FATCA Remains Vulnerable Despite Implementation

It’s fair to say that FATCA has not been wholly welcomed with open arms, globally or indeed in the US itself. One leading US tax lawyer memorably compared the regime to “exterminating ants with a nuclear bomb” which would not have the right effect on offshore tax avoidance. FATCA is many things: it is extra-territorial,ham-fisted, unilateral, complex, and most importantly, validly enacted US law. Personally and professionally, I wish FATCA didn’t exist in its current form, it seems odd that it targets only individuals and specifically exempts reporting on accounts held by U.S. corporations.

FATCA’s stated purpose is to catch Americans who use international capital markets to cheat on their taxes. Few would argue the validity of this goal. However, the manner in which FATCA sets out to achieve this goal is ambitious to say the least.

FATCA basically turns non-US financial institutions into a conduit for the collection and disclosure of information on US depositors. It would be difficult to imagine the domestic law of any jurisdiction

having more lofty ambitions. Only Treasury’s creative and extra-legal invention of intergovernmental agreements (IGAs) to enforce the law has made its implementation even remotely possible.

Even if by some miracle FATCA survives its current challenges, in several years time Congress will be forced to take it up again as recognition sets in that it simply is not capable of accomplishing its intended goals. For all the acrimony and international financial upheaval it has caused, FATCA is a poor excuse for a solution to tax evasion. There’s a direct correlation between the severity of a tax code and the level of effort individuals are willing to put into avoiding or evading taxes. Attempting to address the latter while ignoring the former is a fool’s errand. It’s the fiscal equivalent of the war on drugs – a costly enforcement-minded solution in which government agencies are always two steps behind their targets. And like the drug war, FATCA will produce considerable collateral damage and invasions on innocent Americans.