FATCA: The U.S. Tax Law that Affects the World—Even Switzerland

In 2010, following the Financial Crisis, the U.S. Congress passed the Foreign Account Tax Compliance Act (FATCA). The goal was to make it more difficult for U.S. citizens to evade taxes through so-called offshore accounts abroad.

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However, the new law imposes extensive reporting requirements not only on American taxpayers, but also on non-U.S. companies and banks doing business with U.S. citizens around the world.

American citizens who have financial assets outside the United States—which includes the roughly 7 million Americans living overseas—have long been required to report those assets to the IRS as the United States applies the principle of citizenship-based taxation to all citizens regardless of their place of residence. Since 2011, the Foreign Account Tax Compliance Act also requires foreign financial institutions to report information about assets of U.S. persons to the IRS.

Of what interest is this to the Swiss? Since January 1, 2013, FATCA requires Swiss (and all non-U.S.) financial institutions (FFIs) to report information about financial accounts held by U.S. taxpayers, or by FFIs that have U.S. clients directly to the IRS.

While the requirement that U.S. citizens report their overseas assets is uncontroversial, the requirement that FFIs submit information about their clients’ accounts to the IRS is causing great difficulties for banks and companies around the world. Many financial institutions are struggling to find ways to implement the new IRS requirement without violating their countries’ client privilege and privacy laws, and some have declared that they will no longer provide services to U.S. citizens. Others describe the cost of compliance as many times the amount of additional tax revenue the IRS can hope to receive. These costs, of course, will be passed on to clients and consumers—that is, the larger economy.

How the Swiss–American Chamber of Commerce Sees FATCA:

  • FATCA affects around 200,000 financial-services providers and other industries around the world, creating enormous compliance challenges for them.
  • FATCA imposes a 30 percent withholding tax on all payments going from the U.S. to an FFI in those cases where the intermediary does not have a tax agreement with the United States.
  • If the FFI does have an agreement, it is obliged to report accounts that it manages for U.S. citizens as well as for U.S.-controlled foreign companies.
  • The tax consequences of FATCA are “draconian.”
  • The level of detail with which FFIs are charged to ensure that all relevant U.S. taxpayers will be included “exceeds the normal anti-money laundering ‘Know-Your-Customer’ standard and gives the impression that the IRS intends to treat foreign financial intermediaries as it does banking institutions located in the U.S.”
  • “Conflicts between divergent legal systems are pre-programmed.”
  • “What is striking is the intentional incongruity existing between the payments collected on the one hand and the FFI’s registration obligations on the other. In addition to the name of the account holder and the U.S. Social Security Number…the registration requirements include an account summary and gross realized revenues, withdrawals made by the account holder, as well as the highest month-end balance of the previous 12 months.”
  • The FATCA rules “represent an unprecedented challenge for the banking industry.”
  • FATCA also has heavy consequences for businesses outside the finance sector: “A company located in Switzerland that meets the definition of an FFI can nevertheless be affected by the FATCA requirements, namely where it receives income from American sources or profits from the sale of American securities through an American paying agent or an FFI.”

How is the U.S. able to get institutions in other countries to comply with a U.S. law? Economics and finance writer Nick Giambruno states that the “U.S. can enforce FATCA in foreign countries because it controls the world’s reserve currency and has threatened to effectively cut off access to the U.S. financial system for countries that don’t comply.”

In 2013, Switzerland signed a FATCA agreement with the U.S.

In 2016, Switzerland and the U.S. signed a competent authority agreement for a FATCA exemption for “certain accounts of lawyers (in general, custodian and depository accounts.)”

FATCA , Financial Privacy, and the OECD’s “Global Standard”

Not only does FATCA impose cumbersome and costly rules on business, banks, and private individuals, it has created “an inescapable global dragnet.” While the computer age has already been chipping away at financial privacy for years, FATCA appears to be the final nail in the coffin. As Nick Giambruno explains: “The U.S. can access information about any account virtually anywhere.”

And that’s just the beginning of the problem: U.S. success in enforcing FATCA has inspired “countries to band together and push for a sort of FATCA on steroids,” Giambruno says. This involves the OECD’s plan for a “global standard on Automatic Exchange of Information” (AEOI)—informally called GATCA.

How will this global standard work? Rather than each country setting up its own version of FATCA, with all the bilateral agreements that would entail, the leaders of the OECD “are pushing to make the exchange of financial information automatic among all countries,” Giambruno explains. “In the near future, it’s very likely that no citizen from any country will be able to ‘hide’ financial assets anywhere. Every financial institution in the world will automatically send information on foreign account holders to other governments.”

Some critics see these developments as having nothing to do with catching tax evaders, and everything to do with “establishing a global tax.”

Calls to Repeal FATCA

FATCA quickly became controversial and unpopular. So great are the negative financial effects and so burdensome are the restrictions on U.S. expats, that more and more Americans living overseas are renouncing their citizenship—from an average of less than 1,000 per year, to more than 3,000 per year since 2013 (the first year that FATCA was fully in operation). (There even exists a “Guide to Relinquishing or Renouncing U.S. Citizenship,” for people fed up with U.S. tax law.)

To make matters worse, FATCA critics claim that all these costly regulations “completely and utterly fail to do away with the real tax evaders, who are not going to . . . hide their millions by opening a savings account in the Royal Bank of Scotland.” FATCA is punitive and ineffective, say critics.

Critics also point out that the U.S. is one of the few countries that uses citizenship-based taxation instead of residence-based taxation—the latter of which taxes people only where they live and work, regardless of whether that country corresponds with citizenship.

Already, there have been calls for repealing FATCA. Some even brought lawsuits:

The United States is not reciprocating with partner countries by sharing information about foreign account holders at U.S. banks. This now leaves open the question of whether partner countries will continue to abide by the lop-sided FATCA. Stay tuned.

Reading and resources: