonetheless essentially been drafted into the king's collection army.
Pushback From Abroad
The preliminary response to the FATCA requirements from abroad is tinged with a tone of outrage. One commentator, an American executive working in Hong Kong for a major investment company, called it "America's most imperialist act since it invaded the Philippine Islands in 1899."
Such overreaching almost inevitably invites pushback. As in other areas of imperialist misadventure, it is fostering anti-American sentiment around the world. No other country attempts to enlist foreign entities so systematically as workers in its tax collection efforts.
The backlash against the law has taken very tangible form, asserting itself in ways that may be quite counterproductive for the U.S. For example, last summer, the private banking group HSBC announced that it would cease supplying services outside the U.S. to U.S. residents.
At the same time, Switzerland's secretary of state for international tax and financial affairs characterized the U.S. action as "greedy." The European Commission has also objected to FATCA. In addition, the possibility of FATCA-type tit-for-tat law in other countries is very real.
In other words, what goes around comes around.
FATCA is also not without its inherent absurdities. In theory, the law could even apply to a bank in someplace like Uzbekistan that opens an account for a local camel herder. If the bank holds U.S. Treasury bills as part of its portfolio, it conceivably could be required to verify that the camel herder is not a U.S. citizen - or else withhold taxes automatically and send them to the IRS.
FATCA and OVDI
The U.S. already aggressively pursued taxes on unreported income and assets of Americans with offshore accounts through the Offshore Voluntary Disclosure Initiative, which ended in September 2011. To be sure, the U.S. government is in urgent need of revenue to pay down its massive debt. But the combination of FATCA and OVDI seems like overkill in the effort to achieve that.
Because of the many concerns about FATCA, voiced from around the world, the U.S. Treasury Department has pushed back the implementation date for the regulations that will implement the law. Treasury originally planned a January 1, 2013 rollout, but the date has been postponed until 2014.
Despite all of the opposition, however, FATCA is still coming. If you have assets in overseas accounts, talk with an experienced tax attorney about how to prepare.
