(U.S. Treasury Secretary Jack Lew Image:The Times)
Hat-tip to repealFATCA.
A leading member of the U.S. House of Representatives has struck what may turn out to be a mortal blow against “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 rejected the idea as claimed publicly by the Treasury’s public that the U.S. will impose on American domestic financial institutions the “equivalent” of FATCA’s reporting requirements on foreign financial institutions (FFIs).
Denying Treasury the authority to force FATCA-like regulations on U.S. firms removes 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 Perspectivesto 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 counter-productive 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.
For more on FATCA click here and here.