Fidelity Investments appears to be the latest unintended consequence of the United States’ stepped-up efforts to collect taxes from its citizens and residents regardless of where they live and earn their money. Last July, Fidelity decided to bar its U.S. clients living abroad from buying or trading its mutual funds.
Ironically, even though it has only been a few years since the U.S. bailed out the banking sector in the wake of the economic recession, evidently the U.S. government believes that it has recovered enough to take a pound of flesh.
In May of 2014, Credit Suisse pleaded guilty to conspiracy to aid U.S. taxpayers in filing false income tax returns. It agreed to pay $2.6 billion in fines.
In 2009, Swiss giant UBS agreed to pay a $780 million fine to quietly put to rest charges that it helped wealthy Americans evade taxes.
Critics say the legal and regulatory burden on U.S. citizens living abroad is so high these days that many financial institutions have thrown up their hands in disgust, deciding to cease doing business with U.S. expats altogether.
Unlike most nations which practice a territorial system of taxation, taxing its citizens only on the income that is earned within its borders, the U.S. is one of just a few countries left on earth that taxes its citizens on their worldwide income – regardless of where it is earned (i.e., from Tunisia to Uzbekistan to the North Pole) and even if they haven’t set foot in the U.S. in years.
In 2010, Congress passed the Foreign Account Tax Compliance Act, which was designed to root out tax evasion by Americans with undisclosed offshore accounts. But FATCA – which just recently went into effect on July 1, 2014 – imposes significant burdens on banks that do business in the U.S. These banks must do one of two things: (1) turn over information to the IRS on their U.S. clients, effectively becoming a loud-mouth “tattle teller” or a despicable “snitch” or (2) handing over to the IRS 30% of their payments received from U.S. sources. Faced with these two options, many banks have elected the former over the latter.
Why? Not just to avoid the high cost of compliance, but to avoid something even more dire: the risk of criminal prosecution. Indeed, few banks want to suffer the same fate as Credit Suisse or UBS and FATCA acts as a shield to immunize participating foreign financial institutions from prosecution.
Notwithstanding these benefits, many banks have still turned down the “invitation” to participate in FATCA, essentially thumbing their nose at the U.S. government. While this news might cause some taxpayers to rejoice, it is very easy to come away from this with the wrong impression. The expression, “looks can be deceiving” could not be any more relevant than in this situation. And now for the inconvenient truth: A foreign bank’s boycotting of the FATCA has as much to do with principle and standing up for the rights of its U.S. clients – by protecting the privacy of their accounts – as a politician’s hollow promise to lower taxes during a campaign is based on noble intentions. Instead, it’s all about the cost of doing business.
What do I mean? As high as the cost of compliance might be, it’s still cheaper than putting on boxing gloves and entering the proverbial “boxing ring” with the U.S. government. In other words, foreign banks have reasoned that if they become ensnared within the coils of the U.S. justice system, it will cost them less to go to court and litigate the matter than it would to examine the account information of potentially thousands upon thousands of U.S. clients in an attempt to weed out account-holder wrongdoing.
Therefore, do not be misled into believing that your foreign bank’s decision to withhold U.S. account-holder information has some altruistic motive, such as protecting your privacy rights. Nothing could be farther from the truth. As harsh as this might sound, your foreign bank doesn’t care about you. The moment that your bank becomes a target of investigation for allegedly assisting its U.S. clients to hide money in offshore accounts and realizes the full extent of its liability if the U.S. government prevails in court, is the moment that your bank will throw you under the bus. And who can blame them? That might be the only way for them to reduce their financial burden enough to eliminate what would otherwise result in their collapse.
Is this parade of horribles merely the unintended consequence of a pestilent new law that has become as loathed as the “Jim Crow laws” enacted between 1876 and 1965, or was this the intended purpose of the law right from the start?
“(Congress) just didn’t understand about citizenship taxation,” says Allison Christians, a professor at McGill University in Montreal. “It has all these pernicious effects that people don’t realize.”
One effect that has yet to be mentioned and that I have saved for the end is an increase in Americans renouncing their U.S. citizenship. Renouncements numbered around 500 per year a decade ago. However, it hit a record of nearly 3,000 last year. That’s a sliver of the roughly 7 million Americans living abroad. But critics say there is a growing sense that expats carry too much regulatory baggage.
Fidelity cited “today’s continually evolving global regulatory environment’ for the decision that it made in July to bar U.S. expatriates from its funds.
Georges Ugeux, founder of Galileo Global Advisors, dual citizen of the U.S. and Belgium and an outspoken FATCA critic, said the crackdown has created a “poisonous” atmosphere that has led lenders to become “totally risk averse.”
“The last thing the banks want is questions from regulators,” he said. “I tried to send to my nephew (in Belgium) $100 for his birthday and I couldn’t do it.”
While the Republican National Committee through its support behind a FATCA repeal last January, Congress is highly unlikely to take such action. For now, we must learn to live with the effects – unintended or intentional – of this pestilent new law.