More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
Most Americans—even those reading business papers such as The Wall Street Journal—probably have never heard of a Treasury regulation called FATCA, but the obscure acronym has become a commonly read epithet in the foreign press.
While Americans are absorbed by an IRS scandal involving harassment of taxpayers politically opposed to the administration, foreigners are scandalized by a sweeping U.S. law requiring foreign financial institutions to collect data on U.S. citizens or clients with foreign bank accounts worth $50,000 or more, or send the IRS a 30% withholding tax on securities transactions originating in the U.S.
Foreign banks, overwhelmed by the difficulty of locating customers whom the U.S. regards as citizens and reluctant to divert their revenue to the IRS, won a brief respite Friday when the IRS announced a six-month extension of the compliance deadline to July 1, 2014. Implementation of the law has been extended many times since its 2010 approval.
The U.S. Treasury has imposed FATCA — the Foreign Account Tax Compliance Act — through intergovernmental agreements as part of its ongoing effort to tackle tax evasion by wealthy Americans. But its requirements have a quite broad reach.
In an op-ed in The Wall Street Journal online Wednesday, Colleen Graffy, a law professor at Pepperdine University in Malibu who also serves as director of the university’s London Law Campus, says the government’s reliance on FATCA as an enforcement tool is like using a sledgehammer to crack a nut:
“Imagine this: You were born in California, moved to New York for education or work, fell in love, married and had children. Even though you have faithfully paid taxes in New York and haven't lived in California for 25 years, suppose California law required that you also file your taxes there because you were born there. Though you may never have held a bank account in California, you must report all of your financial holdings to the state of California. Are you a signatory on your spouse's account? Then you must declare his bank accounts, too. Your children, now adults, have never been west of the Mississippi but they too must file their taxes in both California and New York and report any bank accounts they or their spouses may have because they are considered Californians by virtue of one parent's birthplace.”
Graffy, who must file taxes in both the U.S. and U.K., even more laments the burden on U.S. citizens (unlike her) who live full time in a foreign country. While it is increasingly common for U.S. citizens to retire abroad, some have even more attenuated ties to the U.S. Writes Graffey:
“Many, like the very British mayor of London, Boris Johnson, are ‘accidental Americans.’ He was born in New York, where his father worked for the U.N. And unless Mr. Johnson has actively renounced his citizenship, which requires an appointment at a U.S. Embassy, forms and fees, he is still an American citizen... Mr. Johnson, have you filed your taxes and reported all your U.K. bank accounts to the U.S. Department of Treasury yet?”
Financial institutions, particularly in smaller countries, have been caught between a rock and a hard place. An analysis from the Cayman Islands says that had the British Overseas Territory not signed an intergovernmental agreement with the U.S. Treasury, its financial institutions would have been left with three worse choices: signing their own agreements; paying a 30% withholding tax on U.S. dollar transactions; or no longer using the world’s reserve currency. It noted the latter two options were simply unfeasible for Cayman’s financial industry.
But bigger countries, like China, may balk at signing an intergovernmental agreement on FATCA. The New York Times quotes a tax law professor who says the latest FATCA delay may result from Chinese reluctance to agree to such a law, suggesting an erosion in U.S. credibility if it can’t implement the law after years of efforts to do so.
Meantime, the regulation is already having an impact on some of the 6 million Americans who live abroad as well as foreign financial institutions with U.S. customers. The Israeli financial newspaper Globes reports that the threat of FATCA has caused Israel bank account holders with U.S. ties to withdraw some $4 billion to $5 billion within the past two years.
Graffy, in her Journal op-ed, says “the core injustice in America's tax policy is that it is based on citizenship rather than residency,” a principle shared only by the Horn of Africa nation of Eritrea, whose policy the U.S. has condemned as the “extortion of a ‘diaspora tax.’”
Graffy is worried that the U.S. has won intergovernmental agreements by promising reciprocity, and cites House Financial Services Committee member Bill Posey, R-Fla., as saying Treasury lacks the authority to make such a promise:
“If Congressman Posey is wrong, U.S. banks will face enormous reporting requirements and costs," she writes. "If he is right, the U.S. government will face enormous international embarrassment after having coaxed nations into signing IGAs.”
Check out Top 10 Best Foreign Countries for Retirement: 2013 on ThinkAdvisor.