America the bully
Recently I’ve traveled to places like Switzerland and Britain. One thing I noticed is that American policy is perceived quite differently overseas than in America. At home, I don’t recall much discussion of “Fatca,” a regulation that forces foreign banks to provide the US Treasury with all sorts of data on American citizens. This is also tied in with other somewhat unrelated issues; US spying on Germany, the Snowdon revelations, the $9 billion fine imposed on a French bank, etc. BTW, here’s a sensible essay that criticizes both sides of the French bank dispute:
There are no meaningful checks on this process, let alone a plausible procedure for BNP to appeal. Bank bosses cannot even publicly criticise deals they agree to under extreme duress. No precedent is set and no guidance provided as to the limits of the law and the proportionality of the punishment. So even if BNP fully deserves its punishment, the legal system that meted it out is closer to an extortion racket than justice. France’s economy minister, Arnaud Montebourg, has compared America’s pursuit of BNP to “economic warfare”. In other words, a bank that catered to mass murderers has had some success in portraying itself as a victim. Any process that can make BNP’s dealings with Sudan look anything less than shameful must be very flawed indeed.
BTW, London is really booming right now. The locals believe this is partly due to its legal system, which is not corrupt (like most countries) or completely insane (like the US.) I’m no expert here, so I can’t comment on the merits of Fatca, but here’s what I do know:
1. I can tell when outrage is real as opposed to mere self-interest at work. There is real outrage overseas. It may not be justified, but it is sincere. It isn’t just anger about tax shelters being closed down. There is a perception that the US is trying to make its laws apply everywhere in the world, not just in the US. That the US is a bully in the financial world in the same sort of way that Russia is a bully in foreign policy
2. There are complaints that the US forces foreign banks to divulge all sorts of information on US depositors, but refuses to reciprocate. If Latin American governments ask for information on the Miami bank accounts of their residents (who may be evading taxes) the US government refuses to provide this information. I don’t know if this double standard exists, but it is certainly perceived to exist.
3. The US is the only major country that applies taxes on a citizenship basis, not a territorial basis.
4. There has been a dramatic increase in the percentage of Americans living overseas who renounce US citizenship. Some claim the paperwork requirements are too burdensome. On the other hand the absolute number renouncing citizenship is still fairly small (4000/year out of a overseas population of 7 million), so I don’t know how worrisome this is.
5. Some stories claim the cost of complying with Fatca regulations is actually far more than the expected $800 million in extra tax revenue. Again, I don’t know if this is true.
6. Nor is it clear that the law will impact its intended targets:
Meanwhile, the drug dealers and sophisticated tax evaders who inspired all this will switch into non-financial assets, such as art and property, or hide behind shell companies and trusts. The latter would be easier to penetrate if reliable ownership information were collected, but often it is not””and America is one of the worst laggards (see Delaware, Nevada and all the other money-laundering paradises within its borders).
7. Boris Johnson, who might well be a future Prime Minister, was (possibly?) told that he is no longer welcome to be a customer of National Savings and Investment, a major British investment company. His crime? He is tainted by having been born in New York. Even though he is British, and earns money being mayor of London, the fact that he is born in New York makes him a US citizen and hence a possible target of the US government. That’s an extreme case, but it shows the lengths to which the Treasury is willing to go.
8. There’s also a perception that the US government is trying to go after industries it doesn’t like, by pressuring banks to stop serving them:
The congressional report’s contention is that banks, worried about appearing to turn a blind eye to possible fraud, are simply ceasing to do business with all firms in industries that regulators have identified as suffering from frequent legal problems. These include seemingly legitimate businesses such as selling ammunition, coins, medicine, magazine subscriptions, fireworks and tobacco, the report points out. As it goes on to say, “Banks are put in an unenviable position: discontinue long-standing, profitable relationships with fully licensed and legal businesses, or face a potentially ruinous lawsuit by the Department of Justice.”
Banks have nothing to fear from the Obama administration as long as they obey “the law?” Don’t make me laugh.
I’d be interested in what others think about this issue, especially commenters who have an overseas perspective. Banks are very unpopular right now, and are an easy target. But it also looks like lots of regular people are being hit in the crossfire. Isn’t it always that way?
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21. July 2014 at 09:01
Good post, wrong title. It should have been: “U.S. Government the Bully.”
21. July 2014 at 09:04
The global bully (cf. Vernon Coleman) invades the territory and the internal affairs of its friends, enemies & others in any matter it chooses. One way to combat this is for concerned citizens to invoke a total boycott on all US goods & services. Another is to demand that our own legislators grow some gonads and reject (and punish) unilateral exceptionalism by ANY other state.
21. July 2014 at 09:04
One point that is important to clarify. The US is the only major country that taxes its citizens on their worldwide income, but most other countries do NOT tax individuals on a territorial basis. Rather, the standard alternative is that residents of the country pay tax on their worldwide income. This means that expat citizens are not subject to tax on their foreign income.
21. July 2014 at 09:10
I agree with the post.
21. July 2014 at 09:15
You can’t fault the Obama Administration for inconsistency.
The government is engaging in bullying behavior domestically also. Consider the IRS targeting political groups, or the National Labor Relations Board, or the contraceptive mandate added to the ACA and its contempt for freedom of religion, or the threat of indictments of banks if they don’t cough up money to the Administration, or the use of Title Nine to kill legal due process on college campuses. And then there is the whole, and bipartisan, war on drugs, putting hundreds of thousands in jail. Bully pulpit, indeed.
21. July 2014 at 09:59
One of our Australian profs in Nigeria claimed last year a change in Oz’s tax laws required him to be taxed on his overseas income as well.
21. July 2014 at 10:21
*Trying this again because I think my previous comment was held up due to the links I included*
Krugman and Simon Wren-Lewis both have new posts up criticizing market monetarism.
Also, it sure seems they make an effort not to mention Scott Sumner by name. Weird.
