THE BLOG
06/21/2013 01:37 pm ET | Updated Aug 21, 2013

Should Lex Americana Be Universal? FATCA Turns Foreign Banks Into Tax Informants

Over the last decades, a number of initiatives taken by various U.S. administrations on both sides of the aisle have raised concerns about the actual legality of the extraterritoriality attached to laws imposed by the United States of America on other jurisdictions around the world, often using "political persuasion" rather than legal due process.

In my first course on International Private Law at the Catholic University of Louvain, we were taught that tax laws could not extend beyond the borders of the taxation authorities. The territoriality of tax laws is confirmed by the literature. The double taxation treaties confirm this principle to which the United States is the most significant exception.
As we write this post, Switzerland is confronted with an "emergency" law submitted to its Parliament to accommodate Uncle Sam disclosure requirements. The justification is: if you don't do it, we will ban your banks from operating in the United States. The Swiss Parliament required by the Government to deal with the agreement with the U.S. tax authorities refused the emergency. Already threatening noises of withdrawal of licenses are coming from Washington D.C.

The U.S. applies Universal tax Law
To the best of my knowledge, the United States is the only country that taxes its nationals on a worldwide basis, at least individual taxpayers. The Ways and Means Committee of the U.S. Congress recently questioned the idea that the United States can tax its citizens worldwide.

Our "worldwide" system of taxation is a remnant from the Cold War: While it has been 25 years since we reformed the tax code, it has been almost 50 years since we undertook a bottom-up review of our international tax laws. In other words, our international tax rules were written when the United States accounted for 50 percent of the global economy and had no serious competition from others, a far cry from today's fiercely competitive global economy.

Interestingly, it is probably the strongest incentive for U.S. firms operating abroad to recruit local staff rather than U.S. tax residents. The cost of hiring U.S. taxpayers abroad is sometimes as high as twice the cost of hiring locally.

FATCA is described by the IRS as an important development in U.S. efforts to improve tax compliance involving foreign financial assets and offshore accounts and includes two main features.

1. It requires U.S. taxpayers to declare the existence of their foreign accounts, wherever they are in the world, if they reach $50,000 for singles and $100,000 for married couples. This is consistent with the universal tax principle. This is in addition for the Report of Foreign Bank and Financial Accounts (FBAR) that requires a reporting to the U.S. Treasury under the Bank Secrecy Act from $10,000 up.

2. The IRS, armed with its whip, requires foreign banks to provide information on such accounts if the account holder is a U.S. national or a U.S. resident require a "foreign financial institution" ("FFI") to enter into, and to comply with, a reporting and withholding agreement ("FFI Agreement") with the IRS with respect to U.S. account holders. An FFI that enters into an FFI Agreement is referred to as a "Participating FFI." An FFI that does not enter into an FFI Agreement (referred to as a "Non-Participating FFI") would be subject to a 30 percent gross withholding tax on with-holdable payments, unless it is otherwise exempted from the FATCA regime"

FATCA raises fundamental questions of privacy, but also raises questions about how it can be properly executed. Why, as a Belgian-born, dual-citizen, grandfather, am I no longer allowed to use or send money from my Belgian account for my granddaughter in Paris by using Internet banking? Why is my account subject to all kinds of FATCA restrictions while I am not required to disclose the account because its amount is below the IRS thresholds? Why can I not view the balance of my account online?

Effectively, those accounts become useless, and it is equivalent to inciting U.S. tax persons to close those accounts, pushing them to less regulated and transparent jurisdictions if they need capital abroad, whether it is for their business or their household.

In fact, negotiations are managed country by country by IRS officials. It is therefore a use of the U.S. political muscle and ability to threaten foreign financial institutions
Is the IRS targeting some categories of taxpayers because it is hungry for American money abroad? Of course not: it does not intend to tax corporate revenues abroad. This is just against the individual U.S. taxpayers. This discrimination is even more surprising that it has become blatantly obvious during the Apple hearing that the money that sits in foreign jurisdictions is much more important, and that it escapes taxation.

This debate is now largely open
The U.S. is basically using its political power with the support of foreign banks who have become tax collectors for Uncle Sam. I even received in my mail a U.S. W9 form from my bank in Brussels. The IRS is effectively recruiting tax informants who, at their cost and expenses, need to provide ways and means to comply and change their systems.

Not surprisingly, one by one, banks are refusing to open accounts for U.S. residents or nationals. A friend of mine was refused the opening of a bank account last week in... Tokyo. It has become simply for them to spend millions to become tax collectors for Uncle Sam.

It has become too onerous for them to keep accounts for U.S. residents.

The cost burden for the U.K. is not insignificant: HMRC estimates the cost for U.K. business over the first five years to be £1.1-£2 billion ($1.7-3.2 billion), running thereafter at an annual cost of £50-£90 million. ($80-150 million) HMRC' estimates its own one-off IT and staff project costs at approximately £5 million, with ongoing annual costs of £1.4 million ($2 million) from 2016.

This will affect Americans working outside of the United States who are not going to be able to use local banking facilities. It's a strange version of a self imposed Yankee go Home

A study published by Shearman & Sterling demonstrates the huge complexity of this process that will probably not provide substantial revenues.

Towards a European FATCA?
The opposition to FATCA is growing in Europe and, after pretending that it did not matter, some European Governments, in particular, are now looking at a European version of FATCA. Germany and France Europe is looking for ways to create an EU version of FATCA. If it were effectively imposed it would make sure that no European taxpayer can use U.S. banks for, and that U.S. banks will report all revenues of European taxpayers to the authorities of the taxpayer. This would threaten a substantial part of the international private banking or brokerage operations of U.S. financial institutions, a multibillion business for large U.S. banks.

Rethinking U.S. international tax laws.
I am not an international law expert, but I would strongly argue for a delay to FATCA and the opening of serious discussions at the to figure out an acceptable way to ensure equity between countries. Why would the U.S. be the only tax authorities to benefit from information provided foreign tax authorities?

OECD. I would not dare to even suggest how this could be achieved. In the meantime the FATCA is. Should all countries decide that their citizens will be taxed on a worldwide basis, as the United States does, working abroad will become increasingly onerous and create absolute confusion? The core of this debate is only emerging: either the system is based on territoriality, or it is based on nationality. Having it both ways won't work.

The United States has to ask itself the question of whether its actions are legitimate and question its objectives and the ways it goes about achieving them. This is
especially pertinent at a time when the United States seems to reserve a right to eavesdrop upon foreign nationals.

Is U.S. foreign policy using all its weaponry, including the FCPA and FATCA to impose a (i.e., American law regime) upon the rest of the world? Shouldn't the U.S. first look more closely at its own taxation system and corruption? International tax law is in urgent need of modernization with a focus on equity and fairness rather than threat and blackmail.

Could our U.S. lawmakers have acted as an apprentice sorcerer? Might it have opened the Pandora box? The next few months will certainly provide further interesting developments. But it is questionable, to say the least, to see Uncle Sam recruiting for free tax informants around the world. Is it the price for the Pax Americana?

(This post was also published as well on the Columbia Law School Blue Sky Blog.)