Ius Gentium

University of Baltimore School of Law's Center for International and Comparative Law Fellows discuss international and comparative legal issues

Renunciations on the Rise: U.S. Natural Status Is Dangerous Under FATCA

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Julia Brent

On March 18, 2010, President Obama signed a “jobs” bill into law, paid for by the revenue raising Foreign Tax Compliance Act (FATCA).  Execution of FATCA would access a deep pocket: there is an estimated $40 billion per year in international tax evasion.[i]  Thus far, the U.S. Treasury has taken in $800 million in FATCA-related revenue.[ii]  FATCA doesn’t change the obligations of U.S. taxpayers to pay their taxes on overseas earnings, but creates an enormous reporting obligation on 200,000 foreign financial institutions (FFIs) worldwide to pass on information from accounts of U.S. citizens to the IRS. [iii]  Failure to do report results in a 30% penalty on payments into the account, payable to the IRS.[iv]

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The simple solution is to take advantage of one of several U.S. Tax amnesty programs, and many are struggling to pay their taxes before the reporting begins.  However, the legislation has created complex problems for both the institutions and for taxpayers.  For example, an FFI to merely register its own company with the IRS (much less implement the giant reporting scheme) must master a 135-page guide of registration details.  Similarly, taxpayers face multiple forms and banker’s-box size submissions. For many, hiring an accountant to handle compliance is prohibitively expensive.[v] Some foreign individuals who were born in the U.S. but raised overseas by foreign parents don’t realize they have U.S. citizenship.  Some are “accidental Americans” because their parent was born in the U.S.  Staff at the IRS report that they have been overwhelmed by calls from Americans overseas regarding what they are supposed to furnish under FATCA.[vi]

The result of this high-consequence complexity is that many individuals overseas are eliminating their U.S. citizenship. Those that hold dual citizenship often are nationals with a quality country the EU, Canada, Australia, or New Zealand and are allowed travel without a visa through much of the world (including to the United States).[vii]  In the face of accessing the value of their U.S. passport, the conclusion by many is that there is a real danger.  Many institutions are ill-equipped to handle FATCA compliance, much less retracing steps to correct an error.  Already, the IRS has extended reporting deadlines because foreign governments and FFI’s haven’t finished developing IT systems, and aren’t prepared.  Some believe the scale of implementation is so large that the cost of implementing FATCA will “far outweigh the revenues.”[viii] Scotia Bank in Canada, alone, has already spent $100 million.[ix]  There is a high likelihood of a taxpayer getting caught between the cracks of an imperfect system, and being the victim of incorrect reporting, which comes with significant consequences.  An account holder does not have to be a U.S. citizen for their FFI to report them based on U.S. indicia the distinguishing information on their account.  U.S. indicia can mean as little as a U.S. telephone listed as contact information.  One would hope that if an account held by a true non-U.S. citizen was incorrectly reported as that of a U.S. citizen, the false report would be quickly corrected.  However, the sheer size of the players the IRS, state governments, and FFIs – creates a likelihood that corrections will take months, even years, to sort out in litigation against the IRS or a foreign tax administrator.

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In addition to imperfect reporting, those with American only or dual citizenship are concerned that FACTA requirements compromise privacy and the right to data protection as a taxpayer.  Many governments have executed Intergovernmental Agreements (IGAs), either without considering the rights of the individuals affected or complying by means of what is essentially coercion.[x]  Privacy issues for Canadians have been raised by former Canadian Finance Minister, Jim Flaherty.  His concern is the “far reaching and extraterritorial implications” of FATCA which, in effect, mandate that Canadian banks become extensions of the IRS and jeopardize Canadians’ privacy rights.[xi] Banks in Canada are not required to know the nationality of their clients, and, to conform to FATCA, Canada would have to change its privacy laws.[xii]  All the countries under the Model 2 International Governmental Agreements (IGA’s) have laws which either prevent disclosure or require individual consent.[xiii]  The difficulty with consent is that in many cases it is logistically impossible.  For example, Japanese banks have several hundred million bank accounts, not digitized, all with opening forms in Japanese.[xiv]

FATCA has changed Americans into outsiders in the international financial world.[xv]  As one officer of a global bank reported, the banks are ridding themselves of the “U.S. Person pollution!”[xvi] American Citizens Abroad (ACA) has received multiple testimonies from Americans abroad who have had their foreign bank accounts closed, been refused entry into a foreign pension fund, or who cannot enter into insurance contracts overseas.[xvii]  Some claim that “American citizens are being denied savings accounts, investment accounts, mortgages, credit cards and many of the basic financial services required to live and work in modern society, raise a family and to save for retirement.”[xviii] This is due to the fact that, while there are 780 million American bank clients overseas,[xix] this number is a drop in the bucket for banks who serve a much higher number of non-Americans.

