FATCA: “The Worst Law Nobody Has Ever Heard Of,” Part I

FATCA: “The Worst Law Nobody Has Ever Heard Of,” Part I

When I first heard this story, I knew it was something I had to bring to International Man readers.

It’s no secret that “accidental Americans” are in a serious bind due to FATCA, which has been dubbed “the worst law nobody has ever heard of.”

But it’s not just accidental Americans—FATCA is causing widespread damage for Americans and financial institutions everywhere. It is prudent to understand FATCA and the trend it represents so that you can better protect yourself from the out-of-control politicians who conceived it, because it’s hardly the last thing they’re going to cook up as they sink deeper into insolvency.

The article below eloquently explains.

It was written by MuzzledNoMore, a pseudonym for a 60-year-old retired woman who has lived in Canada since the age of 5. She’s been a Canadian citizen for 41 years and is a dual citizen with the United States by virtue of her birth there. She has been married to a native-born Canadian for 33 years.

Until next time,

Nick Giambruno
Senior Editor

By MuzzledNoMore

I am a US-born Canadian citizen who is personally impacted by the US Foreign Account Tax Compliance Act (FATCA) law.

The Canadian perspective will dominate this article, but the reader should be aware that FATCA affects the entire world. The full brunt of this ill-considered addition to the US tax code falls heavily on people who live outside the United States.

For this reason, I ask the reader to take a few moments to stand in the shoes of a person who is associated with the United States, in my case through citizenship conferred by birth, and whose life has taken her to live elsewhere.

Canada, like the United States, is a land of immigrants. From diverse backgrounds we have come together here in North America and made our lives, having contributed to and benefited from our wonderful countries in a myriad of ways.

Like Americans, many Canadians have maintained family ties with the lands of their heritage, and many have made visits to their ancestral homelands. We’ve probably never questioned our right to return, providing we did not emigrate from countries with despotic or totalitarian governments. Within our countries, we take for granted our right and ability to move freely from one state or province to another.

Now, imagine for a moment that you were born in Pennsylvania and moved as a young child to Illinois. You grew up in Illinois, prospered there, raised a family, and retired there. Then one day over the dregs of your morning coffee, your eye is riveted on a small headline in the back pages of the newspaper that says “Native Pennsylvanians in Illinois, Beware of Little-Known Tax Law”.

To your horror, you read that everyone born in Pennsylvania—even if they haven’t lived there for decades—must file Pennsylvania tax returns and “out-of-state bank account reports” annually for life. The penalties for not doing so are draconian and could include jail time unless you enter a special “amnesty program” which would reduce the “failure-to-file” penalties from 50% to 27.5% of your assets and allow you to skip your stay as a “guest” of the state.

It sounds like a bad plot for a novel, yet today this ridiculous domestic scenario is actually playing out on the international stage for people who are unfortunate enough to hail from one particular nation. Sadly, that nation is the United States of America.

The following will help to explain what’s happening and why the issue so desperately needs the serious attention of everyone.

Citizenship-Based Taxation (CBT)

To understand the origins of our current situation, we need to explore the concept of “citizenship-based taxation” (CBT).

CBT has been on the US law books since the Civil War, initially to punish wealthy Americans who ran away to Europe in the 1860s to avoid military service. It was enshrined as law within the US Tax Code in 1913 and upheld by the US Supreme Court in a landmark decision of 1924 which has never been overturned. US tax law states that all persons deemed to be American citizens shall forever be liable for income taxation by the United States wherever their money is made and wherever they live.

CBT, which has (until recently) been largely unenforced, was either completely unknown or misunderstood by many emigrants and expats (and their advisors), to say nothing of their children, who have been utterly blindsided.

According to the 14thAmendment of the United States Constitution, anyone born in the United States is a de facto US citizen regardless of whatever other citizenship they may hold in the course of their lifetime. Therefore, with the existence of CBT, anyone with a United States birth certificate is forever taxable by the US, even if they have never lived there as an adult or earned any money there.

The only recourse is to officially renounce or relinquish that citizenship at a US consulate or embassy. Although renunciation is a right guaranteed in US law, the process is impossibly expensive for many and could even result in financial ruin.

