As noted earlier, FATCA (the Foreign Account Tax Compliance Act) is unenforceable and unviable unless virtually all countries in the world – or at least all the major financial centers – sign on. That is looking less and less likely, spelling big trouble for a law that one of America’s top tax lawyers has correctly described as “sheer idiocy.”
No China, no FATCA
No scheme of global financial reporting can possibly succeed without China. As noted by Nigel Green, CEO of deVere Group regarding China and Hong Kong:
FATCA could, ultimately, unravel if China rejects the IGA because FATCA’s primary strength would come from all governments around the world forcing their financial institutions to become compliant with it.
Should the country which looks set to be the world’s dominant economic super power in a matter of decades rebuff FATCA, the project would be compromised and could, in the end, fail as such a stance would, many experts agree, prompt other countries to do the same.
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It’s currently unclear but there are signs that Hong Kong could indeed act independently from Beijing’s stance as there has been no reference to Hong Kong, a special administrative region (SAR), in any of the published material we’ve seen on the matter.
Additionally, James Jatras, of the Repeal FATCA campaign, informs us that, interestingly, like the People’s Republic of China, Hong Kong is not on the list of 50 countries the Treasury claims to be negotiating with. [“Could China Kill FATCA?,” Feb. 22, 2013]
Germany “in no hurry”?
While China’s compliance with FATCA always has been problematic, one country the U.S. has counted as a “given” from the outset is Germany. Among the first five countries to indicate a willingness to sign an IGA, Berlin was supposed to have been wrapped up by the end of 2012. While efforts to finalize a U.S.-Germany IGA will press forward hard in 2013, they could be tripped up by Berlin’s insistence that information exchange be a two-way street (“Germany in no hurry to sign its Fatca IGA, expert says,” Feb. 22, 2013).
The problem of reciprocity has raised itself with the report that the U.S. Treasury Department plans to ask Congress – much earlier than expected – for new legislative authority to move closer to “full reciprocity” than currently exists in the Model 1 IGA. It’s speculated that this is because one or more countries has told Washington they will not sign until they get a more balanced exchange of information. Legislative approval of additional authority for information exchange is unlikely in light of Congressional and industry objections to even the limited bank interest reporting already provided for under the “Model 1” version of the IGA.
In short, not just Germany but any government that insists on mutual respect and cooperation from the U.S. side is unlikely to get it.
Time for an alternative to FATCA
As Congress begins to wake up to the inadvertent mess this misguided and insufficiently thought-out law stands to cause, FATCA’s prospects are dimming every day. Incredibly, even as the unraveling of FATCA begins to accelerate, some countries remain convinced (in large part due to a poor understanding of the U.S. political system) that capitulation to FATCA by signing an IGA in one form or another is the only recourse – but “there must be no diminution of the countries’ sovereign rights.” This, of course, is a contradiction in terms, since FATCA inherently is a flat-out surrender of sovereignty to Washington’s diktat. Moreover, the IGAs don’t even provide any significant degree of protection for firms facing crushing compliance costs.
Instead of cooperating with the Treasury Department’s efforts to rope them into the FATCA corral, financial firms and foreign governments need to move with the political winds in Washington – and get behind the campaign to repeal “the worst law most Americans have never heard of.”
As efforts to repeal FATCA begin to pick up steam, it’s time to start thinking about alternatives to what is aptly called by some the “Fear And Total Confusion Act.”