Concerns over FATCA

[Alan]

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Originally Posted by george76 Do you by any chance know why mutual funds and not stocks/ETF's are coming under these restrictions? My concern is that eventually expats won't be able to trade stocks either.

From a UK perspective I believe it is not a matter of mutual funds versus ETF's but funds that voluntary report into HMRC (UK IRS) so that HMRC can be assured that all gains are distributed in the year they arise, and that reported distributions are correctly categorized into the HMRC definitions of capital gains, stock dividends and bond dividends so they be taxed appropriately. (e.g. the first ~$17k of capital gains are free of tax then taxed at 15%) Individual stocks of course are well understood by HMRC.

Vanguard has all its ETF's listed on the HMRC website as "Reporting Funds" but none or few of their mutual funds. (they don't have Wellesley or Wellington on that list)

[MichaelB]

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Originally Posted by nun With sensible planning it isn't that difficult to negotiate the US and UK tax systems. Owning a UK stocks and shares ISA is one of the things to avoid if you are a US resident or citizen. US companies refusing to service accounts with foreign addresses is a big potential problem......so far Vanguard is ok doing that.....if that changes I will have issues.

Agree. It is a burden and limits investing options for US taxpayers but it's not the end of the world. I see this less as a revenue grab and more as an enforcement issue. Other OECD countries are moving in a similar direction (albeit baby steps) and that could lead to some efforts to reconcile.

The actions by financial services companies now to curtail or restrict services to US citizens abroad may also be part of a quiet lobbying effort (my guess). When this type of thing gets into the popular media it does get the attention of policymakers.

[kcowan]

Here are some articles on various aspects of being a US Person abroad:

Banks Dropping International Money Transfer in Wake of Big Fines | PYMNTS.com

Interesting article on FATCA in The Economist

FATCA concerns

FBAR/Taxes

bank accounts in mexico and new RFC

[kramer]

It looks like it is getting even more difficult for US citizens in foreign countries to open a US brokerage account:

Bogleheads • View topic - No New Schwab Accounts for US Expats in Japan

There may still be workarounds for these things but the noose is getting tighter. I have certainly mentally added this whole issue to my "expat risk list" whereas a few years ago it hardly occurred to me.

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On the heels of Fidelity's announcement it was starting to look like Schwab might be the only choice for US expatriates. Recently I got a PM from another member who mentioned that, in a discussion with Schwab, they said they were no longer opening new accounts for US citizens in Japan. On the chance that there was some misunderstanding (allowing some types of accounts but not others, etc), I asked Schwab for clarification and was told: Quote: Based on your friend's country (Japan) of residence, we will not be able to open a new account . Schwab is committed to ensuring it is in compliance with all laws and regulations, including those that could be applied by foreign governments. As a result, certain products and services may not be available in every jurisdiction or country such as yours. However, Schwab is still committed to maintain the relationship with existing clients who reside in Japan. So it looks like those of us who already have accounts are OK for the time being, but the noose of absurd regulation is getting tighter and tighter. My guess, from the emphasis in the note on regulations imposed by foreign governments, is that the treaty with the US allows Japan to demand the same kind of transparency from US financial institutions as the IRS demands from Japanese financial institutions. Last year Japan began their own version of Form 8938, either because they really want the information or in retaliation for being forced to provide such data to the IRS, so this may be the root of it. As usual it's the innocent, law-abiding people who are harmed, while the criminals find other ways, and the government people don't care. In any case, for now, it seems like the only choices for expatriates seeking to use a US broker are (a) set up an account before you leave home and/or (b) deceive the broker about your home address. Another option, of course, is to use a host-country broker that gives access to US-based investments, though this can mean higher costs, restricted offerings, difficulties in tax reporting (no 1099, depending on the broker), and the joy of coping with differences in language, laws, and some rather eccentric notions of good web-site design. Those who don't want to take this lying down should probably write to brokers and to Congress. Perhaps if they get enough queries they'll change their minds.

[Neill]

If you look at the rising number of US expats renouncing you have to ask yourself why? Many of them got fined via OVDP etc for not filling FinCen 114. Many got nasty surprised about their accounts (PFIC, not protected by the treaty etc). Many got their accounts closed etc. They face really big costs of several thousand dollars to get their taxes done for the US alone.
Given the current climate I think you should fully expect to have to renounce your US citizenship if you live in another country for any length of time.
Yes you can plan etc but then they change the rules and you get hit with some crazy penalty. It's not rational what the USG is doing.

[Meadbh]

I guess the USG is looking at all potential sources of revenue to help pay down the national debt.

It does seem very draconian.