21. July 2014 at 11:37
I’m of two minds on this. First, I agree that the United States tends to strong arm other countries on the financial front. Often, however, despite the strong arm tactics, there are legitimate reasons for these policy initiatives.
Regarding FATCA:
1. This is the second iteration of legislation and regulations designed to ferret out tax evaders. FATCA is merely a follow-on to earlier IRS “Qualified Intermediary” regulations which contained many of the same provisions of FATCA; however, FATCA introduced the same type of reporting requirements of foreign banks as US banks have with respect to “US persons”, i.e.., 1099-type reporting. Very few persons object to this type of reporting when required of US banks.
2. The United States has attempted to negotiate bilateral agreements which would provide simultaneous exchange of information regarding income earned by US persons abroad and the income foreign persons earn in the US. Therefore, I’m not sure it is accurate to say the US doesn’t cooperate with foreign countries—the US, however, insists that such cooperation be bilateral.
3. Under US domestic law, non-US persons who earn interest or dividends from US sources (the kind of income subject to FATCA) are subject to withholding at 30 percent. Tax treaties often reduce that withholding to zero for interest and 15 percent for portfolio dividends earned by treaty residents (“portfolio interest”, a term of art, is exempt from US withholding under our domestic law). But, if a foreign bank is unable or unwilling to identify the person to which the interest or dividend is beneficially owned, then is it reasonable to grant treaty-based reduced withholding rates? In essence, FATCA (and earlier legislation) provides a mechanism that ensures those who claim these reduced rates granted under treaties are really who they claim to be. In the past, it was quite easy for residents of non-treaty countries (say, residents of non-treaty Middle Eastern countries investing via a bank located in a treaty country, to hide behind that bank and illegitimately claim benefits. Too many foreign banks, particularly in traditional treaty havens such as Switzerland, were all too willing to cooperate in this deception. The “honor system” just wasn’t working. I find it hard to get worked up over the US threat to withhold a non-treaty rate on US source income to banks who don’t cooperate in identifying their US clients and their income or in ensuring their non-US clients are resident in the treaty jurisdiction where they claim to be and therefore entitled to the benefits of the US treaty with that jurisdiction.
4. Ostensibly, one of the main reasons, if not the main reason, for the QI rules and the subsequent FATCA rules was to expose US persons who evade US tax by investing in US securities via (secret) foreign accounts. Let’s not be coy: In the past, many foreign banks, particularly Swiss banks, were more than happy to assist in this deception. From the perspective of US tax compliance, these rules have been a success. The original QI rules were initiated shortly after 9/11 and I’m sure that there was an anti-terrorism motivation as well. That disaster was used as an excuse for quite a few invasive rules that make much less sense than information sharing on income from investments.
5. Many foreign countries who complain about these rules are secretly happen that the US took the initiative. It allows them to get reciprocal information about their own citizens (if they are willing to enter into a information sharing agreement with the US). In fact, the EU has, in recent years, put significant heat on Switzerland to do something about tax evasion that their banks have facilitated. Switzerland must now withhold tax on payments made to “secret” account holders and remit that to EU countries. Similarly, EU countries have agreed internally on rules that roughly resemble FATCA.
6. One could easily disagree (and I tend to myself) with the idea that the US should tax its citizens on their worldwide income wherever they are resident and domiciled. But, this is an objection to the US strong-arming its own non-resident citizens rather than foreign banks who serve them.
7. If a foreign bank doesn’t like these rules and requirements, then the solution is clear—don’t make US portfolio investments available to your clients.
From a tactics perspective, it is true, and it is nothing new, that the US often uses its financial clout to “force” rules on others. I’ve been hearing this for decades about our tax rules. Foreign countries didn’t like it when we insisted on “limitation on benefits” provisions into tax treaties to prevent “treaty shopping”, they didn’t like it when we introduced “earnings stripping rules” to prevent excessive stripping of earnings out of the US by leveraging up US subsidiaries with related-party debt, etc, etc. Eventually, they all get over it and usually adopt the same rules themselves.
Where the US has gone wrong on QI and FATCA is that they have made it expensive for foreign banks to service US persons who reside abroad and need foreign banks for normal transactions. Most US persons with foreign banks accounts are not evading their taxes. Some foreign banks have found that the cost of complying with these rules exceeds any profit they might make from US persons under their normal fee structures. So, they just refuse to do business with them. The US should have insisted on non-discrimination provisions to prevent hardship to the vast majority of US citizens living abroad who have absolutely nothing to hide.
There are plenty of things to complain about in the post 9/11, Patriot Act World. FATCA would be fairly low on my list.
21. July 2014 at 11:46
5. “….secretly *happy*…”
21. July 2014 at 11:59
I’m sure there are some real issues here, but as to the outrage that has you taking notice: Anti-american-ism is not like what most people who haven’t lived it firsthand guess it is.
21. July 2014 at 12:00
Sheesh, we’re just trying to be more like Europe–more and higher taxes, increasingly complex regulation–and they get all huffy about it.
21. July 2014 at 12:05
Speaking of Europe, France’s film makers seem to have some evidence against higher minimum wages;
http://hisstoryisbunk.blogspot.com/2014/07/ce-quils-ont-demande.html
‘ FICAM also cited the new rules of what is called the “collective agreement,” which regulated the industry practices and created minimum wages in several sectors, including technicians such as electricians and camera operators, costume and wardrobe workers, and assistant directors.
‘ After a decade of debate, the agreement was signed by trade unions and the Association of Independent Producers (API), which represents major production companies Gaumont, MK2, Pathe and UGC in France, in October 2012 and went into effect Jan. 1, 2013. At the time, many directors opposed the measures saying that the new wages and stipulations regarding overtime and night shoots would jeopardize low-budget films.’
FICAM just announced that French movie production is down by 24% since the new agreement has been operational.
