The decision to leave your own country to work in another does not come without a long list of reasons. But for many, the main reason is probably the same as it is for many expatriates—taxes in the home countries are either too high or there are too many regulations, resulting in a harsh business environment.
The United States was, and still is, one of the most popular countries for emigrants. In last week’s “The Saturday Essay,” published in The Wall Street Journal, Michael Barone questioned whether or not another surge of immigration will tear apart the U.S. Barone, resident fellow of American Enterprise Institute, pointed out that the U.S. is strong because it has the ability to assimilate new immigrants into the mainstream society and integrate different ethnic groups, providing them with a peaceful environment to live, work and worship. Immigrants usually do not divide the U.S. — they typically unite it.
People don’t divide a country. But the provisions of the Foreign Account Tax Compliance Act, which will go into effect July 1, 2014, will likely tear Americans apart by deteriorating relationships with foreign countries and invading citizens’ private information.
FATCA requires financial institutions around the world to report all the assets and incomes of any U.S. citizens with $50,000 to the Internal Revenue Service. If the institutions fail to comply, the IRS will withhold 30 percent of dividends and interest payments.
The U.S. has long been known for its uniqueness as a country that practices tax policy based on citizenship rather than residency. Even Americans who haven’t lived on American soil in a long time and are not enjoying any public services or taking up public resources still have to file U.S. taxes every year.
Eritrea, a country located in Northeast Africa, also practices this tax policy. Susan Rice, former U.S. ambassador to the U.N., condemned Eritrea for this practice, calling it “the extortion of a ‘diaspora tax’ from people of Eritrean descent living overseas.” It seems Rice didn’t realize her beloved country was doing the same thing.
If taxing based on citizenship is unreasonable, then FATCA is far from sane. The U.S. government has attempted to close the loopholes in its tax system and recover an estimated $100 billion per year in unpaid taxes of Americans’ assets overseas. But this law has led to outrage and backlash from American expatriates and foreign financial institutions.
Since Congress passed the act in 2010, many American expatriates have considered giving up their U.S. citizenship. In 2012, 189 expatriates renounced their U.S. citizenship. This number surged to 1,131 in the second quarter of 2013, according to BBC. This number is still small compared to the fact that there are six million Americans abroad, but the growth rate is rapid. From a citizen’s perspective, the notorious FATCA will be cutting off the affections and pride that many American expats have toward their country, forcing them either to think about saying goodbye to their U.S. passports or keeping their hard-earned money from going to the bank, in order to prove they owe nothing to the IRS.
For many foreign financial institutions, FATCA is absolutely a hot potato that puts them in a position of predicament. Given the threat of withholding 30 percent of their dividends and interest payments, foreign financial institutions will be less likely to have incentives servicing American clients. FATCA might also be in conflict with financial laws in countries such as Swaziland where banks have obligation to keep their clients’ financial states confidential.
American financial intuitions are not happy about the regulation that the Treasury Department imposed based on FATCA. Banks in the U.S. are required to share data with other countries about foreign investors who have accounts in the U.S. These series of complications are expected to trigger a tremendous amount of lawsuits once it is in effect.
Does this law really serve its purpose to close loopholes and give a boost to the IRS’ book value? It’s hard to say. Does it do any good to Americans? Not at all—neither for expatriates nor for Americans at home.
