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FATCA Historical (R)Evolution: Legislative History Reveals That FATCA Had Little To Do With Collecting Tax Revenue From U.S. Persons Evading Tax Through Offshore Bank Accounts (Part I)



Prior to the enactment of FATCA, Congress and the Executive were in possession of concrete-evidence revealing FATCA would fail to collect any meaningful amount of tax-revenue from U.S. persons evading tax through offshore financial center holdings.  Congress should have halted enactment of HIRE – if in fact, FATCA’s purpose was to collect tax-revenue from offshore tax evasion by U.S. persons.

The United States Congress used estimates from the Joint Committee on Taxation (JCT) as the foundation for supporting the Foreign Account Tax Compliance Act (FATCA), contained in the Hiring Incentives to Restore Employment Act (HIRE).

HIRE was a tax expenditure designed to encourage U.S. small business to hire new employees.  HIRE included two tax expenditures of note: a payroll tax exemption to employers and a one-thousand dollar tax credit for employers hiring employees between February of 2010 and January of 2011.[1]  FATCA was included in HIRE because the tax revenue collected from FATCA was supposed to offset the tax expenditures authorized by HIRE.[2]  The tax revenue FATCA was said to be targeting was from U.S. persons with foreign bank accounts who were evading tax.

In July of 2008, and around the time of the UBS scandal and the Global Financial Crisis the U.S. Senate Permanent Subcommittee on Investigations held a hearing and issued a report entitled “Tax Haven Banks and U.S. Tax Compliance”.[3]  The underlying justification for FATCA as a substantial revenue raiser rested on a single statement found in a footnote in the 2008 hearing report:  “Each year, the United States loses an estimated $100B in tax revenue due to offshore tax abuses.”[4]  In a 2009 follow-up report, the Ways and Means’ Subcommittee on Select Revenue Measures held a hearing entitled:  Banking Secrecy Practices and Wealthy Americans.  During this hearing, the Senate increased the U.S. tax revenue loss-estimate by 50 percent stating: “Contributing to the annual tax gap are offshore tax schemes responsible for lost tax revenues totaling an estimated $150B each year.”[5]  The estimates entered into the record during these hearings measured the offshore tax gap, or the amount of tax revenue[6] that would be collected if offshore tax evasion by U.S. persons holding foreign bank accounts was ended.  One month, before HIRE was signed into law by President Obama, new evidence revealed the offshore tax gap was nowhere near as large as previously thought.

On February 23, 2010, the JCT released a report estimating that FATCA would instead, only collect $8.7B over ten-years or $870M per year; a huge difference from last-year’s estimate of $150B per year.[7]  Assuming this latest estimate was accurate, the 2008 and 2009 estimates were drastically overinflated – to the tune of over $149B annually!  At that point, a reasonable person puts on the breaks and asks questions.  At the very least Congress should have engaged in some due diligence to determine why there was such a huge discrepancy.  After all, there was plenty of time remaining on the legislative clock,[8] and the report invalidated the policy justification for FATCA.  Instead, Congress and President Obama steamrolled FATCA into law in less-than a month after the JCT estimate – almost like, they wanted to hurry to get it in, before someone caught wind that the FATCA had nothing to do with closing the fictitious $150B offshore tax gap, because there was really no tax revenue outstanding.

[1] The Hiring Incentives to Restore Employment (HIRE) Act of 2010 (Pub.L. 111–147, 124 Stat. 71, enacted March 18, 2010, H.R. 2847).

[2] HIRE was originally a $150B dollar incentive package, but the package was reduced to $15B before enactment.  It would be interesting to take a look at the timing of the reduction in the HIRE economic incentive package (from $150B to $15B), and compare it with the JCT’s February 23rd estimate, to determine if the reduction in the spending package was a result of learning FATCA would not collect any meaningful amount of tax revenue from offshore accounts, because there was none to collect.

