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”.
Transparency campaigners love it because it threatens to blow apart the old way of exchanging tax information between countries “on request”, which they view as unwieldy and soft on cheats. FATCA, they hope, will usher in “automatic” exchange of data, leaving the tax-shy with nowhere to hide.
In essence, FATCA turns foreign banks and other financial institutions into enforcement arms of America’s Internal Revenue Service (IRS). They must choose between turning over information on clients who are “US persons” or handing 30% of all payments they receive from America to Uncle Sam. The threat appears to be working. More than 77,000 financial firms have signed up. About 80 countries have struck agreements with America to allow their banks to hand over data.
Editor’s Note: FATCA has been dubbed “the worst law most Americans have never heard of.” See this article for more.