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Americans living abroad will be watching to see what happens now that Senator Rand Paul, a Kentucky Republican, has introduced a bill to repeal provisions of the Foreign Account Tax Compliance Act, or FATCA.
FATCA has released shock waves among Americans overseas, because it compels foreign financial institutions to report on their accounts to the US Internal Revenue Service. The IRS will thus be able to check their private accounts against what they report on their tax returns. Worse, it gives the US government an eye into the personal affairs of these Americans, allowing it to see what sums have entered or left their accounts, to and from whom, and when this occurred.
This is a level of interference that Paul, who represents the libertarian wing of the Republican Party and may be a presidential contender in 2016, has found intolerable, understandably so. In a press release the senator spelled out his rationale: “FATCA infringes upon basic constitutional rights, for under FATCA, private data of anyone considered a ‘U.S. Person’ would have details of their financial assets provided to the IRS without a warrant requirement, suspicious activity report (SAR), or any allegation of wrongdoing at all.”
Paul has also pointed to other aspects of FATCA worthy of contestation. The United States has ignored the sovereignty of states by imposing costly reporting requirements on foreign financial institutions. That’s because non-compliance with FATCA will entitle the American government to withhold 30 percent on all transactions by these financial institution conducted in the US.
FATCA does something even more objectionable. In many countries its implementation would lead financial institutions to break domestic laws barring the reporting of bank information to third parties or foreign governments. In other words financial institutions are asked to contravene domestic legislation in order to comply with the diktat of a foreign entity, the IRS. This absurd situation has pushed the US Treasury Department to negotiate inter-governmental agreements, or IGAs, with foreign countries to override such legal barriers.
The core of the IGAs is reciprocity: The United States promises to give foreign states information on their nationals with accounts in US financial institutions in exchange for their implementation of FATCA. While the US is virtually alone in taxing its citizens on their worldwide income, many countries are nevertheless interested in knowing what their citizens hold in accounts overseas, for the day when they decide to return home and re-enter the tax system.
It is at this stage that FATCA, which until then was under the radar of American political consideration, emerged as a potent issue. American banks, realizing they too would be saddled with costly reporting requirements to IGA partners, in other words to dozens of foreign governments, went to court. Both the Texas Bankers Association and the Florida Bankers Association filed a federal lawsuit against the Treasury Department and the IRS saying they would lose billions of dollars from the measure, and that the regulations imposed on them were improper.
The negative constitutional implications of imposed reciprocity were echoed by Paul. “[T]he Treasury Department, without the consent and authority of Congress, will force U.S. financial institutions to provide the bank account information of private customers to foreign nations,” his press release read.
Once FATCA was an American concern it became more vulnerable, even if the conventional wisdom is that that repeal will fail because Congress is too divided. There are several barriers before a bill can become law. Paul’s proposal is long overdue, but it will quickly be redefined as one to protect tax evaders, which will muddle party considerations. The IRS is a powerful actor in Washington. And at a time when President Barack Obama is keen to secure new revenues for an economy reviving only slowly, few Democrats (and perhaps even some Republicans) will want to side with Paul, especially if Obama is likely to veto the decision.
But legislative battles can also awaken diverse interests, and this is what Paul is betting on. The US banking sector, which doesn’t like FATCA’s implications, is influential in Congress. More generally, the United States will lose money if foreigners, who don’t want their finances revealed back home, start closing accounts and taking their money elsewhere.
The Credit Union National Association, which represents a majority of American credit unions, has also backed Paul’s bill. Like the banks, it fears that the IGAs will impose high costs on credit unions and undermine the privacy of their members.
As for businesses, they have been ambiguous about FATCA. To the displeasure of multinational corporations, Paul has held up Senate approval of several tax treaties, on the same grounds that he has contested FATCA. Corporations like predictable business environments and Paul’s resistance has prevented this. However, Americans in many countries have been unable to open bank accounts, because banks do not want the headache of reporting back to the IRS. This has created difficulties for American employees of American companies operating abroad. So while businesses prefer not to upset the IRS, if Paul’s repeal effort gains momentum, they may support it.
All this comes at a fluid time when there has been discussion of rewriting the US tax code and public unease with efforts to expand the government’s powers of surveillance. To Paul’s credit, his hostility to FATCA is primarily grounded in his concern for privacy. That is, indeed, what is most shocking in the legislation, which asks foreign institutions to gather data on Americans without oversight or security guarantees, when most Americans at home would reject such monitoring.
Rand Paul has suddenly made FATCA an internal American affair. He may succeed in repealing the legislation, or he may not, but Americans abroad finally see that someone is speaking on their behalf. What a shame that their government has failed to do so.
