FATCA and You

The Foreign Account Tax Compliance Act (FATCA ):Restoring balance to the United States Tax Laws, or an Example of Unbridled American Imperialism?

A Five-Part Series

by Vaughn E. James, MBA, JD, Ph.D.

[Dr. Vaughn E. James is a former Calypso and Roadmarch King of Dominica, and former President of the Dominica Calypso Association. A member of the Dominica Calypso Music Hall of Fame, he is currently an Endowed Professor (The Judge Robert H. Bean Professor of Law) at Texas Tech University School of Law in Lubbock, Texas. He is the former Director of the Texas Tech University Tax Clinic, and the Incoming Director of the Texas Tech University Master of Laws Program. He teaches International Taxation, Federal Income Taxation, Federal Estate and Gift Taxation, Elder Law, and Law & Religion.]

Part V: FATCA is here-What shall we do?!

Introduction

By the time this final installment of our series goes to print, FATCA would have taken effect. Nonparticipating FFIs ("PFFIs") would have already been subjected to 30% U.S. withholding tax on certain transfers to accounts of U.S. citizens and residents ("U.S. persons"). A new system would have been in place, a system that will remain until the United States Congress repeals the draconian statute. Draconian? Yes, draconian. In this final installment, we shall discuss why FATCA is bad for CARICOM, bad for the Third World, bad for the world – bad for even the United States itself.

Early Compliance

Of course, not all countries believe that FATCA is bad for them. Hence, some have willingly entered into IGAs with the United States. As of May 16, 2014, 32 jurisdictions had entered into such IGAs. Two of these countries – the Cayman Islands and Jamaica – are members of CARICOM. Another 34 jurisdictions had also reached "agreements in substance" with the United States. Two of these are CARICOM members: the Bahamas and the British Virgin Islands.

It is not difficult to imagine why the majority of countries have not signed on to FATCA. After all, the statute presents a clear example of American imperialism. It presents problems to other countries – particularly Third World countries – on issues of sovereignty and finance.

A Matter of Sovereignty

Twelve years ago, the OECD robbed a number of small nations, most of them members of the group of nations known as the African, Caribbean and Pacific ("ACP") countries, of their sovereignty, forcing them to enact legislation that would help the OECD member states arrest the prevailing flight of capital from their high-tax jurisdictions to the low-tax jurisdictions of the ACP countries and a few European jurisdictions. As the most powerful, most influential member of the OECD, the United States had a role in this humbling of the ACP countries. Today, that same United States is replicating the OECD's anti-harmful tax competition initiative, and, like the OECD did before it, is threatening punitive action against financial institutions in those countries who do not bow down. The only difference is that while the OECD commanded the non-member nations to enact legislation to implement the OECD's goals, the United States has gone ahead and enacted legislation and now simply demands that other countries agree to abide thereby.

Yet, even friends of the U.S. – and members of the OECD, at that – are troubled by the provisions of FATCA. Some have been weary that the U.S. is forcing FFIs and foreign governments to collect data on U.S. citizens at their own expense and transmit this to the IRS. Former Canadian Finance Minister, Jim Flaherty, expressed his concern with the "far reaching and extraterritorial implications" of FATCA which would require Canadian banks to become extensions of the IRS and would in the process jeopardize Canadians' privacy rights.

Moreover, how can one country enact a statute affecting its citizens then turn around and order other countries – who have little, if any, dealings with that country – to comply? To be sure, the United States has every right to locate and prosecute its citizens who commit tax evasion. It may ask friendly countries to assist in this great effort. But to command countries the world over, and all banks and other financial institutions in every country on the planet to toe the line and become part of the United States' efforts is morally reprehensible. The international community should not allow this to continue.

The Issue of Cost

American opponents of FATCA argue that although numbers are still somewhat speculative, estimates of the additional revenue to be raised by FATCA are heavily outweighed by the cost of implementing the legislation. The Association of Certified Financial Crime Specialists ("ACFCS") claims FATCA is expected to raise annual revenues of approximately US$800 million for the U.S. Treasury. However, the costs of implementation are more difficult to determine, and experts have made estimates ranging from hundreds of millions to over US$10 billion. ACFCS also claims it is extremely likely that the cost of implementing FATCA (which will be borne by the FFIs) will far outweigh the revenues raised by the U.S. Treasury, even excluding the additional costs to the IRS for the staffing and resources needed to process the data produced.

Costs borne by the IRS is understandable, and not the subject of this article. After all, the American Congress enacted this statute, the American President signed it into law, and the Americans should thus absorb the costs of implementation and not complain.

However, the matter of costs to FFIs and foreign governments is very troubling, especially when we consider that they did not ask to be a part of this. Not only that, but their compliance costs are very high! Indeed, experts estimate that compliance costs to these FFIs will be US$8 billion a year. This figure is not far-fetched. The United Kingdom government has already estimated that the cost of implementation to British businesses will be £1.1 billion to £2 billion for the first five years. Meanwhile, an October 2013 report in the Financial Post revealed that Canadian bank, Scotia Bank, had already spent $100 million on implementation. We can be certain that costs to Third World banks will be just as high (in relation to their size and revenue). What will stand out is that the Third World banks will not have the money to fully and properly implement FATCA.

Conclusion

Third World countries have forever been pushed around by their wealthier, more developed "neighbors." Sixteen years ago, the OECD launched an attack on the Third World, claiming the organization was simply seeking to erase harmful tax competition. Somewhere along the line, in an effort to rope in the citizenry of the Third World countries, the OECD added money laundering to the list of grave sins it was trying to eradicate. Four years after it began its campaign, the OECD was victorious. All but seven of the jurisdictions that had fought against this gargantuan organization capitulated and enacted the legislation the developed member countries of the OECD were clamoring for.

Even with victory in hand, some politicians in the United States were not satisfied. They wanted to eradicate tax evasion by their citizens, and at the same time continue to blacklist so-called tax havens. In 2010 they found a way to address the tax evasion issue – but not eradicate it – through FATCA, a statute stealthily included in the HIRE Act of 2010. While FATCA does not provide for the blacklisting of Third World countries as tax havens, it places such onerous burdens upon them that their economies will continue to stutter. Meanwhile, the U.S. will garner the tax revenue it seeks through FATCA, but will not share one penny of that money with the Third World countries who have complied with the draconian statute.

So, is there a solution for the Third World? More so, is there a solution for CARICOM? Indeed, there is! The answer lies in true Caribbean integration. The rebirth – reconstituting – of the West Indies Federation where all the islands and mainland countries that make up CARICOM can stand together to negotiate in these matters and take concerted action when necessary would usher in a period of growth, sovereignty and dignity for the people of the Caribbean. It is high time that every President, every Governor-General, every Governor, every Prime Minister, and every Chief Minister in the Caribbean stop being monarch in his or her own backyard, abdicate and let power be in the hands of one President who will lead a united Caribbean into a union that it so strong no FATCA, no OECD, no United States of America would be able to dictate its tax and economic policies.

I pray every day for that day to come quickly.