Certain aspects of the Foreign Account Tax Compliance Act (“FATCA”), the revenue-raising portion of the 2010 stimulus bill known as the HIRE Act, have been a continuing source of controversy since its inception. A spate of recent criticism and introduced legislation raises the question whether FATCA will survive if any tax reform proposals are enacted. For example, on April 5, Senator Rand Paul (R-KY) and Representative Mark Meadows (R-NC 11th) sent an open letter to the Treasury Secretary and the Director of OMB outlining administrative steps that the Trump administration could take to halt, or at least severely slow, the enforcement of the law. This follows another open letter sent by several lobbying organizations to congressional leaders raising several common complaints about the law and urging that repeal be included in any potential tax reform package.
GOP Efforts to Repeal FATCA. It is worth noting that in 2014, the Republican National Committee passed a resolution calling for the repeal of FATCA. Meadows and Paul reintroduced FATCA repeal legislation in this Congress, after the bills they introduced in the last Congress failed to get any traction in committee. Rand Paul also remains a plaintiff in a lawsuit challenging FATCA that is currently on appeal in the Sixth Circuit (the District Court dismissed the case for lack of jurisdiction). Nonetheless, lawmakers may be reluctant to abandon the treasure trove of information that FATCA generates and may find it politically difficult to vote “yes” to repeal a law targeted at tax evaders (the IRS’ latest estimates for the gap between tax collected and tax due are about $450 billion per year).
FATCA Implementation/IGAs. FATCA was intended to assist the IRS in taxing income earned by U.S. persons outside the United States by prescribing reporting and due diligence requirements foreign financial institutions must satisfy to avoid a withholding tax on payments to them. FATCA has achieved widespread participation by foreign governments and major foreign financial institutions, with the United States having signed Intergovernmental Agreements (“IGAs”) with approximately 100 jurisdictions and continuing to negotiate with nearly 20 more. The IGAs, which result from negotiations that at times have been arduous, establish an unprecedented flow of information to the IRS concerning international economic activity at the individual and institutional level. This information is expected to be of significant value to government researchers and policymakers as well as law enforcement. FATCA has also inspired other countries to seek ways to collect similar information about their citizens, with copycat laws now adopted across the globe. In 2014, Her Majesty’s Revenue & Customs implemented an equivalent regime in the United Kingdom to collect information on accounts in ten Crown Dependencies and Overseas Territories. In addition, nearly 100 nations (but not the United States) have committed to adopting the “Common Reporting Standard” by 2018, an information sharing regime similar to FATCA developed by the Organisation for Economic Co-Operation and Development. The implementation of FATCA has not been seamless, however. The Treasury has been slow to provide guidance, and full implementation of some parts of the law has been delayed until 2019.
Balancing Costs and Benefits. FATCA’s status as a revenue raiser is also unproven. For fiscal year 2016, for example, the IRS estimated that its costs to implement FATCA would be greater than the revenue generated by the law (revenues are projected to be higher than IRS costs for fiscal year 2017). Of course, these estimates do not take into account significant costs incurred in the private sector by global financial institutions, which some estimates put at as much as ten times the amount of revenue estimated to be raised. Like many elements of U.S. tax law, the legislation creates a system designed to target tax evaders while imposing burdens on compliant persons. Some have likened FATCA to using an elephant gun to kill a mosquito. While there can certainly be different views on the outcome of a cost-benefit analysis of the FATCA regime, it is the status quo. Lawmakers may prefer to keep FATCA, whatever its flaws, to retain the information flow and the United States’ leadership role in combating tax evasion through the information collection systems now in place.