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These difficulties explain why the amount of renunciations since FATCA was implemented has quadrupled.[xx]  Renunciations have caused such a backlog of paperwork that, in November last year, the fee for renunciation was increased by 400%.[xxi] The U.S. response has been inadequate:  Robert Stack, Treasury Deputy Assistant Secretary of International Tax Affairs, described the claim that Americans living abroad will give up their U.S. citizenship because of liabilities and burdens created by FATCA as Myth No. 3.[xxii]  Meanwhile, the New York Times reports, “The bureaucratic burden of identifying, verifying and reporting has caused many banks to regard American clients, particularly those of moderate means, as more trouble than they are worth.”[xxiii]

There is currently a push to make renunciation “easy and harmless,” financially and mentally, since new regulatory burdens on non-resident US citizens make living with that status nearly impossible.[xxiv]  Recently, a “renunciation meeting” was held in Canada, the first of its kind, to permit 22 Americans together to renounce their U.S. Citizenship, in spite of the $2,350 fee and paperwork. Tara Ferris, then Senior Counsel at Chief Counsel IRS, and others did an outstanding job in drafting the internal revenue rules and regulations of FATCA, an unprecedented behemouth of legislation.  However, the code implements policies that have significant unintended consequencesMass renunciations, a sort of reverse of our naturalization ceremonies, may become a thing of the future.[xxv]

[i] http://www.fas.org/sgp/crs/misc/R40623.pdf, Summary

[ii] Id.

[iii] http://www.acfcs.org/fatca-may-identify-tax-cheats-but-its-dragnet-for-financial-criminals-may-produce-an-even-bigger-yield/

[iv] http://fatca.thomsonreuters.com/about-fatca/

[v] http://cnsnews.com/news/article/gabrielle-cintorino/tax-laws-pushing-americans-living-abroad-renounce-their-us

[vi] http://www.bloomberg.com/news/features/2015-04-08/an-emotional-audit-irs-workers-are-miserable-and-overwhelmed

[vii] http://opiniojuris.org/2012/01/08/fatca-fallout-mass-renunciations/

[viii] http://www.acfcs.org/fatca-may-identify-tax-cheats-but-its-dragnet-for-financial-criminals-may-produce-an-even-bigger-yield/

[ix] http://business.financialpost.com/news/fp-street/electronic-spying-a-big-issue-for-banks-scotia-ceo-waugh-says

[x] http://www.keepcalmtalklaw.co.uk/accidental-americans-the-us-citizenship-conundrum/

[xi] http://sundominica.com/articles/fatca-and-you-1462/

[xii]http://web.archive.org/web/20130601041733/http://americansabroad.org/issues/fatca/fatca-is-bad-for-america-why-it-should-be-repealed/

[xiii] https://www.irs.gov/Businesses/Corporations/FATCA-Governments

[xiv] http://web.archive.org/web/20130601041733/http://americansabroad.org/issues/fatca/fatca-is-bad-for-america-why-it-should-be-repealed/

[xv] Id.

[xvi] http://www.finance.senate.gov/imo/media/doc/Republicans%20Overseas,%20Inc.1.pdf, page 3

[xvii] Id.

[xviii] http://www.finance.senate.gov/imo/media/doc/Republicans%20Overseas,%20Inc.1.pdf

[xix] http://money.cnn.com/2016/02/08/news/americans-citizenship-renunciation/

[xx] http://intltax.typepad.com/intltax_blog/2016/02/new-expatriate-record-2015-nearly-4300-expatriations.html

[xxi] http://www.bbc.com/news/35383435

[xxii] https://www.treasury.gov/connect/blog/Pages/Myth-vs-FATCA.aspx

[xxiii] http://www.nytimes.com/2015/05/14/opinion/an-american-tax-nightmare.html?_r=0

[xxiv] http://www.keepcalmtalklaw.co.uk/accidental-americans-the-us-citizenship-conundrum/

[xxv] http://opiniojuris.org/2012/01/08/fatca-fallout-mass-renunciations/

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Author: Ius Gentium

Ius Gentium is a legal forum for the University of Baltimore School of Law's Center for International and Comparative Law Fellows to write on and discuss international and comparative legal issues.

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