U.S. Foreign Tax ----- Weekend News
How to Lose Friends, Citizens and Influence
The U.S. Foreign Account Tax Compliance Act seeks to co-opt foreign banks as long-arm enforcement agencies of the IRS.
London
Beware the sledgehammer used to crack the nut. In this case, the nut
is the U.S. government's laudable goal of catching tax evaders. The
sledgehammer is the overreaching effect of legislation that is
alienating other countries and resulting in millions of U.S. citizens
abroad being forced to either painfully reconsider their nationality, or
face a lifetime of onerous bureaucracy, expense and privacy invasion.
The legislation is Fatca, the Foreign Account Tax Compliance Act. To
appreciate its breathtaking scope along with America's unique
"citizen-based" tax practices, imagine this: You were born in
California, moved to New York for education or work, fell in love,
married and had children. Even though you have faithfully paid taxes in
New York and haven't lived in California for 25 years, suppose
California law required that you also file your taxes there because you
were born there. Though you may never have held a bank account in
California, you must report all of your financial holdings to the State
of California. Are you a signatory on your spouse's account? Then you
must declare his bank accounts too. Your children, now adults, have
never been west of the Mississippi but they too must file their taxes in
both California and New York and report any bank accounts they or their
spouses may have because they are considered Californians by virtue of
one parent's birthplace.
Extrapolate that example to the six million U.S. citizens living
around the globe. Many, if not most, don't know about these
requirements. Yet they face fines, penalties and interest for not
complying—even if they owe no U.S. taxes, own no U.S. property, have no
U.S. bank account and haven't lived there in years—if ever.
A particularly alarming aspect of Fatca
is that it seeks to co-opt foreign banks as long-arm enforcement
agencies of the Internal Revenue Service—even when it might contravene
that country's own privacy or data-protection laws. If financial
institutions don't report U.S. citizens holding accounts with them,
these institutions face a 30% withholding tax on securities transactions
that originate in the U.S.
Given this threat, why allow an American, or even suspected American,
to bank with you? The reporting costs, and the consequences of a
mistake, are too onerous. It isn't always obvious who's a U.S. citizen,
either. Many, like the very British mayor of London, Boris Johnson, are
"accidental Americans." He was born in New York, where his father worked
for the U.N. And unless Mr. Johnson has actively renounced his
citizenship, which requires an appointment at a U.S. Embassy, forms and
fees, he is still an American citizen. Mayor Johnson repudiated his
American citizenship in a newspaper column once, but it's far from clear
that this would satisfy U.S. authorities. Mr. Johnson, have you filed
your taxes and reported all your U.K. bank accounts to the U.S.
Department of Treasury yet?
Foreign financial institutions trying to avoid these new requirements
have two alternatives: to drop American clients, or don't invest in the
U.S. Neither scenario benefits America. And yet it's hard to believe
that Chinese financial institutions will acquiesce in reporting their
clients' account information to the U.S. Imagine the howls down the
halls of Congress if China informed U.S. banks that they must report to
China all of the bank accounts held by Chinese citizens in the U.S. or
face penalties.
This infringement on the sovereignty of other nations has not gone
down well abroad and has only served to reinforce the most negative
stereotypes of America. To address this, the U.S. Treasury has been
negotiating "Inter-Governmental Agreements" which promise reciprocity in
return for compliance. But in a letter to Treasury Secretary Jacob Lew,
U.S. Congressman Bill Posey—a member of the House Financial Services
Committee from Florida—alleged that Treasury had exceeded its authority
in promising reciprocal financial reporting to foreign nations. If
Congressman Posey is wrong, U.S. banks will face enormous reporting
requirements and costs. If he is right, the U.S. government will face
enormous international embarrassment after having coaxed nations into
signing IGAs.
The core injustice in America's tax policy is that it is based on
citizenship rather than residency. This novel approach is practiced by
only two countries in the world: the U.S. and Eritrea. Ironically,
then-U.S. Ambassador to the U.N. Susan Rice condemned this practice by
Eritrea in 2011 as "the extortion of a 'diaspora tax' from people of
Eritrean descent living overseas." Many would describe U.S. practice in
similar terms.
Dual citizens like me who live bi-continental lives are aware that
there is no upside in our tax position. We are required to file in both
countries, we pay taxes where the taxes are highest, and we can take
none of the tax advantages either country has to offer. But for many
others, whose lives are only in one country—and that one country is not
the U.S.—this type of taxation is particularly destructive. It forces
honest people with affection for their ties to America to either keep
quiet about their heritage, or spend potentially thousands of dollars a
year to prove that they owe no U.S. taxes. Or, as is increasingly
occurring, it forces them to give up their U.S. citizenship. The result
is that the U.S. is turning millions of "good will" ambassadors into
"bad will" ambassadors. Can any of this be good for America?
Let's find another way to crack this nut.
Ms. Graffy is a law professor with Pepperdine
University in Malibu, California based in London as director of
Pepperdine's London Law Campus.
8:39 AM, Jul 17, 2013
• By DANIEL HALPER
The Foreign Account Tax Compliance Act, or Fatca, is forcing
millions of Americans living abroad to reconsider their U.S.
citizenship, a lawyer, Colleen Graffy, writes in the Wall Street Journal.
"The legislation is Fatca, the Foreign Account Tax Compliance Act. To
appreciate its breathtaking scope along with America's unique
"citizen-based" tax practices, imagine this: You were born in
California, moved to New York for education or work, fell in love,
married and had children. Even though you have faithfully paid taxes in
New York and haven't lived in California for 25 years, suppose
California law required that you also file your taxes there because you
were born there. Though you may never have held a bank account in
California, you must report all of your financial holdings to the State
of California. Are you a signatory on your spouse's account? Then you
must declare his bank accounts too. Your children, now adults, have
never been west of the Mississippi but they too must file their taxes in
both California and New York and report any bank accounts they or their
spouses may have because they are considered Californians by virtue of
one parent's birthplace," Graffy explains.
"Extrapolate that example to the six million U.S. citizens living
around the globe. Many, if not most, don't know about these
requirements. Yet they face fines, penalties and interest for not
complying—even if they owe no U.S. taxes, own no U.S. property, have no
U.S. bank account and haven't lived there in years—if ever.
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