(Editor’s Note: To address this topic, we’ve prepared for International Man readers a free report called The American Expatriation Guide—How to Divorce the US Government. This report will guide you through the process of renunciation in amazing detail. To get a copy, simply log in to the International Man site and then go to the Free Resources section to download the PDF.)

Of the world’s 193 nations, only two practice CBT: the African dictatorship of Eritrea and the United States of America. Eritrea has been condemned for the practice by both the United Nations and the Supreme Court of Canada.

Although it began with the intent of collecting revenue from people who left their country in order to avoid their military responsibilities at a time of the nation’s gravest need, CBT as practiced today is inherently unreasonable and entirely unjustifiable.

Its continuing presence in the tax code shows that the United States has adopted the policy that anyone who leaves the United States must be doing so for some nefarious purpose.

In reality, US citizens leave the country for a variety of very ordinary reasons. My father, for example, was offered a job in Canada that was so perfectly suited to his skills and temperament that he took a cut in pay so he could take it.

CBT’s punitive provisions require that people who receive no services from the United States and no payments from the US government, who have no property, investments, or any other monetary relationship to that country, and who cost it not a dime, must file tax returns that are so complex and full of so many potentialities for making penalty-generating mistakes that there can be no thought of saving money on accounting fees by doing them oneself. “Cross-border” tax accountants are notoriously expensive, and ordinary people making ordinary money are simply out of their league.

It must be remembered that CBT is levied in addition to the tax that the individual pays to the country she is actually living in and from which she receives her services.

While it is true that a certain amount of “foreign earned income” is exempt from US tax, other forms of “foreign” income, such as investments, are actually taxed by both countries.

In other cases, the US imposes tax on income that’s entirely tax exempt in the country of residence as a result of that exemption. For example, CBT demands that a Canadian of US origin declare and pay tax on a long list of registered accounts set up by the Canadian government as tax-deferred or tax-exempt savings vehicles for special purposes.

One of these is the Registered Disability Savings Plan (RDSP). The contribution to this type of plan made by the individual is matched up to three times by the Canadian government. By taxing these accounts, the United States receives revenue from the entire pool of Canadian taxpayers, most of whom have no connection to the United States.

In addition, Canadians of US origin risk paying capital gains tax to the IRS on the sale of a principal residence, which is fully tax-free in Canada.

It is beyond the scope of this article to provide a comprehensive listing of all the requirements that “overseas” Americans (who get nothing for their money) must meet on their tax forms because of CBT. It must suffice to say that they are far greater than the requirements for Americans living in the US who actually receive the services for which they pay.

However, I must not fail to mention the Foreign Bank Account Report (FBAR). Instituted in the early 1970s but unknown to most “overseas” Americans until very recently, this is easily the most offensive filing required of us.

On the FBAR, one must list all one’s “foreign” financial assets to which one is signatory if the aggregate is above $10,000. This includes accounts held jointly with non-Americans and accounts for organizations of which one might be a signing officer. Included in the reporting requirements are account numbers and bank addresses.

This exposes the accounts to an array of vulnerabilities never imagined before the age of computers.

A Canadian of US birth has all her money, often jointly with a Canadian spouse, in a Canadian bank down the street from where she lives. This account is not offshore. The bank is local to her, and she and her husband must have this account in order to survive in their own country.

The Foreign Account Tax Compliance Act (FATCA)

In 2008 the world endured the most disastrous economic event since the Great Depression.

It was largely caused by foolish banking practices (subprime mortgage lending resulting in the collapse of the real estate market, etc.) in the United States. At the same time, America had an influx of veterans returning from service in Iraq and Afghanistan, and many were ending up unemployed and homeless.

In response to these two issues, President Obama signed into law the “Hiring Incentives to Restore Employment (HIRE) Act,” which on its surface appeared to be a necessary and humanitarian piece of legislation.

However, within its pages and largely unnoticed, unread, or ill-considered by Congress, was a section relating to the matter of how the provisions of HIRE were going to be paid for. This section is called: The Foreign Account Tax Compliance Act, or FATCA.

FATCA was inspired by the US government’s “takedown” of the Swiss bank “UBS” and was supposed to enable the US government to recoup money it was losing to overseas tax havens.

