Foreign Account Tax Compliance Act (FATCA) Goes Into Force Today
July 1, 2014
Today, the Foreign Account Tax Compliance Act (FATCA) goes into force. FATCA was passed by Congress in 2010 as part of the “Hiring Incentives to Restore Employment Act of 2010” in order to ensure that those who have assets overseas are not evading their U.S. tax liability.
It does this by first requiring U.S. citizens and taxpayers to report assets held in overseas accounts worth more than about $50,000. Second, it requires foreign financial institutions to disclose financial information on U.S. citizens that they do business with. If the U.S. citizen does not comply, they are subject to a large penalty. If foreign financial institutions do not comply, all their transactions dealing with U.S.-based investments are subject to a 30 percent withholding tax. This of course is a huge incentive to comply.
Even though FATCA takes effect today, the next two years will be a transition period, allowing financial institutions and individuals time to comply with this complex law.
According to JCT, FATCA should raise approximately $800 million a year in revenue.
The biggest issue with FATCA is that it is exceedingly complex and creates compliance costs that exceed its revenue projections. Not only will U.S. citizens living abroad need to file more paperwork, financial institutions will need to do so too. The total cost of this new compliance burden is estimated to be about $8 billion a year. This compliance cost is estimated to be 10 times greater than the expected revenue gain of $800 million a year. This casts large doubts on whether this law is worth it at all.
Even more, the law may be pushing to disengage with the U.S. tax system altogether. Since 2010, about 8200 people have renounced their U.S. citizenship, 2999 of those happening in 2013 alone. This is compared with the relatively low-level of expatriations in the previous decade (about 500 a year). According to international tax experts, a major reason for this increase in renounced citizenships is the “ever-increasing burden of complying with U.S. tax laws.” If people with assets held abroad continue to renounce their citizenship, it is likely that FATCA will raise even less revenue than predicted. That would defeat the purpose of the law.
Instead of being a fix to prevent tax evasion, FATCA is a poor bandage for a broken tax system.