Just in time for tomorrow’s American Independence Day, a leading member of the U.S. House of Representatives has struck what may turn out to be a mortal blow against the misguided “Foreign Account Tax Compliance Act” (FATCA).
In a letter to U.S. Treasury Secretary Jack Lew, Congressman Bill Posey (R-Florida 8th), a key member of the House Financial Services Committee, has turned thumbs down on Treasury’s public claims that the U.S. will impose on American domestic financial institutions the “equivalent” of FATCA’s ruinous reporting requirements on foreign financial institutions (FFIs). It’s now clear that is not going to happen.
Denying Treasury the authority to force FATCA-like regulations on U.S. firms knocks out a critical element of the Department’s strategy in rescuing an already fatally flawed law. Top FATCA proponents have recognized that the FATCA “statute as written was wholly unachievable” – Treasury just doesn’t have the resources to enforce FATCA directly and extraterritorially on hundreds of thousands of FFIs in almost 200 countries. The only way forward is to pressure or entice foreign governments into enforcing FATCA against their own institutions and citizens as effective deputies of the IRS pursuant to so-called “intergovernmental agreements” (IGAs).
But impelling some foreign governments to sign IGAs comes with a price: the U.S. would have to provide “equivalent levels of reciprocal automatic exchange” to foreign “FATCA partners.” Treasury has promised “equivalent” reporting from domestic U.S. institutions – a mandate found nowhere in FATCA – both in the “reciprocal” version of the IGA as well as in international forums like the G-8 and G-20, where the Department has been peddling global financial information exchange as a solemn U.S. commitment.
Treasury is making promises to foreign governments it can’t keep.
There’s just one little problem with this strategy: as even Treasury admits, the Department doesn’t have the legal power to keep its promises and needs to have new statutory authority enacted by Congress. A request for that authority – which includes the stunning admission that “in many cases, foreign law would prevent foreign financial institutions from complying with FATCA,” hence the unavoidable need for IGAs to abrogate local human rights, data privacy, and other protections – was included in the Fiscal Year 2014 Budget request sent up to Capitol Hill in April (Analytical Perspectives to the Fiscal Year 2014 Budget, page 202):
Provide for reciprocal reporting of information in connection with the implementation of the Foreign Account Tax Compliance Act (FATCA). — In many cases, foreign law would prevent foreign financial institutions from complying with the FATCA provisions of the Hiring Incentives to Restore Employment Act of 2010 by reporting to the IRS information about U.S. accounts. Such legal impediments can be addressed through intergovernmental agreements under which the foreign government agrees to provide the information required by FATCA to the IRS. Requiring U.S. financial institutions to report similar information to the IRS with respect to nonresident accounts would facilitate such intergovernmental cooperation by enabling the IRS to reciprocate in appropriate circumstances by exchanging similar information with cooperative foreign governments to support their efforts to address tax evasion by their residents. The proposal would provide the Secretary of the Treasury with authority to prescribe regulations that would require reporting of information with respect to nonresident alien individuals, entities that are not U.S. persons, and certain U.S. entities held in substantial part by non-U.S. owners, including information regarding account balances and payments made with respect to accounts held by such persons and entities.
With Mr. Posey’s letter this request can be considered effectively D.O.A. – “dead on arrival” – in the House of Representatives, where it would need to be approved by at least two committees: the Committee on Ways and Means; and the Committee on Financial Services, on which Congressman Posey’s is a important voice. “I have shared my concerns with my fellow members of the House Financial Services Committee,” writes Congressman Posey. “Given the evidence above, it is difficult to conceive of any circumstance that would justify imposing such an expensive and counterproductive domestic mandate.”