However, in addition to catching big fish living in the US who have actually hidden money offshore, by virtue of CBT (citizenship-based taxation) it has trawled in all “Americans” of every ilk who are just normal, middle-class folk living their lives in countries outside the United States.

Called “the worst law that most Americans have never heard of” by Washington, DC lawyer James Jatras, FATCA is indeed one of the most arrogant and immoral pieces of legislation to ever emanate from the US capitol.

In a nutshell (the actual regulations comprise 577 pages), FATCA requires every financial institution (FI) on the planet to seek out any of its clientele who may be considered “US Persons” and to submit their names, account numbers, and account balances directly to the United States Internal Revenue Service (IRS).

It isn’t even required for these “US Persons” to be notified. But if the person is notified and will not give her permission for the transfer of information, her account will be deemed “recalcitrant” and will be closed.

“US Persons” may be any of the following:

  • US citizens, i.e., those with a US birthplace or naturalization, or those with an American citizen parent who lived for at least five years in the United States, two of them over the age of 14;
  • green card holders, including those with an expired green card that was never formally canceled;
  • those with a US mailing address (Canadians who spend their winters in Arizona or Florida need to be careful here);
  • those with standing instructions to have money forwarded to an account in the United States (see above); and
  • those with deposits from US sources.

The circumstances in the above list are known as US indicia.

Accounts of under $50,000 are supposed to be safe from scrutiny, but this is by no means guaranteed. According to the FAQ page on the website of auditing firm Deloitte, “We understand that a number of FFIs are not going to use the $50,000 de minimis exception due to difficulties in changing multiple systems to calculate the value of its depository accounts.”

The financial industry feels it has no choice but to comply because the US is wielding a threatening stick in the form of 30% withholding of all US source payments to non-compliant FIs.

Intergovernmental Agreements (IGAs)

The intrusive measures necessary for FIs to comply with this legislation would make it necessary to break the privacy laws of the countries in which the FIs are located.

The US Treasury Department recognized the difficult position that the FIs were in, so it came up with a plan which would allow banks to submit the necessary information to the governments of their respective countries, which would in turn submit the information to the IRS themselves.

The banks would still have to collect the information, but at least they would not be breaking local law by doing so. Governments which signed on to this Treasury Department offer, called an Intergovernmental Agreement (IGA), would need to be willing to adjust their countries’ laws accordingly.

In the IGAs, the US Treasury assures signatory nations that the United States understands the importance of providing them with reciprocal data on their own taxpayers and that it will do its best to do that.

However, such reciprocal data-sharing has not been authorized by Congress and is never likely to be. In fact, as I write, a lawsuit over the issue filed against the Treasury Department by the bankers’ associations of the states of Texas and Florida is before the courts.

As it stands at present, FATCA is a one-way street with information flowing to the US from all other nations, and nothing whatsoever flowing back the other way.

Moreover, even if at some point in the future full reciprocity is instituted, it will not be a fair exchange because except for Eritrea, all other nations on earth practice residence-based taxation (RBT). They have no need for information about the finances of their citizens who no longer live within their borders.

In addition, it has been suggested that the IGA approach instituted by the US Treasury Department isn’t even legal. IGAs were not mentioned in the FATCA legislation that passed through Congress. They were instituted after the fact by the Treasury Department when it realized that FATCA wasn’t going to fly without them.

As it stands, the agreement process has not been given the green light by Congress. Indeed, as types of tax treaties or amendments to tax treaties, the agreements require ratification by the US Senate. None has so far been subjected to scrutiny by that body.

Regardless, many governments have signed FATCA IGAs, agreeing to alter their own privacy and banking laws to accommodate the United States. They have signed out of fear of the institution of the 30% FATCA sanctions against their banks.

The Canadian government did so and now finds itself the defendant in a lawsuit being brought against it by two Canadian women of US birth. They represent the estimated one million Canadians and their families who now stand completely unprotected by their own government, whose moral integrity and courage have collapsed in the face of the sheer might of US economic power.

Editor’s Note: Be sure you get the free IM Communiqué, to keep with the latest on FATCA and other crucial international diversification topics.

See here for the second and final part of this article. 

This article originally appeared on The Isaac Brock Society blog here and here.

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