21. July 2014 at 12:09
I had not seen the Boris Johnson story, very funny, but a minor correction: NS&I is not an investment company, it is the UK Treasury’s retail financing operation, issuing retail savings bonds (&c) as I believe “Treasury Direct” does in the US.
21. July 2014 at 12:45
First posted comment is important.
21. July 2014 at 14:24
I think people in London tend to blame the U.S., sincerely, for a lot of silly things. I’ve been treated to lectures about how British cider has become Amercianized and how that’s a national tragedy, along with complaints about networks showing too many commercials, a devious trick they also learned from the Americans.
With regards to BNP; isn’t that an issue even with American banks in the U.S. The incentives are for both sides to settle before trial and so no legal precedent is ever set.
As the world’s most important financial center, doesn’t it sort of naturally fall to the U.S. to deal with these types of international finance legal issues, in the absence of a strong international financial court.
21. July 2014 at 14:38
If U.S. citizens living overseas can’t open bank accounts, that’s a problem that needs fixing.
The rest is BS. The U.S. doesn’t get its way just because it’s powerful. It gets its way because it’s usually on the right side of things. The anti-bribery law is a good example. The U.S. completely banned bribery at a time when it was generally legal. And it “bullies” foreign companies into not engaging in bribery. Good!
21. July 2014 at 15:39
Not just banks, either. FedEx is currently indicted for refusing to look into the contents of the packages it sends.
21. July 2014 at 15:45
Good post. Of course the real solution is to tax consumption…as we see, taxing income becoming a global mess, horribly complicated.
Are simple sales taxes easier to administer, or would new complications emerge? Sniveling about yacht taxes?
21. July 2014 at 15:57
The problem about taxing consumption too high is that you drive the market underground. The best thing is to tax income, consumption, and wealth (property, for example) all moderately to decrease opportunities for extracting rents and inefficiencies.
21. July 2014 at 16:26
“CMA, OK, I see you’ve stopped even addressing my points. You said:
“Repos are the main means by which central banks maintain the the short term interest rate on target during normal non zlb periods. Europe’s MRO and LTRO are repo’s.”
As I already explained, that has no bearing on whether banks are “subsidized.””
I already explanined what I meant by subsidy. A benefit confered by the fed to banks. The word subsidy is confusing you. All the repos by fed or other CB’s provide preferential funding to banks. Its not equitable or effective. Monetary policy is centered on repo’s, its the main tool for affecting the target interbank rate in Australia, pre 2008 US and is main tool in Europe.
21. July 2014 at 16:33
As someone who lives in China and is paid solely RMB, I can tell you that it is indeed very annoying, I never end up having to pay anything anyway other than the rather steep fee for my taxes to be prepared(there is too much vagueness in the questions for me to feel comfortable doing it myself especially when I contacted the IRS twice about the same question and got two opposite answers). Though many who are in slightly different situations and cannot declare bonafide residency instead are forced to avoid America like the plague as they will be required to pay significantly more taxes if the stay for over 32 days regardless the reason.
21. July 2014 at 17:00
Scott, FATCA is discussed regularly in the wsj.
Both in the opinion page … http://m.us.wsj.com/articles/SB10001424127887323848804578607472987119796?mobile=y
And in the money/business pages.
Not so much in the news section.
21. July 2014 at 17:09
Scott, my question is not so much about FATCA as it is about the free banking concept of Selgin and White. Things like FATCA come about because of international trade and business. And if the government of one country can impose regulations on the banks of another country, isn’t that a potentially fatal problem for free banking?
21. July 2014 at 19:53
@David R. Henderson – The U.S. people are responsible for the actions of the U.S. government. Pretending otherwise is just a convenient cop-out. Why does the government do things most people don’t want? Because the people have allowed a political system to arise that serves the interests of the parties and the politicians instead of the people.
It astonishes me that the country that prides itself on free market capitalism allows politics to be dominated by an anti-competitive duopoly. The parties don’t do a better job because they don’t have to. And the people accept it to the point where any effort to reform the system gets bogged down in Dems vs. Reps partisanship.
Back on topic, the U.S. treats others somewhat poorly, for a big rich country. Is that a flaw, or is that like complaining that the rich guy isn’t generous with his money. My impression is that the U.S. looks to take advantage of almost any situation or power imbalance. But to America’s credit it also expends great resources for the common good. People may complain that the costs have gone up, but I think the benefits still outweigh them. But that’s a very subjective calculation on both sides of the equation.
21. July 2014 at 20:55
I’m a US citizen living in France. Over the years I’ve purchased several apartments here (with mortgages necessarily from French banks) but this year on the purchase of my last apartment I almost didn’t get a loan because all but one of the six banks I applied to passed on my application simply because they didn’t want the hassle of complying with new reporting rules for “US persons.” So, for me, the impact of FATCA has had a noticeably chilling effect over legitimate, albeit small business, and I agree with above commenter Vivian Darkbloom:
“Where the US has gone wrong on QI and FATCA is that they have made it expensive for foreign banks to service US persons who reside abroad and need foreign banks for normal transactions. Most US persons with foreign banks accounts are not evading their taxes. Some foreign banks have found that the cost of complying with these rules exceeds any profit they might make from US persons under their normal fee structures. So, they just refuse to do business with them. The US should have insisted on non-discrimination provisions to prevent hardship to the vast majority of US citizens living abroad who have absolutely nothing to hide.”
21. July 2014 at 21:07
Not merely a bully, but a puritanical scold as well.
Killjoy, bully, cultural imperialist… Not exactly the worst mannered hegemon the world has ever seen. But still quite distasteful. Perhaps there really will be some advantages to living in a multipolar world. Or perhaps not.
22. July 2014 at 01:19
US Citizen and has lived in several countries over the past 25 years, not the US. FATCA is proving a nightmare. To date, three bank accounts closed and compliance costs are through the roof even though I will not owe taxes. Wife died last year and now getting hit with more taxes from the US (wife was not US person and never lived there). I am now sorry that I have passed on the tax burden of US Citizenship to my children, who will likely never live there.
