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How The World Should Respond To The US FATCA Driven Attack On The Tax Base Of Other Countries



How The World Should Respond To The US FATCA Driven Attack On The Tax Base Of Other Countries

This purpose of this post is to continue the general theme of focusing on the difference between what a law says and what the law means in application and effect. Yesterday’s post (The Pandora Papers, FATCA, CRS And How They Have Combined To Create Tax Haven USA) focused on the role that the 2010 US FACTCA law played in in facilitating the rise of Tax Haven USA. (To be clear, I am not saying that FATCA was the sole cause.) That said, the unwillingness of the USA to sign the CRS (“Common Reporting Standard”) has also played a role in the growth of the US as a tax haven.

Many believe that FATCA is just the US version of the CRS. Because of this belief the US has received little or no resistance to its refusal to join the CRS. This belief that FATCA and the CRS are fundamentally the same is wrong. They are very different.

The purpose of this post is two-fold.

First, to explain how/why FATCA is very different from the CRS.

Second, to explain how FATCA is used to export the “original sin” of Us citizenship-based taxation into other countries. To put it simply FATCA assists the United States in capturing the tax residents of other countries and subjecting them to direct US taxation.

Why FATCA is very different from the CRS

1. Agreement vs. Sanction: While the CRS is a multilateral agreement among countries, FATCA was the US imposition of a US law on other countries. FATCA is a sanction (in the form of a 30% penalty tax) on other countries who refuse to comply with a US demand for information.

2. Exchange of Information vs. Extraction Of Information: The CRS is the automatic EXCHANGE of information. FATCA is not about information exchange. FATCA is a US demand that other countries provide information to the United States without the US providing anything in return. I want to be VERY CLEAR on this point. There is nothing in the Internal Revenue Code (1471 – 1474) that requires the United States to provide information. There is nothing in most FATCA IGAs that requires the United States to provide any form of equivalent information. FATCA is a regime where information flows ONLY to the United States. Under the CRS there is a constant flow of information EXCHANGE.

3. Transfer Of Information About Accounts Where A Person DOES Live vs. Exchange Of Information About Accounts Where A Person Does NOT Live: The US employs “citizenship-based taxation“. US citizens live in many countries around the world. FATCA demands information about bank accounts owned by US citizens including US citizens who actually live outside the United States. Therefore, FATCA demands that information be transferred about financial accounts in a country where the person DOES live to a country where the person DOES NOT live. Obviously the CRS demands information be transferred about accounts where a person does NOT live to a country where he DOES live. To put it simply and accurately, FATCA is a US law that is used largely to demand information about the tax residents of other countries!

In summary FATCA is the forcible application of a US law on the world. The CRS is a voluntary/cooperative exercise engaged in by the world.

(Note: I am not suggesting that I approve of the CRS. I am saying only that is different from FATCA in many respects.)

The failure of the US to join the CRS (encouraged by FATCA) means that …

The failure of the US to join the CRS has provided incentives for individuals to move their capital from their country of tax residence to the United States. This is a clear transfer of capital from the country of tax residence to the United States. This results in the erosion of the tax and capital base of the non-US country.

How FATCA is used to export the “original sin” of Us “citizenship-based taxation” into other countries

What the US calls “citizenship-based taxation” is actually the United States claiming the right to:

Impose worldwide taxation on the non-US source income of tax residents of other countries who do NOT live in the United States.

For example, a resident of Australia (who is a US citizen because he was born in the United States) is taxed by the United States on his Australian employment income.

FATCA had the effect of (1) causing Australian banks to hunt for Australian residents who were US citizens (2) alert them of their US tax filing obligations (3) inevitably causing many of them to enter the US tax system and (4) Often renouncing their US citizenship.

To put it simply: Australian source income which Australia has the right to tax is now also subject to taxation by the United States (according to US tax rules). Neither the US FEIE (“Foreign Earned Income Exclusion”) nor the FTC (“Foreign Tax Credit”) rules will necessarily save that Australian resident from double taxation. Furthermore, US tax treaties contain a saving clause that allows the US to impose worldwide taxation on US citizens living in the treaty partner country.

The imposition of FATCA on other countries means that …

The United States has effectively expanded its tax base into other countries by claiming residents of other countries as US tax residents. This is a direct attack on and the erosion of the tax base of those other countries.

I have previously developed this argument more fully in the following 2019 post at AmericanExpatFinance.com.

Over the last few weeks and months, more media attention than usual has been paid to the 2010 Obama law known as the Foreign Account Tax Compliance Act (FATCA).

And invariably, we have been noticing, journalists from respected media organizations like The Guardian and Financial Times newspapers in London keep referring to it as a “tax evasion law,” no doubt because that was its original purpose.

That may well have been true in 2010, says Toronto-based expat lawyer and expat rights campaigner John Richardson…

But, he argues here, as anyone familiar with FATCA’s massive impact on individuals who don’t live in the U.S. now – and indeed haven’t for decades and possibly never did, and are tax residents of other countries – it has evolved into an all-but- impossible-to-avoid “extra-territorial money-sucking machine.”

It has also made it very difficult for such individuals to engage in normal financial and retirement planning – or even to get, and keep, a local bank account.

And while it may remain a disincentive for Homeland Americans to attempt to hide their wealth (the way some used to) in Swiss banks, FATCA (along with the Common Reporting Standard, as the OECD’s global version of FATCA is called), is now playing a role in enabling the U.S. to act as a tax haven to wealthy individuals in other countries who are seeking to keep their personal wealth from their own tax authorities.

The fact that the U.S. hasn’t signed up to the CRS, arguing that it has no need to – because FATCA gives it all the information it needs to know about its own citizens – helps to make this possible, Richardson points out.

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Continue reading here.

Conclusion

FATCA and US citizenship-based taxation have played a role in eroding the tax base of other countries.

In 2021 US Treasury Secretary Janet Yellen approached members of the G7 and G20 and asked that the world help protect the United States from tax competition. On July 1, 2021 the OECD issued a statement confirming an agreement toward Pillar 1 and Pillar 2 (effectively agreeing to accede to the US request and protect the US from tax competition).

In return the G7 and the G20 should ask the United States for the following two things:

1. Abolish FATCA and join the CRS.

2. Stop the US imposition of worldwide taxation on the tax residents of other countries by ending US citizenship-based taxation.

Have a question? Contact John Richardson, Citizenship Solutions.

READ PART ONE OF THIS SERIES

The Reality of U.S. Citizenship Abroad

My name is John Richardson. I am a Toronto based lawyer – member of the Bar of Ontario. This means that, any counselling session you have with me will be governed by the rules of “lawyer client” privilege. This means that:

“What’s said in my office, stays in my office.”

The U.S. imposes complex rules and life restrictions on its citizens wherever they live. These restrictions are becoming more and more difficult for those U.S. citizens who choose to live outside the United States.

FATCA is the mechanism to enforce those “complex rules and life restrictions” on Americans abroad. As a result, many U.S. citizens abroad are renouncing their U.S. citizenship. Although this is very sad. It is also the reality.

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