The implementation of a new and ill-conceived tax act, which would damage the U.S. economy, adversely affect American firms that operate globally and negatively impact the seven million U.S. citizens who live overseas, appears to be floundering.
Created, according to the Treasury Department, to catch offshore tax evaders, the Foreign Account Tax Compliance Act will require all foreign financial institutions to report the activities of their American clients to the Internal Revenue Service. Essentially, every overseas bank will have to act as a snooping agent for Uncle Sam. The penalty of not complying with FATCA will be that the institutions need to impose a 30% tax on non-compliant transfers or payments.
This highly controversial tax act, which was slipped into the 2010 HIRE Act and wasn't reviewed properly by Congress, is due to come into effect on Jan. 1, 2014. However, in recent weeks, it is becoming clear that the process to implement this new law, which has a host of serious, unintended consequences, is losing momentum.
There are two clear reasons why I, amongst others, believe FATCA is beginning to unravel.
Firstly, the Treasury Department has now missed two of its own deadlines to publish FATCA's final rules, a key step in rolling out the policy. The first deadline came and went in September, and the second at the end of last year. However, earlier this week, Bloomberg reported that final FATCA regulations are expected in "coming days."
Secondly, only the U.K., Denmark, Ireland and Mexico, plus a handful of British crown dependencies, have signed FATCA's required Intergovernmental Agreement. The Treasury Department had hoped to finalise IGAs with many others, including Canada, France, Germany, Italy, Japan, Spain and Switzerland, before the end of 2012, according to anti-FATCA lobbyists. It failed on that too.
I'm welcoming such indicators that FATCA is in trouble as I hope that the Treasury and the White House will ultimately see sense and repeal this toxic piece of legislation.
Indeed, there is a growing consensus amongst financial and legal experts that FATCA, which former U.S. Senate foreign policy analyst and Washington-based lawyer James Jatras has dubbed "the worst law most Americans have never heard of," must be scrapped.
FATCA is not only a legislative form of U.S. imperialism. It could also damage delicate international relations and trade agreements. It is in direct conflict with many foreign laws, and, crucially, it would be another hammer blow to America's fragile economy as it would dramatically reduce foreign investment in the U.S.
Overseas investors would stop investing in the U.S. overnight, preferring to put their money elsewhere due to the penalty of not complying with FATCA.
This reduction in foreign investment would, of course, dampen U.S. economic growth and threaten American jobs – just at the time when the country is showing signs it might be recovering from the worst recession in a generation.
In addition, with it being extremely expensive and highly complex for foreign financial institutions to become FATCA-compliant, many are simply rejecting business from American firms who operate in global markets and from U.S. expats – even if they have been clients for many years.
Indeed, major wealth management firms including HSBC Holdings Plc, Deutsche Bank AG, Bank of Singapore Ltd. and DBS Group Holdings Ltd. have all rejected business from U.S. citizens ahead of the implementation of FATCA.
U.S. firms and citizens who work outside America need foreign bank accounts to facilitate payments from overseas clients/employers and to pay local charges, amongst other things. Therefore, having no access to non-U.S. financial institutions would significantly reduce their competitiveness.
In short, FATCA must be repealed as soon as possible as it does little to actively target tax evaders, which is its primary objective. It would make investors question investing in the U.S. Additionally, it would turn American companies abroad and millions of expats into financial pariahs.
I'm sure that the Treasury Department will soon announce that other countries have engaged with FATCA IGAs and it will, finally, publish its rules. But there's no denying that the implementation of FATCA is stalling. And that must give us hope.
Nigel Green is founder and chief executive of the deVere Group, a global financial advisory firm.