Tax evasion - Dropping the bomb

From The Economist

"America’s fierce campaign against tax cheats is doing more harm than good

At a recent conference for offshore wealth managers in Geneva, Basil Zirinis of Sullivan & Cromwell, a law firm, began his presentation with a discussion of events in Iraq, where Islamist fighters were advancing on Baghdad. Barack Obama, he claimed, was drawing a red line around the city and, if necessary, would “drop FATCA on them”. Worse, they would get no deadline extension. The nuclear option, he added, was to treat them as if they were Swiss.

The analogy was tasteless, but also telling. FATCA stands for Foreign Account Tax Compliance Act, an American law passed in 2010 to crack down on the use of offshore banks, particularly in Zurich and Geneva, to hide taxable assets. The law, part of which takes effect on July 1st, is the most important and controversial development in decades in the international fight against tax evasion. It is feared and loathed by moneymen because of its complexity, its global reach and the high cost of compliance. One senior banker denounces it as “breathtakingly extraterritorial”.

In essence, FATCA turns foreign banks and other financial institutions into enforcement arms of America’s Internal Revenue Service (IRS).”

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FATCA’s flaws

From The Economist

“America’s new law on tax compliance is heavy-handed, inequitable and hypocritical.

In the depths of recession in 2010, a jobs-obsessed Congress passed the Hiring Incentives to Restore Employment Act. Bolted on to it was the arcane-sounding Foreign Account Tax Compliance Act. There was scant debate about FATCA, as it is more commonly known, because it was touted as a way to bring in money by curbing offshore tax evasion. In tough times, such “revenue-generators” are no-brainers.

Going after tax dodgers is understandable. But FATCA, which will take effect on July 1st, is overkill.

America is the only large economy to tax its citizens on everything they earn anywhere in the world. FATCA’s purpose is to ensure that not a centime or rouble that a “US person” has stashed away goes undetected by the IRS. In a piece of extraterritoriality stunning even by Washington’s standards, the new law requires banks, funds and other financial institutions around the world to report assets held by American clients or face a ruinous 30% withholding tax. America is, in essence, using threats to outsource its financial policing. This is working: so far, more than 77,000 financial institutions have agreed to pass information to the IRS.”

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FATCA: Good Intentions, Poor Design

From ValueWalk

“An estimated 6.8 million Americans live and work overseas. Starting July 1, every one of them is going to be negatively affected in some way when the Foreign Account Tax Compliance Act, or FATCA, becomes fully operational.

It appears that the unreasonable and expensive mandates prescribed by this law will be felt hardest not by wealthy “fat cat” tax dodgers but hardworking Americans who have no intentions of cheating the tax system: students studying abroad, missionaries, charity workers, members of Doctors Without Borders, professionals doing a stint in their companies’ overseas branches and many more. FATCA makes no distinction between the honest and dishonest. Everyone, from the Rhodes Scholar to the al-Qaeda financier, is lumped into the same pool of suspects.”

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IRS Names Offshore Accounts With Higher Penalties - Unless You Beat August 4, 2014 Deadline

From Forbes

“The IRS’s Better Offshore Amnesty Program has sparked new interest in cleaning up offshore accounts. The timing is good, since over 100 Swiss banks are about to provide data to the IRS. More globally, FATCA disclosures are right around the corner. Many foreign banks are rooting out Americans with increasing vigilance.

Although many of the changes in the IRS deal are liberalizing, some changes to the Offshore Voluntary Disclosure Program are not. For some, the penalty goes from 27.5% To 50%. But for who? The IRS has released a list of the 10 firms currently under investigation whose clients could be subject to this new 50% penalty.”

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FATCA Causing Shock Waves Around the World

From Wall Street Sector Selector

“In 2010, Congress passed House Resolution (H.R.) 2847, the Hiring Incentives to Restore Employment Act, or HIRE Act.

This legislation included a number of tax breaks meant to encourage businesses to put people on the payroll.

This law also called for greater scrutiny of foreign accounts that U.S. citizens hold in an effort to improve tax compliance, thereby bringing in more tax revenue and helping to offset the tax breaks of the HIRE Act. This portion of the law is called the Foreign Account Tax Compliance Act, or FATCA.

So far, so good. The tax breaks went into effect quickly. Were more people hired because of them? Who knows?

The greater scrutiny of foreign accounts took more time to implement, and actually has yet to go into effect. It is slated to begin on July 1.

The reason for the long lead time was the complexity of the process…

The U.S. has essentially mandated that every foreign financial firm report back to the IRS on accounts that U.S. citizens hold. The scope of this can’t be overstated.

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