22. July 2014 at 01:37
Slightly OT, but…and the USA has a much better record on citizens’ rights, but…
How would we feel about a large warfleet, with aircraft carriers and possibly nukes, repeatedly sailing around the Gulf of Mexico, and even practicing offensive maneuvers?
I just described the U.S. Seventh Fleet in the China Sea….
22. July 2014 at 01:51
I can confirm that this US tax system burden is real. After a few attempts to relocate some people from a US office of a company that I worked for to Europe the HR just announced company-wide ban on any US relocation. The cost were just exorbitant. In the meantime there were no problem moving people from Asia or LATAM not to speak about switching position within European branches.
22. July 2014 at 03:59
‘I’m no expert here, so I can’t comment on the merits of Fatca’
Ok … But now I’m wondering what the point of this post is?
American policy caters more to domestic interests than expats? The US is perceived more negatively abroad than at home? Foreign debate on American policy focuses more on US action overseas than domestic debate does? America is a more stringent relative banking regulator on an international basis than most Americans think?
All but the last seem obvious … Maybe even inevitable. And the tone of the post strongly suggests the last is not what prof sumner means.
For some reason I’m left with the feeling that this post might really be a commentary on fatca after all …
22. July 2014 at 04:01
Dear Commenters,
Could someone please explain the problems with this study?
“States That Raised Minimum Wage See Faster Job Growth, Report Says”
http://www.npr.org/blogs/thetwo-way/2014/07/19/332879409/states-that-raised-minimum-wage-see-faster-job-growth-report-says
22. July 2014 at 05:28
Travis – disclaimer – I’m not an expert, and not even that smart, but:
It sounds like that trend has been pretty consistently observed over the last few months, so I doubt there are many substantial problems with the report. OTOH, I couldn’t find the actual report, so I can’t say.
Here’s some more info:
http://www.cepr.net/index.php/blogs/cepr-blog/2014-job-creation-in-states-that-raised-the-minimum-wage
I’d be interested in knowing some more:
– How much did each of the 13 states raise their minimum wage?
– What were the changes in jobs at or near the minimum wage?
– Did the states that raised their minimum wages by the most cluster at one end or the other of the distribution?
Overall, if you look at the variation between states in each group (raised minimum wage|didn’t), it looks like there’s enough noise that I wouldn’t expect relatively small increases in the minimum wage to have a noticable short term effect, especially with limited data.
Certainly this tends to cast doubt on a hypothesis that small increases in the minimum wage will have devastating and immediate effects on employment.
22. July 2014 at 06:00
‘Could someone please explain the problems with this study?’
It’s from NPR, and it violates ‘ceteris paribus’.
22. July 2014 at 06:30
Patrick R. Sullivan,
It’s not from NPR. And doesn’t almost everything violate ceteris paribus?
J Mann,
Good points, thanks!
22. July 2014 at 06:31
David, Good point.
Thanks Robert.
BB. I agree.
CA, When Krugman mentioned me in the past, bad things have happened.
Vivian, Thanks for that info. Very helpful. I don’t quite understand this point:
“If a foreign bank doesn’t like these rules and requirements, then the solution is clear””don’t make US portfolio investments available to your clients.”
So the US doesn’t object to Swiss banks facilitating US tax evasion as long as the money is not invested in US securities?
Of course the best solution is to stop taxing capital income, it would greatly ease the paperwork of paying taxes.
Thanks Britmouse.
Max, Bribery is a very different issue. People should not pay bribes, but it’s also true that governments should not tax capital income. So evading capital income taxes is similar to NOT paying bribes, other than it being illegal, of course.
John, I’m not surprised.
Ben, Good point.
CMA, No, that’s the free market interest rate.
Rob, Yes, the IRS cannot answer my tax question either. And yet there are people who claim the income tax system is just.
Thanks Jon.
Gordon, Good point, it would be much more difficult.
Riccardo, Thanks for that info.
Alexei, You really notice how puritanical the US is when you travel around. Unless you go to Saudi Arabia of course.
Ted, Thanks for the info.
JV, Thanks for the info.
Nick, The post was what I said it was, and attempt to raise an issue and find out more information. I succeeded. Not from your comment, but from other commenters.
22. July 2014 at 06:51
“”If a foreign bank doesn’t like these rules and requirements, then the solution is clear””don’t make US portfolio investments available to your clients.”
So the US doesn’t object to Swiss banks facilitating US tax evasion as long as the money is not invested in US securities?”
Scott,
I’m sure the US “doesn’t object”, but neither FATCA nor the QI regulations do anything about that. If a foreign bank does not want to participate in these regimes, then the sanction is that the US will withhold 30 percent tax on US source income paid via that bank (e.g., dividends paid by a US company and interest paid by a US obligor). Those are basically the US domestic law withholding rates in any event. Actually, this regime more or less replicates what happens when a US bank fails to identify its customers. If you fail to supply a US bank with your tax identification number (or fail to report income from your account) you are subject to “backup withholding”. Of course, if someone wants to come forward and file a tax return with proof of ownership and the tax withheld on that payment, they will get a credit (or a refund) for the tax.
So, yes, there are two possible consequences for a foreign bank failing to participate in this regime:
1. The customers of the bank that invest in US securities will be subject to a 30 percent withholding tax on US source income;
2. The foreign bank (and its customers) can avoid that by investing in non-US securities.
One of the more onerous and costly aspects of these regimes is that those banks are subject to independent audit on their compliance. Acceptable auditors will take a sample of the bank’s customers and confirm that the bank is properly identifying its customers (not just US persons) and representing this appropriately to US securities custodians so that the latter can apply the proper withholding rate (zero for persons identified as US citizens and residents, lower treaty rates for residents of treaty countries, and 30 percent US domestic rates for all others).