[3] Tax Haven Banks and U.S. Taxpayer Compliance, Senate Permanent Subcomm. on Investigations, Comm. on Homeland Security and Governmental Affairs, 110th Cong. (2008).

[4] Ibid.

[5] Banking Secrecy Practices and Wealthy Americans, House Ways and Means Subcommittee on Select Revenue Measures, 111th Cong. (2009).  Emphasis added.

[6] In the U.S., we have a 1099 system, where banks are forced to report interest and dividends.  Unless there is some income from the account, it follows that there can be no income tax due from that account.  The way to determine whether there is income from an account is to require the accountholder’s financial institution to report on the income from the account.

[7] The 2010 JCT report estimate of $8.7B in offshore tax evasion tax-revenue to be collected over ten-years or $870M per year (median average). It should be noted that the report breaks down the estimate by year. Therefore the median average is not the best number to use in every case.  Individual calculations based on empirical data from a particular year proving the current validity of the report will incorporate the amounts listed on the report for each relevant year in question to preserve the integrity of the proposition for which the calculation was intended to support.

[8] The House Ways & Means Committee held the Hearing on Banking Secrecy Practices and Wealthy American Taxpayers on March 31st, 2009.  The House passed the original version of HIRE on June 18th, 2009.  The JCTs estimate was released on February 23rd, 2010.  HIRE passed the Senate the following day on February 24th, 2010 (with amendment).  The House followed by adding an amendment on March 4th, 2010 (with amendment) which was approved by the Senate on March 17th, 2010.  March 18th, 2010, President Obama signed HIRE into law, and thereby FATCA into law as well.  Therefore, there was a full month from the time the JCT report was issued, and the day President Obama signed HIRE (containing FATCA) into law. (Part I….To Be Continued)

 © 2018 GARY K. HEALD, JR. ALL RIGHTS RESERVED

Your comments on this post below are encouraged.

 

 

 

Gary Heald

Gary Heald

A tax professional with experience in State and Local Tax as well as International Tax. I’ve represented the State of Illinois, Department of Revenue as an Assistant Attorney General prosecuting corporate and individual income tax issues and supported an AM200 SALT litigation group by performing research, writing memos, meeting with clients, and producing pleadings. Most recently, I considered shifting into International Tax. For the last six months, I have been researching and writing on the Foreign Account Tax Compliance Act (FACTA), Offshore Financial Center: Use & Abuse, The Taxation of Intellectual Property and Technology and U.S. Transfer Pricing.

11 thoughts on “FATCA Historical (R)Evolution: Legislative History Reveals That FATCA Had Little To Do With Collecting Tax Revenue From U.S. Persons Evading Tax Through Offshore Bank Accounts (Part I)

  1. lsnyder1000 says:

    Forgive me if I’m asking a too-obvious question, but if, as this article explains, the purpose of FATCA was in fact NOT to collect tax revenue from offshore tax evasion by U.S. persons then what was FATCA’s purpose? Only to provide a knowingly fictitious compensation for the expenditures of HIRE? Only that?

  2. Robert says:

    Gary, I agree that FATCA does not lead to any significant tax collections. Although it is possible that Congress acted under the impression it would. If, as you state, tax collection was not the underlying rationale, what was the purpose of FATCA, and can you share proof thereof?

    • Gary K. Heald, Jr. says:

      My initial response to Robert’s July 10th, 2018 9:06AM comment.

      That’s an important question. I am going to restate it, to be sure I understand it correctly. You asked me whether it’s possible that Congress could have been under the impression FATCA would lead to significant tax collections. The answer is yes, but then that would make them either ignorant or indifferent to the JCT report.

      As I mention, Congress claimed that the FISC was annually short $150B in tax revenue due to offshore tax evasion by U.S. persons. That was the foundation that the House and Senate used to pass their preliminary versions of HIRE. The 2008 and 2009 hearing estimates were based on two case studies: LGT and UBS. Those two case studies were based on anecdotal evidence including extremely large foreign banks, which do not properly represent the offshore tax gap. This was made clear by the JCT’s report issued prior to enactment, where the number was effectively reduced from $150B lost annually, to $870M lost annually. That’s less than one-half of one-percent of what Congress originally estimated FATCA was going to generate in tax revenue.

