Newsweek Delves Into FATCA And The Growing Trend In Expatriation

I was recently interviewed by Newsweek for a story covering FATCA and its effects on US citizens abroad, as well as the perceived impact it has had in causing many individuals to give up their US citizenship. The questions asked by the reporter, Barbara Stcherbatcheff, were quite illuminating; my responses even more so. Many of my statements did not make it into the ultimate Newsweek article, but I believe readers will find the entire interview most revealing. Read on, and learn the true FACTS behind FATCA.

1. NEWSWEEK: The compliance cost of FATCA to financial institutions alone has been roughly estimated at US$8 billion a year, approximately ten times the amount of estimated US tax revenue estimated to be raised ($792 million.) Unusually, FATCA was not subject to a cost/benefit analysis by the Committee on Ways and Means. So why do you believe that the government is going ahead with this?

VLJ: FATCA looked good on the political agenda. It made the politicians look really good in 2010 when it was enacted. Remember, at that time, the US economy had been struggling. The dam had broken with the Swiss banking fiasco at the height of frenzy with revelations by Bradley Birkenfeld about UBS’ assistance in US tax evasion. The enactment of FATCA was a soothing balm to many who viewed Americans overseas as a bunch of tax dodgers. The movement slowly picked up momentum. Other countries dared not get the USA angry – one by one they began to sign on to so-called Intergovernmental Agreements (IGA’s). As time went on, other cash-strapped countries started to consider their own FATCA-wannabe laws. It is an easy way to rake in tax dollars. Now, we have an international push to enact a global FATCA, derisively known as GATCA. So, with everyone jumping on board the FATCA Express, why should the US not continue to move forward. FATCA is a foregone conclusion. It’s here to stay.

2. NEWSWEEK: With FATCA, the US government is effectively imposing an extraterritorial law on financial entities in other countries. Still, as of May 2014, 33 countries have signed the agreement, and another 34 jurisdictions have also reached “agreements in substance.” Why do you think that so many foreign banks have bowed to the demands of the US?

VLJ: Foreign banks and foreign governments have bowed to the US because they are afraid of losing access to the US market. Plain and simple, money talks. The US has the power to send any financial institution doing business in the US into possible bankruptcy.

3. NEWSWEEK: Has FATCA made Americans working overseas less competitive?

VLJ: FATCA has had a huge impact on Americans abroad and this will only get worse with time. From the individual impact upwards, the effects can be seen. US individuals are being denied access to banking services abroad as well as products offered by foreign financial institutions. Many of my American clients in Switzerland are being told by their banks to close accounts. They are no longer welcome; they are losing their mortgages from such institutions. On a broader level I have clients telling me that their employers will no longer consider them for certain higher-level positions – for example, any that require signature authority over financial accounts or the establishment of foreign entities in the business which are held in nominee status by a corporate officer. Many are concerned they may lose their positions due to the FATCA factor.

4. NEWSWEEK: Has FATCA had a stifling effect on entrepreneurship and small business growth for US citizens working abroad?

VLJ: Absolutely. Foreign banks don’t want them as customers, nor do businesses that create and manage offshore corporations, trusts, pensions and other structures. If the American abroad is denied such services, it is impossible to do business and grow. In addition, many global businesses do not want to partner with US persons because of the far-reaching effects of US tax and tax information reporting rules.

5. NEWSWEEK: On January 24, 2014, the Republican National Committee passed a resolution calling for the repeal of FATCA. Do you see these laws changing (or being repealed) anytime soon? Are they here to stay?

VLJ: I strongly believe that FATCA is here to stay. FATCA planted the seed of an idea for other countries across the globe and its roots are now very far-reaching. We are seeing the Asian-Pacific countries sign on to IGA’s. I don’t think people believed this was possible back in 2010 when FATCA was first enacted. What we are seeing is that FATCA has been a model for governments in other countries. They are using FATCA as a springboard to enact similar legislation. GATCA is on its way too – the global exchange of tax information will surely come. In time, I predict that the traditional extradition treaties and tax treaties regarding enforcement of another country’s tax laws will also change. People will be extradited for tax crimes and foreign governments will assist one another in enforcing each other’s tax laws in the signatory foreign country. Currently, the extradition treaties and tax treaties are not robust in these areas.

