New foreign investment reporting estimated to cost more than it will raise in revenue

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Betsi Fores The Daily Caller News Foundation
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In an effort to collect tax revenue in ever new and creative way, Congress passed the Foreign Account Tax Compliance Act (FATCA), requiring that all American dollars invested overseas pay a 30 percent tax penalty, creating an “bureaucratic nightmare for fund managers,” according to the Economist.

On top of this added tax burden, foreign financial institutions (FFIs) — the ones responsible for reporting these investments — are now at the helm of the IRS.

While the law has gone largely unnoticed domestically, abroad, foreign firms have been scrambling for the last two years as the Jan. 1, 2013 phase-in looms and companies try to assess the added cost of compliance with the IRS.

The burden is so great that many foreign institutions have decided to no longer accept American clients. One Singapore-based banker told Bloomberg, “I don’t open U.S. accounts, period.”

Bloomberg added that the new regulatory burden means “additional compliance costs for banks and fewer investment options and advisers for all U.S. citizens living abroad, which could affect their ability to generate returns.”

The Institute of International Bankers and the European Banking Federation said that the
nearly 400-page law is full of  “unnecessary burdens and costs.”

The group estimates “that it will cost each foreign bank with more 25 million accounts $250 million to sift through those accounts and identify those held by Americans. In total, that would cost the top 30 foreign banks $7.5 billion,” the Wall Street Journal reported.

In a Feb. 8 decision, the IRS made a reciprocal deal with five European Union “partner countries” to allow  FFIs in partner countries to report directly to their country, rather than to the IRS. The countries must then pass the information along to Washington.

In return, however, the U.S. must comply with the same reporting measures that it is asking of these “partner countries.” Therefore, all investments in the U.S. by foreign citizens must be reported to the Treasury and then sent to their respective governments.

Ultimately, it is expected that additional countries will join this “partnership,” adding massive compliance and bureaucratic costs to this international financial information sharing.

Lawyer-lobbyist James G. Jatras expressed his immediate concern over the issue of FATCA. In an interview with The Daily Caller, Jatras said that the law “imposes an expensive compliance regime on foreign institutions. Not just banks, it’s also pension funds and other investments as well.”

In a May 8 op-ed, Jatras wrote that this reciprocal relationship with “partnership” countries could have devastating consequences on the U.S. economy if American investment firms were to respond the same way foreign ones have. “If only a tiny fraction of $21 trillion in foreign investment in the U.S. were pulled out over FATCA fears, the impact on the American economy and jobs could be devastating.”

“The Congressional Joint Committee on Taxation estimates FATCA’s revenue benefit to the U.S. Treasury at less than $1 billion yearly, out of yearly tax revenues of about $2 trillion a year,” he added, noting that no cost/benefit analysis has been done yet to compare the revenue from FATCA versus the worldwide cost of compliance.

Jatras noted that “firms in ‘partner’ countries mistakenly are believed to be reporting to their own governments, not to the IRS.” But in reality, “firms’ ‘partnership’ costs may turn out to be even greater, with the prospect of reporting on assets from multiple countries, not just one. It’s the IRS who’s really being rescued, with foreign governments being ‘allowed’ to do IRS’s job for it.”

Firms urged the IRS to delay the new reporting provisions at a hearing on May 15, arguing that “representatives from a range of businesses complained that FATCA’s rules would cause confusion and reporting errors that could destabilize markets.”

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Betsi Fores