Why Americans abroad want Trump to act on FATCA

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07 Dec, 2016

Why Americans abroad want Trump to act on FATCA

President-elect Donald Trump could make a lot of friends overseas if he were to scrap just one of President Barack Obama's measures: the Foreign Account Tax Compliance Act.

Better known as FATCA, the law was approved in 2010 and took effect in July 2014. It orders all non-US financial institutions (including banks, insurance companies, investment funds and pension funds) to report the financial information of American users who have accounts with funds over $50,000 directly to the Internal Revenue Service. The idea of the law is to prevent tax evasion, but Nigel Green, founder and CEO of UK based deVere Group, says it's had a negative impact on both his firm and its US clients abroad.

"Tackling tax evasion is a noble and worthwhile objective," Green says, "yet FATCA's dragnet approach will be highly ineffective at achieving this as well as being prohibitively costly”.

Scores of US citizens have taken extreme measures merely to escape FATCA's reach. In 2015, 4,279 US citizens surrendered their long-term US residency, according to the Treasury Department. That's an increase of 25.3% from the 3,415 individuals in 2014 and adds to the 10,693 total who gave up their citizenship between 2013 and 2015. That's even higher than the 10,189 who did the same between 1998 and 2012. In the first quarter of 2016 alone, over 1,000 US citizens abroad renounced their citizenship.

Mr Green estimates that there are 8 million US citizens living overseas, which makes the number who revoke their citizenship insignificant by comparison. However, Green notes that FATCA's strict reporting rules, for overseas banks and investment firms that hold the assets of US citizens and US citizens who hold money in foreign accounts, have had an impact on those renouncing citizenship. Because criminals have held money in accounts in Switzerland, the Cayman Islands and elsewhere to hide taxable income from the US government, FATCA enforces huge penalties on those who won't obey to the law.

As the non-partisan Tax Foundation notes, those penalties pushed foreign banks to avoid US clients altogether. While that takes away tax shelters, it also weighs on a lot of innocent citizens abroad.

"Many US citizens cannot even now hold a bank account in their country of residence as foreign banks routinely feel Americans are too much trouble thanks to FATCA's onerous and costly rules by which they would need to abide to take them on as clients," Green says.

"This makes normal life extremely challenging, to say the least. By using its super power status, the U.S. has over the last few years been coercing foreign financial institutions around the world into accepting FATCA, or facing stiff financial penalties and extraterritorial sanctions”.

Last year, a deVere Group survey found that 73% of American expatriates were considering relinquishing their US passports as a direct result of the law. Trump has noted that he would revoke a number of Obama's executive orders once he takes to office, and members of the international finance community have urged him toward reversing the more punitive portions of FATCA, in particular, as they are enforced via executive agreement.

Jacques Herman, head of international retail banking and wealth management for HSBC Bank USA, said: "With three out of four expats finding some part of personal finances more complex, the expat life clearly brings with it personal benefits as well as many complications, often times from unfamiliar financial regulations and tax obligations”.

It comes as no surprise then, that those who come from other countries to live or work as expats in the US fare far better than their US counterparts who have moved overseas. According to HSBC, nearly half (45%) of expats moving to the United States rank finances as their most important consideration: especially the 39% who earn more than $101,000 per year here. Although the cost of living is generally higher in the US, 59% of expats here reported they had more disposable income. That money is going toward significant investments, with 53% reporting that they can now afford to own one or more properties, while 48% can now afford a nicer car.

In comparison, less than one-third (30%) of Americans living abroad are driven by finances, and their salaries back that up. Roughly 45% make less than $60,000 per year, while less than one-third (27%) make more than $101,000. However, the 48% of US expats who say they have more disposable income have spent it on domestic help (38%) and luxurious holidays (35%). Less than one-quarter (24%) can now afford to own one or more properties.

US workers overseas have a much harder time with finance than their counterparts. While more than three-quarters (76%) of all expats said moving abroad made their finances more complex, 38% of US expats struggled to organise their finances, while 39% of foreign expats said living in the United States made setting up their finances easier.

However, giving up on US citizenship doesn't make all of your financial problems go away. To renounce citizenship, you have to prove five years of US tax compliance. If you're wealthy and have a net worth greater than $2 million or average annual net income tax for the five previous years of $157,000 or more for 2014, you'll pay an exit tax. If you aren't wealthy, you'll still have to pay a fee for renouncing your citizenship. That fee just jumped from $450 to $2,350 in 2014. If that sounds steep, it's because exit fees in other developed nation are 20 times lower.

While US citizens abroad are stuck with FATCA until Trump is sworn in and gets around to repealing it, deVere's Green implores him to do so sooner rather than later.

"This is a golden opportunity for Trump to show his mettle and reverse a fatally flawed, misguided, imperialistic law that's nothing more than a masterclass in the law of unintended consequences," Green says. "Once in the White House, he must do the right thing and show some backbone on FATCA”.