6. NEWSWEEK: Why have no politicians come to the support of US citizens living abroad? 7.6 million expats = 13th largest US state by population size (right behind Virginia.) Is this effectively taxation without representation?

VLJ: Let’s face it, most politicians blow in the direction of the wind in order to suit their own agendas. The US expat abroad has never had much political power. Fortunately, we have very active groups, such as American Citizens Abroad, Inc. to be a voice.

7. NEWSWEEK: Do you believe that FATCA will catch / deter tax cheats?

VLJ: Of course, to a certain extent it will. I am also seeing a very clear trend that US persons overseas are now taking their tax filing obligations seriously. When I first moved to Dubai, very few were interested in US tax because the tax laws were not being effectively enforced. There are scores of dual nationals and green card holders in the region who have not been tax compliant for decades. Many persons had acquired US citizenship at birth because they were born in the US by happenstance. Many became naturalized US citizens, or obtained green cards after studying in America but then moved back to the Middle East. Many never even obtained Social Security numbers which are required in order to file a tax return. Many worked in the US but then left America and subsequently dropped out of the tax filing system. Many of these people were not aware of their tax filing requirements. These people are now realizing the precarious position they are in and are trying to clean up their tax issues and become tax compliant. Some are doing this simply in order to expatriate or relinquish their long-term green cards, as the US law requires that one certify under penalty of perjury that he has been tax compliant for the 5 years prior to expatriation or giving up a green card that has been held for a long period of time.

8. NEWSWEEK: Do you think more and more people will give up their US citizenship?

VLJ: Absolutely – I have them as clients and am seeing more and more of them each day. I understand that many Consulates and Embassies in Europe have waiting lines for those wishing to expatriate. Think about it – let’s say you are a Saudi Arabian national and are very happy living and working in Saudi Arabia or some other tax-free Middle Eastern country. You plan to remain in the region because this is where you grew up, your family is here and your roots are here. Perhaps you became a US citizen after studying in America over a decade or two ago. You also have ownership in the family business and plan to build it up with your siblings. The US tax laws require you to report extensive information about that foreign-owned business causing disharmony in your family (including for example, provision of profit and loss statements, as part of your US tax return); you may have to file information returns about the financial accounts owned by that business; you will be paying US tax on your world-wide income and many potential business partners may no longer wish to do business with you because you are an American. Wearing those shoes, a decision to expatriate may become more understandable.

9. NEWSWEEK: Do you think that US lawmakers realize that how much hassle FATCA is causing for ordinary overseas citizens?

VLJ: It has certainly been all over the press. I have to assume that those on Capitol Hill can read!

10. NEWSWEEK: There is a myth going around US expat circles that if you choose to expatriate, you will need to file taxes for the next 10 years. Is this true and in what circumstances?

VLJ: There is a lot of confusion and mis-information regarding expatriation. In part, this is because the tax rules surrounding expatriation have changed numerous times over the past two decades. The most recent expatriation law brought changes for any expatriation occurring on or after 17 June 2008. The expatriation rules were very different under the regime in effect prior to that date. In part, those old rules continued to tax certain expatriates who were treated as having a tax avoidance motive based on specific criteria (e.g., net worth on the expatriation date) on certain items of US-source income for a 10-year period after expatriation. The current tax law rules are very different. They do away with this 10-year “shadow” period and apply instead, the Exit Tax as well as impose other repercussions, for example, on any US individual receiving gifts or bequests from the so-called “covered expatriate” (A “covered expatriate” is an individual who is deemed to have a tax avoidance motive based on certain criteria, such as net worth).