FATCA has released shock waves among Americans overseas, because it compels foreign financial institutions to report on their accounts to the US Internal Revenue Service. The IRS will thus be able to check their private accounts against what they report on their tax returns. Worse, it gives the US government an eye into the personal affairs of these Americans, allowing it to see what sums have entered or left their accounts, to and from whom, and when this occurred.
This is a level of interference that Paul, who represents the libertarian wing of the Republican Party and may be a presidential contender in 2016, has found intolerable, understandably so. In a press release the senator spelled out his rationale: “FATCA infringes upon basic constitutional rights, for under FATCA, private data of anyone considered a ‘U.S. Person’ would have details of their financial assets provided to the IRS without a warrant requirement, suspicious activity report (SAR), or any allegation of wrongdoing at all.”
Paul has also pointed to other aspects of FATCA worthy of contestation. The United States has ignored the sovereignty of states by imposing costly reporting requirements on foreign financial institutions. That’s because non-compliance with FATCA will entitle the American government to withhold 30 percent on all transactions by these financial institution conducted in the US.
FATCA does something even more objectionable. In many countries its implementation would lead financial institutions to break domestic laws barring the reporting of bank information to third parties or foreign governments. In other words financial institutions are asked to contravene domestic legislation in order to comply with the diktat of a foreign entity, the IRS. This absurd situation has pushed the US Treasury Department to negotiate inter-governmental agreements, or IGAs, with foreign countries to override such legal barriers.
The core of the IGAs is reciprocity: The United States promises to give foreign states information on their nationals with accounts in US financial institutions in exchange for their implementation of FATCA. While the US is virtually alone in taxing its citizens on their worldwide income, many countries are nevertheless interested in knowing what their citizens hold in accounts overseas, for the day when they decide to return home and re-enter the tax system.
It is at this stage that FATCA, which until then was under the radar of American political consideration, emerged as a potent issue. American banks, realizing they too would be saddled with costly reporting requirements to IGA partners, in other words to dozens of foreign governments, went to court. Both the Texas Bankers Association and the Florida Bankers Association filed a federal lawsuit against the Treasury Department and the IRS saying they would lose billions of dollars from the measure, and that the regulations imposed on them were improper.
The negative constitutional implications of imposed reciprocity were echoed by Paul. “[T]he Treasury Department, without the consent and authority of Congress, will force U.S. financial institutions to provide the bank account information of private customers to foreign nations,” his press release read.
Once FATCA was an American concern it became more vulnerable, even if the conventional wisdom is that that repeal will fail because Congress is too divided. There are several barriers before a bill can become law. Paul’s proposal is long overdue, but it will quickly be redefined as one to protect tax evaders, which will muddle party considerations. The IRS is a powerful actor in Washington. And at a time when President Barack Obama is keen to secure new revenues for an economy reviving only slowly, few Democrats (and perhaps even some Republicans) will want to side with Paul, especially if Obama is likely to veto the decision.
But legislative battles can also awaken diverse interests, and this is what Paul is betting on. The US banking sector, which doesn’t like FATCA’s implications, is influential in Congress. More generally, the United States will lose money if foreigners, who don’t want their finances revealed back home, start closing accounts and taking their money elsewhere.
The Credit Union National Association, which represents a majority of American credit unions, has also backed Paul’s bill. Like the banks, it fears that the IGAs will impose high costs on credit unions and undermine the privacy of their members.
As for businesses, they have been ambiguous about FATCA. To the displeasure of multinational corporations, Paul has held up Senate approval of several tax treaties, on the same grounds that he has contested FATCA. Corporations like predictable business environments and Paul’s resistance has prevented this. However, Americans in many countries have been unable to open bank accounts, because banks do not want the headache of reporting back to the IRS. This has created difficulties for American employees of American companies operating abroad. So while businesses prefer not to upset the IRS, if Paul’s repeal effort gains momentum, they may support it.
All this comes at a fluid time when there has been discussion of rewriting the US tax code and public unease with efforts to expand the government’s powers of surveillance. To Paul’s credit, his hostility to FATCA is primarily grounded in his concern for privacy. That is, indeed, what is most shocking in the legislation, which asks foreign institutions to gather data on Americans without oversight or security guarantees, when most Americans at home would reject such monitoring.
Rand Paul has suddenly made FATCA an internal American affair. He may succeed in repealing the legislation, or he may not, but Americans abroad finally see that someone is speaking on their behalf. What a shame that their government has failed to do so.
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