Policy Documents

Research & Commentary: Foreign Account Tax Compliance Act

June 26, 2013

The Foreign Account Tax Compliance Act (FATCA) was passed as an amendment to the Hiring Incentives to Restore Employment (HIRE) Act in an effort to combat overseas tax evasion and help identify hidden assets in undisclosed foreign bank accounts. FATCA requires foreign financial institutions (FFI) to report to the Internal Revenue Service information about the accounts and assets of United States citizens.

Since its passage, FATCA has attracted numerous criticisms both in the United States and abroad. In a response to the potential economic losses and financial privacy concerns, Sen. Rand Paul introduced a bill to repeal FATCA. In a letter to his colleagues, Paul argued any benefits of FATCA have been “vastly outweighed by the deleterious effects of FATCA on economic growth and the financial privacy of Americans.”

FATCA can discourage foreign investment in the United States by forcing many FFIs to violate their countries’ financial laws and the privacy rights of their U.S. clients. The Joint Committee on Taxation estimated FATCA would raise approximately $800 million per year, which is only a small portion of the $100 billion most experts estimate is lost to overseas evasion annually because of the law.

Launched at the beginning of 2013, FATCA creates several new reporting requirements for FFIs and imposes severe penalties for noncompliance. FACTA requires each FFI to provide a detailed report to the IRS identifying the names and addresses of their U.S. clients along with their largest account balances and the total debits and credits from each U.S. account. Financial institutions that do not comply with FATCA are subject to a 30 percent withholding tax on all their transactions, including interest and dividend income and proceeds from the sale of U.S. stocks or bonds. 

Foreign companies have voiced serious concerns about the future ability to move financial resources and capital in and out of the United States. The early results have found several FFIs ending their business with U.S. citizens and focusing on more friendly markets, with others hinting similar action in the future. Americans living abroad are now beginning to find it increasingly difficult to access banking, pension, and financial services, and some have moved to renounce their U.S. citizenship. 

Although supporters of FATCA argue the new regulations are necessary to capture hidden tax revenue overseas, the new requirements exemplify overreach that could discourage foreign investment while creating an unnecessary burden for Americans living abroad. Congress should seriously consider repealing FATCA to ensure U.S. economic competitiveness worldwide. 

The followings articles examine FATCA in greater depth.

FATCA Overreach Sabotages American Global Competitiveness
http://news.heartland.org/newspaper-article/2013/02/19/fatca-overreach-sabotages-american-global-competitiveness
Writing in the Heartlander digital magazine, Andrew Quinlan, president of the Center for Freedom & Prosperity, argues FATCA is likely to do much harm to the global competitiveness of the U.S. economy: “FATCA will divert untold billions of dollars per year away from productive activities in order to pay lawyers to comply with a law optimistically expected to raise less than $800 million in tax revenues per year. The U.S. government is also looking to saddle our own domestic banks with the same costly requirements, making a crazy and destructive law even worse.”

Foreign Account Compliance Act ‘Losing Momentum,’ Financial Expert Says
http://news.heartland.org/newspaper-article/2013/01/21/foreign-account-compliance-act-losing-momentum-financial-expert-says
In this Heartlander article, George Prior reports FATCA is losing momentum around the world and tells how several countries are reacting to the new tax law. Prior also describes efforts by several groups to repeal FATCA.

Research & Commentary: Worldwide vs. Territorial Taxation
http://heartland.org/policy-documents/research-commentary-worldwide-vs-territorial-taxation
Heartland Institute Senior Policy Analyst Matthew Glans examines the U.S. worldwide tax system and explains how it puts the United States at a competitive disadvantage versus other nations with lower, less-complicated corporate tax rates. Glans argues switching to a territorial system would make the United States more competitive by bringing foreign earnings back home to invest while encouraging more companies to set up headquarters here. 

Coalition for Tax Competition Urges Support for FATCA Repeal Bill
http://freedomandprosperity.org/2013/press-releases/coalition-for-tax-competition-urges-support-for-fatca-repeal-bill/
This letter from several free-market, taxpayer protection, and grassroots organizations urges Congress to support legislation by Sen. Rand Paul to repeal most of the Foreign Account Tax Compliance Act (FATCA). The bill, S. 887, would repeal FATCA’s most costly and privacy-violating provisions.

Why FATCA Is Bad for America and Why it Should Be Repealed
http://www.americansabroad.org/issues/fatca/fatca-is-bad-for-america-why-it-should-be-repealed/
This fact sheet from American Citizens Abroad (ACA) outlines the multiple dangers of FATCA and argues for the repeal of the FATCA legislation before it becomes active and wreaks irreparable harm on the economic interests of the United States. “The Foreign Account Tax Compliance Act (FATCA) will have a devastating impact on the U.S. economy, U.S. financial markets, American businesses operating abroad and American citizens who work and reside overseas.”

Hong Kong Rejects U.S. Compliance Law, Ireland Embraces It
http://news.heartland.org/newspaper-article/2012/12/13/hong-kong-rejects-us-compliance-law-ireland-embraces-it
Writing in the Heartlander, Heartland Institute Research Fellow Steve Stanek reports on how other countries are responding to the new FATCA requirements: “The chief executive of Hong Kong’s Securities and Futures Commission is warning against allowing U.S. and European financial regulation in Asia, according to the Global Legal Post, an international legal media publication.” 

Around Much of the World, U.S. Is Considered a Tax Haven
http://news.heartland.org/newspaper-article/2013/06/03/around-much-world-us-considered-tax-haven
Steve Stanek reports on the efforts of U.S. legislators and the IRS to combat overseas tax evasion, noting the irony that many countries consider the United States to be a significant tax haven itself.

Facts about the Foreign Account Tax Compliance Act
http://freedomandprosperity.org/issues/foreign-account-tax-compliance-act/facts-about-fatca/
The Center for Freedom and Prosperity examines FATCA in this fact sheet and makes several recommendations for reform, including repeal: “Imposing draconian reporting requirements on the rest of the world does not serve American interests. FATCA will make it more difficult for Americans to raise foreign capital, prevent law-abiding Americans from investing in the institutions of their choice, and potentially spark reciprocal action by other governments against US banks.” 

FATCA Law Is a Nightmare for Cross-Border Economic Activity
http://www.cato.org/blog/fatca-law-nightmare-cross-border-economic-activity
Daniel Mitchell of the Cato Institute discusses the potentially enormous damage the tax treatment of cross-border economic activity under FATCA can do to the nation’s prosperity. 

Senator Rand Paul Introduces Bill to Repeal FATCA!
http://www.repealfatca.com/index.asp?idmenu=4&title=News&idsubmenu=124
RepealFatca.org, an organization opposing FATCA, highlights Sen. Rand Paul’s new bill to repeal elements of FATCA. The article includes a letter from the senator to his Senate colleagues, in which Paul argues against FATCA and outlines its destructive effects and the unsupportable claims that FATCA is a legitimate tool for controlling tax evasion.

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartlander’s Finance and Insurance News Web site at http://news.heartland.org/insurance-and-finance, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.