[It needs to be understood that this is a denial that will stick. As noted in the letter, Congressman Posey is the chief sponsor of another piece of legislation with strong bipartisan support, H.R. 2299, which would abolish and prohibit existing regulations mandating nonresident alien interest reporting by U.S. banks and credit unions. (These regulations “would not themselves bring one penny into the U.S. Treasury,” notes Posey.) This lesser level of reporting – not “equivalent” to what FATCA demands from FFIs – that H.R. 2299 would prohibit is also promised by Treasury in the IGAs, despite strong opposition from Congressman Posey, Ways and Means Oversight Subcommittee Chairman Charles Boustany, and other Congressmen and Senators, plus other objections and a federal court challenge from the financial community in the U.S. In short, given the support Congressman Posey has been able to secure in the House for legislation withdrawing this existing regulatory authority, he and his colleagues certainly can block new legislation requested by the Administration to authorize the issuance of even more damaging regulations.]
Without this new authority, on which the Congressman’s letter pronounces what amounts to a veto, Treasury cannot deliver on promises of “equivalent levels of reciprocal automatic exchange.”
And without imposing “equivalent levels of reciprocal automatic exchange” on domestic U.S. banks, credit unions, and other institutions, Treasury cannot pretend that IGAs are anything but a one-sided, extraterritorial diktat that foreign governments enforce FATCA to the detriment of their countries’ institutions, taxpayers, and consumers, and in violation of their sovereignty.
And without the IGAs, FATCA is unenforceable.
Thus, by sounding the death knell for reciprocal authority, Congressman Posey is sinking the IGAs, and in turn FATCA itself.
Posey: “Further delay in FATCA enforcement and a moratorium on negotiating and signing additional IGAs is in order,” pending “substantial modification or, more likely, outright repeal.”
The Congressman further spells out the larger implications for FATCA and the painful scrutiny the Treasury Department – already under House fire for IRS abuses – can expect on the IGAs’ dubious constitutional and statutory basis:
“In closing, two further observations. First, I note that the IGAs that are the source of this commitment are not authorized or even mentioned in FATCA. Despite the absence of any specific legislative authorization, these IGAs are not being submitted to the Senate as treaties or treaty amendments for its advice and consent, nor – apart from the enhanced reporting authority described above – is any request being made to the full Congress for statutory authority to implement the IGA.
“Second, it is difficult to avoid the conclusion that the flaws evident in the IGAs being negotiated to implement FATCA are reflective of flaws in the law itself. It is clear that substantial modification of FATCA is in order or, more likely, its outright repeal and possible replacement with a cooperative scheme that pursues actual tax evasion without harming the innocent. I note that legislation to repeal FATCA was recently introduced in the Senate, and I would expect a companion bill to be introduced in the House of Representatives shortly.
“I expect these broader questions to be more fully aired by the Committee in its examination of the anticipated request for enhanced legislative authority. In the meantime, I suggest a further delay in FATCA enforcement and a moratorium on negotiating and signing additional IGAs is in order.”
The reference to FATCA repeal legislation in the Senate is to S. 887, introduced by Rand Paul (R- Kentucky) in May, with House introduction anticipated in the near future. FATCA repeal must be considered a prime candidate for inclusion in any tax reform legislation that may move through Congress in the foreseeable future.
For FATCA, the writing is on the wall. What’s needed now is for all negatively impacted interests – which one way or the other, is pretty much everybody – to join with us.
Contact RepealFATCA.com and find out how you can help get rid of “the worst law most Americans have never heard of”!
Full text of Congressman Posey’s letter at: http://www.repealfatca.com/downloads/Posey_letter_to_Sec._Lew_July_1,_2013.pdf .
More information on Senator Paul’s repeal bill at: http://www.repealfatca.com/index.asp?idmenu=4&title=News&idsubmenu=124 .
More information on support for FATCA repeal from American credit unions at: http://www.repealfatca.com/index.asp?idmenu=4&title=News&idsubmenu=125 and http://www.repealfatca.com/index.asp?idmenu=4&title=News&idsubmenu=126 .
More information on support for FATCA repeal from American taxpayer advocates at: http://www.repealfatca.com/index.asp?idmenu=4&title=News&idsubmenu=128 .