Foreign banks are required to do due diligence on beneficial owners of foreign trusts and privately held corporations (hiding behind such vehicles had been a common evasion tactic and Swiss banks were notorious for assisting US persons and others to set up such structures to hide their identities). Also, FATCA introduces a new requirement of 1099 reporting. This goes beyond the earlier QI rules. BTW, the original QI regime was a Bush II administration initiative. If you don’t like this, it really is not the brainchild of the Obama administration.
22. July 2014 at 06:56
“I’m *not* sure the US doesn’t object…” (Gotta get a better proofreader).
22. July 2014 at 07:54
It’s not from NPR. And doesn’t almost everything violate ceteris paribus?’
Okay, it’s from AP–the analysis of data from BLS–not NPR; same problem, it’s not economics, it’s politics.
Yes, to some degree, ceteris isn’t paribus with all studies, but this one is particularly stupid. Say;
‘The number of jobs in Florida has risen 1.6 percent this year, the most of the 13 states with higher minimums. Its minimum rose to $7.93 an hour from $7.79 last year.’
What does that have to do with Obama’s proposal to raise the minimum wage to $10.10?
22. July 2014 at 07:54
Travis: again, I’m not an expert, but I think one of my questions was on target.
9 of the 13 states had automatic inflation adjustments. Assuming the others were in line with Ohio, that’s a little more than 1%.
The other 4 (NY, NJ, RT, and CT) had much larger adjustments. Of those, 3 of the four are below the mean for all states, and are the bottom 3 for the minimum wage increasing states.
My guess is the data isn’t precise enough to tell much, but if you were going to rely on it, you could say “1% wage increases are associated with greater increases in employment, but bigger min wage increases tend to be assocated with smaller increases in employment.”
22. July 2014 at 12:15
“States That Raised Minimum Wage See Faster Job Growth, Report Says”
At a glance I’d say that’s what’s known as a Fox Butterfield, a statement that raises a seeming contradiction but is actually noncontradictory. The richer a society is, the higher it is willing to raise minimum wages, because the effect on unemployment is smaller.
There’s also a perception that the US government is trying to go after industries it doesn’t like
That’s probably because it’s de rigeur in Europe to protect “national industries.” Obviously these are terrible policies anywhere, but they’re much less common here (though this is probably less true now than in the past, because the rest of the OECD has generally been liberalizing and we’ve gotten a bit less liberal on trade issues).
Really, about 90% of the criticism of the United States from abroad is nonsense, and the other 10% involves complaints that the U.S. is acting like other countries usually do.
22. July 2014 at 12:16
J Mann,
Thanks again!
Patrick R. Sullivan, fair enough.
22. July 2014 at 12:27
Whatever the European view of the US is for the reasons given above, the Europeans know that when there is the danger of war, that they can’t fight a bear without US muscle. It sort of tempers things.
But the perception is poor, in general. Reading, a few US blogs, gives a glimpse into the heat and confrontation in the society. Bring that to Europe and it is just not acceptable.
22. July 2014 at 12:47
@ David Henderson & MF:
Yes, the US government is a bully. But it gets its power from the American people. So America is, indeed, a bully (via its government).
22. July 2014 at 12:58
True or false?
Ezra Klein: “No, the Halbig case isn’t going to destroy Obamacare”
22. July 2014 at 13:58
Philo:
Which people? Certainly not me, certainly not everyone.
I know what you mean, and in a way I agree with it, but your fleshing things out that way still lumps innocent people into it, because there are “American people” who are anti-US government.
Or maybe we can say that those who don’t support the American government are not American? That’s fine with me, because it’s just a silly label anyway. Why can’t we all refer to each other by our names? Philo, nice to meet you, I’m Major_Freedom.
So hard?
22. July 2014 at 14:28
“CMA, No, that’s the free market interest rate.”
Free market in reserves only banks can hold.
22. July 2014 at 18:11
Vivian- The FATCA withholding is different than FDAP withholding and isn’t really concerned with treaty shopping. Most foreign investment is debt, and the portfolio exception (if applicable) excludes interest while gain is not generally taxable to NRAs. That doesn’t require treaty qualification and is open to residents of Caymans, BVI, or anywhere so long as they certify that they aren’t U.S. taxpayers.
FATCA is a completely different monster and imposes 30% withholding even on portfolio interest and gains from the sale of FDAP assets. Withholdable payments do include FDAP income but that’s just statutory definition-by-reference. No treaty protects withholdable payments.
And FATCA definitely reaches foreign people with no U.S. investments. A Brit mom n pop shop that banks at HSBC must give FATCA disclosures because the UK has imposed FATCA on its financial institutions and FATCA requires them to sniff around their customers. If they refuse, UK HSBC may be required to withhold 30% on behalf of the U.S. as well. In any case, foreigners could indirectly suffer 30% withholding even if they’re 7 degrees of separation from a U.S investment.
Also, the QIA are not reciprocal. The country partner commits to enforce FATCA (a U.S. law, with a U.S. administered reporting regime, with specific requirements and penalties (!), which means that the country passes legislation to compel its financial institutions (including funds, pensions, credit card companies, investment vehicles, etc.) to comply FATCA or incur the FATCA penalty. How does the U.S. reciprocate? We promise to provide information on the country partner’s residents’ accounts but doesn’t compel any particular collection regime, penalties, and limits its obligations to accounts “maintained” by U.S. financial institutions. (Congress militantly imposes taxing or reporting on foreign depositors by U.S. banks– see, e.g., the 2012 amendment to the Red Tape Reduction Act (H.R. 4078)) In sum, THEY enforce our FATCA law and WE don’t impose any obligation, let alone FATCA, on ourselves.
FATCA is bullying because we are strong-arming all foreign institutions (not just banks) to enforce our laws, commit resources to reporting on their own clients, and generally do the job of the U.S. government at their own expense. Just because the institution bought some Treasuries or something innocuous. My life would be a lot easier if I could force my neighbors under financial penalty to watch my kids, but it wouldn’t be neighborly.