[Neill]

We had a bank account that for a long time contained only a couple of pounds. My mother paid in a wedding gift cheque to that account that we didn't know about.
It earned at most $2 of interest in one year. With no FBAR files the IRS demanded 27.5% of the balance of this account in OVDP. We explained that after we took away the foreign tax credit the tax rounded to zero. They didn't care. Unreported income with no FBAR meant we lost part of the balance.
Now the IRS has now admitted the OVDP was too harsh. Notice that there is no way to get any money back if you were treated badly by this process. The new rules contains some traps also. The 5% penalty applies to all accounts even if no income was unreported (think pensions).
The biggest mistake in my life was to think the IRS would be reasonable. They pulled loads of tricks on us relating to foreign accounts. We were advised to enter OVDP by an attorney and many professions are saying that this was a mistake for huge numbers of people they put into this process.
They are littering the tax code with special penalties, special statue of limitations and special informational filling with steep penalties for anything foreign.

[M Paquette]

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Originally Posted by Meadbh I guess the USG is looking at all potential sources of revenue to help pay down the national debt.

And if we have to spend a few thousand million a year in enforcement, collections, and lost economic opportunity to collect 792 million a year in taxes, well, so be it. It's worth spending thousands to collect hundreds, right?

They'll make it up in volume...

Foreign Account Tax Compliance Act - Wikipedia, the free encyclopedia
FATCA Carries Fat Price Tag - Forbes

Oh, and FATCA misses the bulk of international tax evasion.
http://fas.org/sgp/crs/misc/R40623.pdf

[Meadbh]

Have they thought this through? The net effect of this will be more isolation of the US. Foreigners will not be so keen to establish a US presence, marry USians, go into business with them, invest, etc, etc. It will also increase banking costs internationally. USians will find it more difficult to live or even study abroad as they will not be able to easily establish a financial presence.

[tmm99]

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Originally Posted by kramer There has been a thread on this on the Bogleheads board and it is worth reading through as there are a lot of details in there by people in this situation: Bogleheads • View topic - US citizens abroad cannot invest through [Fidelity] .

I get it that you cannot buy more, but you cannot even rebalance what you already have in IRA's either?? That seems way too much restriction.

[timeasterday]

So it seems like dishonesty is the least hassle to get around this. Keep a US address someplace (mail forwarding agency, relative, etc.), a US phone number via VOIP, and a US bank account. Never tell your IRA company where you really live.

[meierlde]

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Originally Posted by timeasterday So it seems like dishonesty is the least hassle to get around this. Keep a US address someplace (mail forwarding agency, relative, etc.), a US phone number via VOIP, and a US bank account. Never tell your IRA company where you really live.

The only concern then is to be sure that your US residence is in a state with no Income tax. You would need to move there for a while get a drivers license and renew it, register to vote etc. As far as the US government is concerned that is probably ok because the 1099s will get mailed.
But of course you will have to give up the foreign earned income exclusion to do this.

[theOAP]

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Originally Posted by M Paquette I'd love to see a breakdown of expenses in FATCA processing and enforcement compared to revenues recovered. I suspect it might not be the most effective revenue generation mechanism the US government has.

No one answered your question.

There has never been a cost/benefit analysis for FATCA. The closest anyone came was from a joint congressional committee. Their estimate: FATCA would generate $8.7 billion of revenue over 10 years. That's $870 million a year.

The cost to the US is virtually nil, only the IRS time and expenses to collate the information. The US, at present, will not reciprocate. It's unlikely they ever will.

The cost to other countries can be measured in $'s and goodwill. From an article in The Telegraph, a higher end UK daily paper:


British public footing a £1bn bill - to aid the US taxman

Playing poodle? British businesses have spent years and hundreds of millions of pounds preparing for these new US tax rules.

The Investment Management Association, for example, the trade body for Britain’s fund managers, lists 1,000 documents on its website related to these rules. Many lawyers and consultants advising British finance firms have had a field day, working on nothing else for years.

....last year, after the Government had negotiated a less cumbersome version of the requirements, HMRC said it expected the one-off costs to fall to £900m-£1.6bn ($1.53bn-$2.72bn), followed by an annual £50m-£90m ($85m-$153m). HMRC’s own “one-off IT and project costs” would be £5m ($8.5m), with “annual costs of £1.4m ($2.38m) incurred from 2016”. (Bold mine, at current exchange rates)

No one wants tax evasion anywhere. But surely we shouldn’t be footing a £1bn-plus bill for initiatives of benefit to another country?

British public footing a £1bn bill - to aid the US taxman - Telegraph


This for the UK only, and the UK is but one of over 200 tax jurisdictions around the world.

[MichaelB]

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Originally Posted by theOAP No one answered your question. There has never been a cost/benefit analysis for FATCA. The closest anyone came was from a joint congressional committee. Their estimate: FATCA would generate $8.7 billion of revenue over 10 years. That's $870 million a year. The cost to the US is virtually nil, only the IRS time and expenses to collate the information. The US, at present, will not reciprocate. It's unlikely they ever will. The cost to other countries can be measured in $'s and goodwill. From an article in The Telegraph, a higher end UK daily paper:

FATCA isn't a revenue measure, it's a compliance effort. There are no new tax obligations. Alongside it's rollout has been a well publicized crackdown on banks. Not so public has been a tax amnesty program for non-criminal evasion, which I understand is has already collected close to the number you suggested and is probably soon to phase out.

