Will Canada Save Us?

FATCA, officially known as the Foreign Account Tax Compliance Act, is probably the worst law that most Americans don’t know about.

I’ve written about this monstrous law repeatedly, most recently here. But now, it looks as if the prospects for FATCA’s implementation could be throttled by the courts of meek and mild-mannered Canada, of all places.

If you haven’t heard of FATCA, you’re not alone. US citizens living in the US who don’t invest outside the US aren’t affected by the law. But if you’re a US citizen living in another country, or one who invests outside the US, FATCA is very bad news, indeed.

Naturally, the Obama administration and the IRS vigorously disagree. Once again, the lawsuit is a long shot, but if the courts agree that even one of the arguments is valid, FATCA could be stopped dead in its tracks by an injunction.

In the meantime, efforts to repeal FATCA have thus far failed, but if the 2016 election results in a Republican president and a Republican-dominated Congress, repeal could become a realistic possibility.

But even if challenges to FATCA in the courts and in Congress don’t succeed, the law has an “Achilles heel” that could ultimately lead to its downfall. That’s because the IGAs the IRS has signed with more than 100 countries, are, in effect, a complete fabrication. That’s because even though the agreements call for the reciprocal exchange of information, US law doesn’t permit the IRS to send tax information to any other country. The only exception is if that country makes a specific request about a specific taxpayer, and also has a “double taxation agreement” in effect with the US. In other words, information flow under an IGA is onlyone-way. The Obama administration has proposed legislation to deal with this omission, but it’s gotten nowhere in Congress. Many in Congress justifiably fear that foreign investors could pull trillions of dollars out of US banks if the proposal becomes law. That could dramatically reduce foreign purchases of US Treasury debt and crush the US dollar.

Yet without actual reciprocity, I think foreign governments could quickly tire of sending information on US taxpayers to the US, and getting nothing in return.

I sincerely hope that if the courts don’t invalidate FATCA and governments that have signed IGAs don’t renege on their agreements, Congress eventually repeals the law. (Congress could also bring US law in line with the laws of every other major nation by imposing tax only on individuals resident in the US, and not on non-resident citizens. But that’s even a longer shot than outright repeal.)

In the meantime, I’m advising our clients to deal only with offshore banks and financial advisors that are making a good-faith effort to comply with FATCA. I’ll keep you posted of new developments as they occur.

Reprinted with permission from Nestmann.com.