FATCA is just the latest and worse imposition on foreigners dealing with U.S. citizens. And how useful is any of that? The PFIC reporting requirements already made it a pain to have minority U.S. shareholders, F5471 compliance made it a pain to hire U.S. directors and officers, F3560 makes it difficult for ordinary foreign trusts and estates to deal with kids sojurning in the U.S. How much evasion is being caught or forestalled? How many small businesses without expensive finance/accounting departments are excluded from the global market of investors, customers, and investments?
22. July 2014 at 23:39
Bababooey,
You’ve misrepresented or misunderstood a few things I said in earlier comments. So let me set the record straight:
“The FATCA withholding is different than FDAP withholding and isn’t really concerned with treaty shopping.”
I did not write that FATCA withholding was identical to FDAP withholding. My comment referred to both QI regulations and the follow-up FATCA legislation. The FATCA legislation, which is a follow-on to QI rules, concentrates on US persons and strengthens the enforcement rules regarding them. The QI rules addressed both US persons and NRA’s. FATCA requires withholding on US persons that is greater than FDAP withholding on foreign persons for the simple reason that the scope of taxation of US citizens and residents is different from our taxation of foreign investors. FATCA requires withholding on US persons and in similar circumstances much the same as the backup withholding that US banks must initiate with respect to US persons who don’t provide their SSAN or TIN. Withholding on FATCA for undocumented US persons must be made, for example, on portfolio interest for the simple reason that US persons are not exempt from US tax on portfolio interest (e.g. Treasuries) and on gross proceeds of US securities (similar to backup withholding required of US banks)
These rules clearly *are* concerned with “treaty shopping” and are closely based on FDAP rules and principles (as well as “backup withholding” under FATCA for US persons). For example, QI rules require that foreign banks that have signed QI agreements identify their customers and apply treaty (or non-treaty withholding rates) on FDAP correctly. The QI rules are not just concerned with US persons evading their US taxes. If the US were not concerned with “treaty shopping” the rules would not make them liable for applying non-treaty rates (or inappropriate treaty rates) to non-US persons that don’t qualify. Also, “US persons” are not within the scope of persons protected by tax treaties. If a US person conceals his or her identity from a foreign bank and gets an exemption from withholding (including backup withholding) they *are* treaty shopping. Every US tax treaty contains a “savings clause” reserving the right of the US to tax its citizens.
Treaty benefits are, by definition, granted to *residents* of the treaty partner country that derive (and beneficially own) income from sources within the other treaty state. To argue that source state cannot insist that persons taking advantage of these treaty rules and lower withholding tax rates is not required to establish they are residents of the foreign country concerned and the beneficial owner of the protected income isn’t well founded, in my view. Many years ago, when the US adopted “conduit financing regulations” to combat back-to-back financing and licensing arrangements via ostensible treaty partner countries, it created an uproar. But, those US concerns were well-founded and the resulting rules, while initially quite unpopular by some of our indignant treaty partners who built significant industries encouraging such practices, eventually got over it.
“Also, the QIA are not reciprocal. The country partner commits to enforce FATCA.. .” First, you must mean the FFIA are not reciprocal because the FFI Agreements relate to FATCA. I did not say the QIA (“Qualified Intermediary Agreements”) or the FFIA were reciprocal. I said that at the same time the US has implemented FATCA, they offered bilateral and reciprocal exchange of information agreements to foreign governments (actually, even before that). Since you are mentioning the UK, here is the text of the agreement the US entered into with the UK which commits the US to provide information on income earned from US bank accounts by UK residents:
http://www.treasury.gov/resource-center/tax-policy/treaties/Documents/FATCA-Agreement-UK-9-12-2012.pdff
This was in response to the following original quote by Scott:
“If Latin American governments ask for information on the Miami bank accounts of their residents (who may be evading taxes) the US government refuses to provide this information. I don’t know if this double standard exists, but it is certainly perceived to exist.”
The fact is, the US is very willing to enter into mutual simultaneous information exchange agreements with those Latin American countries (and any other country).
Apropos the UK, here’s a news release supporting the idea that “imitation is a form of flattery”;
https://www.gov.uk/government/news/new-uk-multilateral-action-to-combat-tax-evasion
Also, the FATCA legislation foresees the situation in which a *foreign* government prohibits withholding by country resident banks. In that instance, rather than have the foreign bank withhold the tax, the foreign bank can provide information and instructions to the US custodian (Brown Brothers Harriman and the like) so that the withholding can be done at that level.
“And FATCA definitely reaches foreign people with no U.S. investments. A Brit mom n pop shop that banks at HSBC must give FATCA disclosures because the UK has imposed FATCA on its financial institutions and FATCA requires them to sniff around their customers. If they refuse, UK HSBC may be required to withhold 30% on behalf of the U.S. as well. In any case, foreigners could indirectly suffer 30% withholding even if they’re 7 degrees of separation from a U.S investment.”
I’m afraid you are going to have to explain this one. Foreign Financial Institutions (FFI) participate in FATCA by entering into an FFI agreement with the IRS. You seem to be confusing UK legislation with FATCA, in which case your beef is with the UK government. The QIA agreement requires withholding on NRA’s; FATCA requires withholding on US persons. Neither require withholding on any non-US source income.
As stated at the very outset, I’m of two minds regarding FATCA (and QI rules). In an era of global capital mobility and global banking, one simply cannot rely on the “honor system” of tax enforcement. These rules, or some more reasonable version of them, were probably necessary for adequate enforcement. I think the recent flood of revelations concerning Swiss banking practices in assisting in tax avoidance by US persons bears this out. For these same people to now claim the US is “bullying them” is self-serving and rather disingenuous.