I agree the domestic cost is much less than that thrust upon US trading and banking partners. For most people and businesses, engaged in honest effort and intending to comply, the learning curve is steep and substantial initial effort is needed. Once up and running, however, it shouldn't be that bad. Countries with weak fiduciary structures or limited legal systems, however, may see it differently.

I think the biggest negative impact will be on migrant's remittances. This would be unfortunate, these folks are poor and cannot afford additional cost, and it could drift into migrant labor markets.

[theOAP]

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Originally Posted by MichaelB FATCA isn't a revenue measure, it's a compliance effort.

Whoa.....! I think we'll have to respectfully agree to disagree on this point. Compelling compliance for someone to have a driving license in order to drive on the public roads is not a revenue raiser; it's required compliance for the publics' safety. The IRS's sole purpose is to collect tax revenues to fund the US Government and it's various programmes. If we have 100% compliance with all IRS regulations by all those responsible to comply, but the net result in revenue is $0, would the IRS be congratulated on it's achievement of 100% compliance and its collection of $0 revenue be acceptable?

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Originally Posted by MichaelB There are no new tax obligations

Agreed, the tax obligations for a US Person are not new, but the reporting obligations as a result of FATCA (8938 for example) are new, and the obligations, both financial and reporting, placed on foreign financial institutions and foreign governments (with IGAs) is new. What is also new are the penalties for not completing 8938 (if required) and the 30% sanctions placed on FFIs if they do not subject themselves to FATCA.

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Originally Posted by MichaelB Alongside it's rollout has been a well publicized crackdown on banks.

And rightfully so, if their intention was to commit tax fraud. The UBS and CreditSwiss crackdown has been enforced by the US Department of Justice, not the IRS. But calling PostFinance guilty for having accounts held by Swiss Citizens and residents who also may have had US Person status (unknown to the bank, or possibly the person themselves) is not a crackdown. It's a gotcha by our rules.

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Originally Posted by MichaelB Not so public has been a tax amnesty program for non-criminal evasion, which I understand is has already collected close to the number you suggested and is probably soon to phase out.

To my knowledge, there has never been an amnesty programme. There have been a number of programmes with reduced penalties. A sort of plea bargain situation. The latest programme, the NEW Streamlined Programme comes the closest, but still contains potential risks for the filer.

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Originally Posted by MichaelB Countries with weak fiduciary structures or limited legal systems, however, may see it differently. I think the biggest negative impact will be on migrant's remittances. This would be unfortunate, these folks are poor and cannot afford additional cost, and it could drift into migrant labor markets.

Appraisals of the FFIs around the world who have signed up to FATCA are starting to come in. The results are interesting. In terms of world GDP, the number signed up represent countries comprising almost 75% to 80% of global GDP. What is disturbing are the (large) geographical areas who have yet to come on board. They represent the majority of countries with the low/lowest economies. If a US charity (even US Government sponsored) donation were to be made to assist a poorer country, and that country had not signed on to FATCA, would the US withhold 30% of the donation? Not good news for those countries.

[MichaelB]

Perhaps we can agree that FATCA did not introduce any new tax obligations on US residents or citizens, it is an enforcement mechanism for the existing liabilities combined with new reporting requirements.

It may be a case of using a cannon to ward off a mosquito, but then again, around the world there are few monetary or tax issues capable of generating such resistance.

"Tax amnesty" was the term coined by the Treasure and the accounting world. You are correct that is is better labeled "reduced penalty".

[timeasterday]

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Originally Posted by meierlde The only concern then is to be sure that your US residence is in a state with no Income tax. You would need to move there for a while get a drivers license and renew it, register to vote etc. As far as the US government is concerned that is probably ok because the 1099s will get mailed. But of course you will have to give up the foreign earned income exclusion to do this.

But the US address would just be for the company that holds your investments. If you file your taxes as a foreign resident with an overseas address I don't see how that ever gets back to your IRA company.

[meierlde]

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Originally Posted by timeasterday But the US address would just be for the company that holds your investments. If you file your taxes as a foreign resident with an overseas address I don't see how that ever gets back to your IRA company.

The MF company would send your 1099s to the US address. Since MF companies also send copies of the 1099s to the states, the state would see you as a resident for tax purposes. So the state would see a 1099 with no matching return.

[Free_at_49]

I skimmed over the Boggleheads thread that somebody posted above. I'm amazed at how easily people get lost in the details, there was only one poster who said that all US citizens should be treated equally, regardless of their country of residence. And that is simply not the case.

[Alan]

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Originally Posted by Free_at_49 I skimmed over the Boggleheads thread that somebody posted above. I'm amazed at how easily people get lost in the details, there was only one poster who said that all US citizens should be treated equally, regardless of their country of residence. And that is simply not the case.

I don't know what that statement was meant to say because it seems to me that everyone is treated equally when it comes to FATCA. It doesn't matter if you are a US citizen living in the US or another country, you are required to declare all foreign financial accounts above a certain threshold. (Maybe the threshold for reporting is higher if you reside overseas)