The Truth Behind FATCA

The Foreign Account Tax Compliance Act (FATCA) is part of the effort by the US government to prevent money laundering, and reduce tax evasion.  It has implications for (1) Americans residing outside of the US, (2) for financial institutions outside of the US (FFIs) with American clients and for (3) non-American businesses with American clients.  It is already being phased in so its effects are already being experienced.

FATCA was originally intended to recover part of the estimated $100bn a year in unpaid taxes on US citizens' assets overseas.  Unlike other countries, Americans are taxed not only as residents of the US but also as citizens, wherever they live.  Unfortunately the law of unintended consequences means that ordinary people are being dragged into an expensive and time-consuming form-filling nightmare.  And for some, it's become too much with the press reporting increases in citizenship renunciations.

Some individual tax payers face annual compliance costs of between $2,000 and $5,000 thanks to FATCA, with some banks even turning away American money.  The US Treasury however, is standing firmly behind the new law.  Robert Stack, deputy assistant secretary for international tax affairs, rebuts certain "myths".  He explains that -
"FATCA provisions impose no new obligations on US citizens living abroad... US tax payers, including US citizens living abroad, are required to comply with US tax laws," he says.  "Individuals that have used offshore accounts to evade tax obligations may rightly fear that Fatca will identify their illicit activities. Yet a decision to renounce US citizenship would not relieve these individuals of prior US tax obligations."

Some critics argue that FATCA is about gathering information on the activities of its citizens.  I’m not too sure about this seeing that the Bank for International Settlements already supplies US authorities with transaction information.  I think it is exactly what it appears to be – an attempt by the US to encourage off shore money to come back on shore. 

Keep in mind that from 2007 to 2010, rich countries saw the ratio of their gross sovereign debt to GDP spike from 74% to 101% on average.  British public debt jumped from just 44% of GDP to 79%, while US debt leapt from 66% of GDP to 98%.  Furthermore, thanks to weak profits and higher unemployment, the biggest drag on public finances has come from lower tax receipts.

The real issue in my view is that the administration is dancing around the real target which are American companies as opposed to individuals.  But any politician who has dreams of being re-elected dare not point out this obvious fact.

Apple Inc.’s $147 billion cash hoard now counts for nearly 10% of all corporate cash held by non-financial companies, according to an analysis by Moody’s.  U.S. non-financial companies held $1.48 trillion in cash as of June 30 2013. Cash stockpiles have grown by about 2% from $1.45 trillion at the end of last year, and up 81% from $820 billion at the end of 2006.

An October 1st blog in the WSJ reminds us that corporate cash is still concentrated in just a few hands, with the top 50 holders accounting for 62% of the total.  The companies with the five largest cash holdings – Apple, Microsoft Corp., Google Inc. , Cisco Systems Inc. and Pfizer Inc. – held more than one quarter of the cash.  Despite dividends and buybacks Apple, has about 9.5% more cash than it did at the end of last year.  Apple has nearly double the cash hoard of its next closest rival, since Microsoft has the second-largest cash stockpile at $77 billion.

In terms of industries, the technology sector had the largest amounts of cash in its coffers, holding some $515 billion, followed by the health care and pharmaceuticals industries which held $146 billion in cash.  Both of those industries often move intellectual property and drug patents to low tax jurisdictions, which lets earnings from those assets pile up offshore to avoid paying a U.S. tax rate of 35%. Moody’s estimated overseas corporate cash represented 61% of the total, or about $900 billion, up from $840 billion at the end of last year.

Recently, a number of multi-national corporations, including Apple, have elevated their tax status further, now calling themselves “stateless income” corporations with no discernible tax home or “residence.”  A July 2012 report from the Tax Justice Network estimated that $21-$32 trillion of unreported financial wealth is held offshore by high-net-worth individuals in tax havens worldwide.  In contrast, the International Monetary Fund (IMF) estimates the sum offshore is approximately $5 trillion. Regardless, this only represents financial assets and excludes real estate, yachts and other non-financial assets owned in offshore structures.

So US politicians know that large American corporations are the real target but they dare not target them directly.  As such, US individuals are forced to bear an onerous tax compliance burden.  Read more on DerrenJoseph.blogspot.com  

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