These rules are certainly not perfect. As I indicated above, a lot of US citizens residing abroad who need foreign banking services are caught in the middle. More thought should have been given to their needs. I’m sympathetic to this having lived now more than 35 years outside the US and having consulted on international tax rules during my entire professional career (including QI, although I retired prior to FATCA). Despite this, I’m not particularly surprised or concerned that, within pragmatic reason, the US uses its superior negotiating position to its advantage. Bullying? Maybe, but the situation here is much more nuanced to arrive at that hasty and breezy conclusion.
Rather than being a “bully”, my sense is that the US tends to be rather too puritan in its approach to questions like this one. Rather than a more pragmatic approach that would recognize fully not only the benefits, but also the costs, the US tends to strive for 100 percent enforcement and perfection. The economic rule of diminishing returns seems to get overwhelmed by our puritan ethos. That goes for a lot of silly things we attempt to achieve through government regulation in the US. I also believe that continuing to tax persons purely on the basis of citizenship rather than residency or domicile greatly exacerbates problems that have been encountered by “normal” citizens in respect of FATCA and QI.
BTW, for those interested in a fairly non-technical discussion of FATCA, here’s a good summary prepared by Deloitte:
http://www.deloitte.com/assets/dcom-unitedstates/local%20assets/documents/tax/us_tax_fatca_faqs_061711.pdf
23. July 2014 at 03:27
Ok maybe I’m dense … Sorry.
I learned a lot from Vivian’s comment, to which you answered: ‘don’t tax investment in the first place’. Many others complained about the regulatory burden. I don’t share your ability to distinguish self interest from outrage … So it’s hard for me to know what to make of those. How much of what Vivian said convinced you about the specific of this situation? Because we are going to keep taxing investments for a while.
23. July 2014 at 07:53
@ MF:
I said America is a bully. I didn’t say that every American was a bully.
I used your nickname. Why stand on formality?
23. July 2014 at 08:24
Vivian and bababooey, Thanks for the enlightening discussion of the issues. The issue is obviously quite complex and you two certainly have a far better understanding of it than I do.
Nick, Anyone who has had problems with the IRS, INS, DEA or a host of other agencies knows that the US can be a bully to its own citizens. So when I hear similar stories from foreigners I am not at all surprised. Having said that, I have an open mind on the policy question, as I am certainly far less well informed than Vivian and Bababooey. I would encourage readers to pay more attention to their comments than anything I have to say here. The post was aimed at sparking conversation.
CMA, Banks are free to lend the reserves to you, at which point it’s called “cash.”
Philo, I don’t think those generalizations are helpful. America is so far from being a Swiss-style democracy that it is simply not reasonable to assume that legislation like Fatca reflects the will of the people. The party that controls Congress got less votes than the minority party. But it’s much more than that. You are forced to vote in a two party system, when there are 1000s of issues at stake. That’s not to say that American public opinion might not be quite bullying on many issues, but rather that governance is very complex.
23. July 2014 at 08:25
Philo:
I know you didn’t say every American is a bully. That is what prompted me to ask which Americans you are referring to.
You argued America is a bully because of the American people. I just wanted to know which Americans you had in mind. I of course am not expecting a list of formal names, but maybe some general idea of what you mean by “the American people.” We hear that phrase a lot from politicians, and that means more likely than not it is some form of weasel word meant to decieve.
23. July 2014 at 09:00
“Nick, Anyone who has had problems with the IRS, INS, DEA or a host of other agencies knows that the US can be a bully to its own citizens.”
Yep. And, if there is a big danger with FATCA, that’s it. Aside from the reporting requirements of foreign banks, FATCA introduced enhanced reporting requirements of US persons that have foreign bank accounts and assets. It’s complicated, very complicated, to just figure out what type of assets need to be reported. Failure to report can subject one to both civil and criminal penalties.
If history is any guide, unscrupulous prosecutors will use these rules to nail people, not because they’ve intentionally violated the law, but because they may have made some technical error that opens them up to partisan persecution or are for some other tangential reason. We should be very concerned about the politicization of the IRS and the growing inclination to use public prosecutor’s offices as a branch of one political party or the other. Increasingly complex laws and regulations only enhance the ability of those in power to abuse that power.
23. July 2014 at 10:34
Vivian- I guess I did misread you, sorry. And when I said “QIAs” aren’t reciprocal I meant “IGAs”. the UK agreed to implement FACTA by IGA , but what exactly has the U.S. agreed to? I think you’ll find it’s considerably less.
It remains a common misconception that an FFI with no U.S. investments is immune from FATCA. The reality is that most FFIs have accounts with other FFIs that do have such investments. FATCA makes all FFIs in that chain U.S. withholding agents and given the broad, non-intuitive definition of FFI, that sweeps in a lot of foreign persons who would never have thought they’re legally compelled to withhold for the U.S., register with the U.S. and so on. Even those not swept in are spending money on people like you (:-) to help them figure it out.
Another misconception is that an FFI without U.S. depositor/customers is immune from FATCA; that FFI still has to survey its customers and register report its findings to the IRS and it may have FFI customers too.
Last, I am not surprised that OECD countries are imposing their own FACT regimes. Governments don’t like tax competition, and so, like all mature businesses, they’re forming a cartel to destroy the competition. That’s not good for normal people, because organizations- govt, business, social- that must compete are more accountable to their customers and members.
23. July 2014 at 12:02
U.S. legislation (FATCA, etc.) must at least weakly reflect the will of the American people, since if the latter were *sufficiently* opposed to it the politicians who supported it would be voted out of office (or would never have been voted in). But perhaps it is, after all, an exaggeration to say that the U.S., as opposed to the U.S. government, is a bully; the more accurate statement may be that the U.S.–the nation as a whole–*tolerates*–does not *strongly oppose*–the bullying that occurs. By the same token, perhaps rather than saying that the U.S. government is a bully we should say that *certain elements* in the U.S. government are bullies, and that the rest of the government does not strongly enough oppose that bullying.