      One possibility is that Congress believed that $870M annual tax revenue was, in fact, a significant amount of tax collections. The JCTs final FATCA tax revenue estimate was for $8.7B over ten-years. So, it is possible that Congress reasonably believed FATCA would bring in $870M. But then, the issue is that FATCA was supposed to pay for HIRE. HIRE was a one-year $15B tax expenditure package to create jobs. Given the new estimate, roughly half of HIRE would be paid for. It would take 10-years to pay for one-half of the one-year expenditure. This also does not take into account the additional costs borne by the IRS to implement FATCA, or the additional implementation money they keep asking for (in 2017 alone, the IRS requested over a half-a-billion in additional implementation funding).

      If Congress read the report and ran the numbers, FATCA wasn’t going to collect any meaningful amount of tax revenue. They asked their committee (the JCT), and the JCT told them as much. The estimate was a 10-year estimate. HIRE was law in 2010, and the JCT estimate was from 2010. It’s now half-way through 2018, and as you point out, there’s still no money (and there’s time on the estimate clock remaining).

      Congress serves as America’s fact-finders charged with discerning whether evidence is relevant, probative of some material fact, reasonable, unreasonable or if further clarification should be sought on a matter. The introduction of the new JCT estimate should have shocked their conscience by calling into question the reasonableness of the foundation upon which FATCA was premised.

    • Gary K. Heald, Jr. says:

      I wanted to provide you some hard-evidence that Congress knew FATCA would not lead to any meaningful amount of tax revenue collected.

      https://www.jct.gov/publications.html?func=startdown&id=3649

      In the report JCTX-5-10 (February 23rd, 2010), the JCT estimated that between 2010 and 2020 HIRE would result in a $12.958B tax expenditure, while FATCA would realize only $8.714B in tax revenue.
      Assuming my calculations are correct, at the end of the ten-year period (which will come in a year-and-a-half from now) FATCA should be unable to fund HIRE resulting in a $4.244B deficit.

  3. FATCA merely plugged one small hole in a very leaky dam… IMHO

  4. Keith REDMOND says:

    Excellent article! Thank you! I deal with the global damage + discrimination of Americans overseas + Accidental Americans due to non-reciprocal FATCA every week! So many populations are adversely affected!

    FATCA must be repealed and the US must cease imposing its tax code on tax residents of other countries!

    Keith REDMOND
    American Overseas Global Advocate

  5. brick33 says:

    Fatca is destroying a lot of small businesses owned by Overseas Americans.
    But If one likes lawyers, paper works, paying taxes, red tapes and regulations, this is God sent

  6. Greg says:

    It is not just the Hire Act that used “overseas” people to pay for Bills on paper (only). This tactic goes back years. https://purpleexpat.org/wp/war-on-the-expat/

  7. Greg says:

    Looking forward to part 2.

  8. Great article. Completely accurate.

    I hope part II will make the point that the $8.7B was to come from Financial Institution’s withholding and that the IGAs negated this. The tax revenue from FATCA is closer to $0 than is generally believed.

    The OVDP has raised $11.1B according to this source:
    https://www.irs.gov/newsroom/irs-to-end-offshore-voluntary-disclosure-program-taxpayers-with-undisclosed-foreign-assets-urged-to-come-forward-now

    I agree that revenue raised via the OVDP should not be confused with the $8.7B that was to come from Financial Institution’s FATCA withholding.

  9. Nononymous says:

    Thank goodness that in many countries with Model 1 IGAs, the banks only ask you to self-certify US personhood and do not validate your answer. That makes very it easy for dual citizens to lie and avoid the whole wretched US tax and FATCA mess.

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