Protect Yourself from the Effects of FATCA

How will the U.S. Foreign Account Tax Compliance Act (FATCA) impact you?

In an attempt to wring every last tax dollar out of Americans the Obama administration enacted FATCA into law on March 18th, 2010. With its 30% withholding Tax, it sent shock waves throughout the world. It is estimated that this law would cost global banking institutions between $5 -$10 Million each in extra compliance costs. The combined costs world-wide would be between $1-2 trillion while only generating an extra $850 million in U.S. tax revenues. Note that the U.S. currently spends almost $450 million on PBS alone. See: Will Big Bird Lose His Job?

The Economics of FATCA

On a purely economic basis, then we can see that FATCA would cost more to implement that it would generate. If we were dealing with a business proposition then it obviously wouldn’t be implemented.

FATCABut of course this is not a free-market business decision but a bureaucratic government decision. Often governments will make decisions and implement policies that cost more than the good they produce. As a matter of fact, one might say, that most (if not all) government decisions cost more than they produce. And in this case, the costs are not borne by the U.S. government or even by U.S. citizens (at least not directly). So the government has every incentive to implement and minimal incentives to not implement FATCA. But is this a good time to tack another $2 Trillion liability on the global financial industry? Will that improve the global economy?

The Big Brother Implications of FATCA

In addition to the enormous worldwide costs, there are major non-financial implications for U.S. citizens relating to freedom and privacy. And implications for your future ability to be able to transfer money. It may also impact the ability of Americans living or traveling abroad to be able to transact normal business. Some (many? or most?) foreign banking institutions may feel that the additional benefits of U.S. investors are not worth the additional cost and hassle from the U.S. government and therefore simply decide to refuse to do business with Americans, thus severely limiting the financial options of Americans.

Unfortunately, most Americans haven’t heard of FATCA or have been lulled into a sense of complacency in the years since its passage. In his latest ‘Mountain Vision’ newsletter, Frank Suess of BFI Capital in Switzerland, has written an excellent overview of FATCA.


By Frank Suess

“If you have ten thousand regulations you destroy all respect for the law.” ~ Winston Churchill

Until a few weeks ago, I was living under the assumption that by now everyone knew about the Foreign Account Tax Compliance Act (FATCA) and had a broad understanding of its implications. I realized, though, that I was wrong. FATCA is generally understood by non-US financial institutions; they are directly impacted by the rules and are trying to cope with its enormous administrative and legal requirements. But private investors are frequently not even aware of the regulatory monster preparing to invade.

For some investors, FATCA may have little to no implications. Clearly, it is primarily Americans who live or invest abroad, i.e. outside of US borders, who may be impacted. In our opinion, the most severe implications exist not for individual investors, but for non-US banks and financial institutions, or ‘Foreign Financial Institutions´ (FFI´s), as defined in the respective FATCA provisions.

However, to simply assume that non-American investors will not be impacted, or that private investors in general do not need to be concerned about FATCA, is false and could turn out to be a costly mistake. Although this topic is important for ANY investor worldwide, the subject matter is not being given the attention it deserves.

My goal for this week´s Update is to summarize FATCA in as straight-forward and concise language as possible, in order to then highlight (1) some of the risks that FATCA bears for any international investor, and (2) how you might minimize exposure to these risks.

What is FATCA?

The U.S. government intends to combat tax evasion in the United States more intensively. As such, the Foreign Account Tax Compliance Act (FATCA) was enacted into law on March 18th, 2010. It set out to impose a 30% withholding tax on U.S. source income unless the respective foreign financial institution (FFI) entered into an agreement with the IRS and report its U.S. customers.

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