11. NEWSWEEK: There is a myth going around US expat circles that if you expatriate, you will be banned from reentering the USA even as a visitor. Do you believe this may ever become a reality?

VLJ: Current US immigration laws already provide that former US citizens who are deemed to have renounced their US citizenship for tax avoidance purposes may be banned from entering the US by including them in a class of “inadmissible” aliens. This law is commonly referred to as the “Reed Amendment” and was enacted in 1996. The law has never been enforced probably because of doubts as to its constitutionality. However, as a practicing tax professional, I am hearing of some cases when expatriates are now being denied visas to enter the US. Granting of a visa involves much discretion on the part of the Consular officers. As such, we would never really know the reason a person may be denied a visa, but many are suspecting that it is because of the fact that the person has expatriated. Granting of a visa is not a transparent process, so the truth may never be known. Similarly for the expatriate holding a passport to a country not requiring a visa to enter the US – he may be denied entry upon arrival but never know the reason why.

The latest tax expatriation proposal in 2013 was prepared by US Senators Robert Casey (D-PA), Jack Reed (D-RI) and Charles Schumer (D-NY). Basically these Senators proposed an amendment to what was the pending immigration reform bill. Their proposal targeted former US citizens (and possibly former “long-term” green card holders) who were deemed to have expatriated for tax avoidance purposes.

Of great concern to practitioners was a provision regarding denial of entry into the US. Under the proposal, a “specified expatriate” would be inadmissible ( a “specified expatriate” is a “covered expatriate” who cannot establish to the IRS that the “loss of his citizenship” did not result in a “substantial reduction in taxes”). The proposal sought to have the expatriation rule be retroactive by applying it to anyone who is a “covered expatriate” who gave up his citizenship in the last ten years! As a practical matter, how was such an expatriate who gave up citizenship, in say, 2006 supposed to now come and demonstrate to the IRS that he did not have the prohibited tax avoidance purpose for expatriating? The 2013 Proposal was a basic carbon copy of the 2012 “Ex-PATRIOT” Act, which had been introduced in the Senate by Senators Schumer, Casey, Blumenthal and Harkin. That 2012 proposal was short-lived and was dropped by the Senate Committee on Finance.

The fact that we are seeing resurrections of such harsh proposals and the fact that the numbers of those expatriating is sky-rocketing makes it a ripe time for another law change. I believe expatriation will be increasingly more difficult to achieve without paying a very hefty price tag.

In accordance with Circular 230 Disclosure

Original Post By: Virginia La Torre Jeker, J.D.

Virginia La Torre Jeker J.D., has been a member of the New York Bar since 1984 and is also admitted to practice before the United States Tax Court. She has 30 years of experience specializing in US and international tax planning as well as international commercial transactions. She has been based in Dubai since 2001; prior to that time she worked in Hong Kong for 15 years as a US tax consultant for international law firms, major banks (including HSBC) international accounting firms (Deloitte) and trust companies. Early in her career she worked in New York with the top-tier international law firm, Willkie Farr & Gallagher.

Virginia is regularly asked to speak at numerous conferences and seminars for various institutes and commercial organizations; publishes a vast array of scholarly works in her area of expertise, been interviewed by CNN and is regularly quoted (or has her articles featured) in local and international publications. She was recently appointed to the Professional Tax Advisory Council, American Citizens Abroad, Geneva, Switzerland. She was a guest lecturer at the University of Hong Kong, LL.M Program (Law Department) and served as an adjunct Business Law professor at the American University of Dubai and at the American University of Sharjah where she also taught the legal / ethical aspects of internet law and internet based transactions.

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1 comment on “Newsweek Delves Into FATCA And The Growing Trend In Expatriation”

  • My wife’s daughter is a permanent resident (Green Card) holder and works for a Russian oil Company. She has came to the US every year for the last 6 years and while here, spent around $20k each time. My feelings there are a lot of folks who do that. She is now giving up her GC because of the tax issues.

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