But here we are entangled in our metaphor. It is relatively (not completely!) straightforward to attribute beliefs, intentions, and agency to individual people. Attributing them to collective entities–collections of people–is fraught with conceptual conundrums.
23. July 2014 at 12:05
@ MF:
Which Americans am I referring to? Explicitly, none. Implicitly, since I referred to *America*, all of them. But I did not say that any of them was a bully.
23. July 2014 at 23:50
“It remains a common misconception that an FFI with no U.S. investments is immune from FATCA. The reality is that most FFIs have accounts with other FFIs that do have such investments. FATCA makes all FFIs in that chain U.S. withholding agents and given the broad, non-intuitive definition of FFI, that sweeps in a lot of foreign persons who would never have thought they’re legally compelled to withhold for the U.S., register with the U.S. and so on. Even those not swept in are spending money on people like you (:-) to help them figure it out.”
Bababooey,
You need to think more carefully about the passage above.
You’ve stated that an FFI “with no US investments” is subject to FATCA. But, the key here is what constitutes “a US investment”. Simply interposing an intermediate entity (say another custodian or FFI) between me and my US stock portfolio means I no longer have “a US investment” is to put form over substance. If FATCA were to allow this type of smokescreen planning, then it would be child’s play to get around the rules. That’s why, historically, tax evaders have set up (multiple) trusts, offshore corporations, back-to-back financing and licensing schemes, etc., to hide their identities from tax authorities. Similarly, if I invest in a partnership that purchases US stock, the individual partner is deemed to have made that investment, not the partnership. Investing “via” a bank, a partnership, a trust, etc., into the US does not mean I’ve invested in a bank, etc., for tax purposes. The rules with respect to when I am investing “via” versus “in” are unquestionably complex, but that is nevertheless what the rules aim at, and for obvious reasons. But, I agree, it makes the rules challenging when there are multiple intermediaries between the investment and the real investor.
Your original comment regarding “Mom and Pop” I think was misplaced. These type of schemes are not the type that mom and pop are likely to be engaged in.
It’s too bad people are no longer spending money on me to figure this stuff out, but I hope you’ll be able to pick up the slack in my absence. I’m too busy now minding the tomatoes and trying to keep Scott honest and I do all of that for free!
24. July 2014 at 00:06
Bababooey,
Let me come at this from a slightly different angle, because I suspect we are not in disagreement:
When you write that an FFI (foreign financial institution) can be subject to FATCA (and QI) even when the FFI “has no US investments”, I think you probably meant *direct* US investment. Of course, in the economic sense, while an FFI can invest for its own account, it is most often acting as custodian or intermediary for another (and really has no direct or indirect investment itself in the real sense because it is acting on behalf of a customer).
As discussed above, I can agree that all FFI’s in the chain of intermediate entities between the investor and the investment are subject to FATCA and this is very complex for all concerned to sort out.
24. July 2014 at 01:26
“France, the Bully”?
Those weakling Swiss bankers are getting beaten up by every bully on the block:
http://dealbook.nytimes.com/2014/07/23/ubs-being-investigated-in-france-over-tax-evasion/?_php=true&_type=blogs&mabReward=RI%3A7&action=click&pgtype=Homepage®ion=CColumn&module=Recommendation&src=rechp&WT.nav=RecEngine&_r=0
24. July 2014 at 11:38
Philo, I mostly agree. Just keep in mind that 98% of Americans have never heard of FATCA, maybe 99.9% of those American not overseas. I’d guess 90% of Americans who know about FATC (mostly overseas Americans) oppose it.
As you say, it’s a matter of degree.
Vivian, Let’s say a Swiss investment company owned no US assets. 100% was invested in European stocks and bonds. Could a US citizen avoid US taxes by putting money into that Swiss company? (Not legally avoid, I mean would FATCA catch the American.)
24. July 2014 at 12:57
Well, Scott, let’s be clear: that US citizen would be violating the law if he or she were not to report taxable income earned through that account. FATCA allows foreign financial institutions to enter into agreements with the IRS. If such an agreement is entered into, they need to report information on their US account holders to the IRS. The consequence for not doing so, or for not entering into an FFI Agreement, is generally that the US will withhold tax (generally 30 percent) on payments of US source income (and gross proceeds) from US securities. Thus, it does not appear that FATCA would, in and of itself, have any “teeth” with respect to the scenario you outline (no direct or indirect ownership of US securities or other assets that produce US source income).
(There’s an additional issue presented by your question given that you’ve used the term “investment company”. I’m assuming for simplicity that the vehicle is considered a foreign financial institution as defined in the statute)
Keep in mind though, that several Swiss banks have gotten into legal trouble even before FATCA for assisting US citizens evade US tax ( the legal theory, I think is basically criminal conspiracy combined with sufficient nexus to give the US jurisdiction). So, FATCA or no FATCA, it’s not a scenario I would recommend US citizens or foreign banks and other FFI’s serving them to follow. Also, FATCA or no FATCA, that US citizen might get caught up in bilateral exchange of information agreements the US has with many countries. BTW, the word you are looking for is criminal evasion, not legal avoidance.
And, just to be sure, I’m not giving you or anyone else here legal advice, As they say, consult with your own lawyer or tax advisor! If need be, one with criminal defense expertise.
4. September 2014 at 02:39
It’s too bad for the US that self-righteousness commands no market price, if it did, the countries economic problems would be over.
Few things grate on me worse than listening to Americans bleating about how their country is the “land of the free” when the North Koreans living across town have more rights than I do. Or did, I should theoretically have the same rights as them now that I have cast away the incredible millstone of US citizenship. However, I don’t think the US will stop its pursuit of runaway slaves just because they took some oath. Renunciation of citizenship hits Americans simultaneously in their wallets (what do Americans love more than money?), and their egos, as it challenges their unquestioned belief that their country is the most holy righteous land the world has ever known and all peoples should bow down and worship them for being American.