Monday, December 16, 2013

A calmer view of FATCA

US citizenship-based taxation being what it is; FATCA, being what it is, I've been thinking more calmly on the subject of FATCA these days. For one thing, I've been compliant as far as tax filings and FBARs are concerned for a long, long time, so I don't personally have any particular problem with reporting. However, I do understand the panic over the terrible penalties others face, potentially, if they have not been compliant. Either they did not know of the FBAR requirement and since they did not owe any tax, they did not realize they still had to file their taxes. The program to bring them into compliance is not really conducive to coming it. It is also punitive and, in the case of people who would owe nothing, I think there should be a more lenient approach. And the taxpayer's side of FATCA declaration, the 8938 form, is a pain in the neck, almost the same form as the FBAR, but not quite and not with the same threshold amounts. It can be confusing. But I do it.

Another aspect of my calm is that I live in France and I think the the inter-governmental agreement (IGA) that was signed on November 14 between the US and France is fair. It doesn't answer all the questions, but it helps. It is a Model IA agreement. (Price Waterhouse has a summary of types of agreements and the particular clauses for each country, as well as how far along in the agreement process they are.) Without an agreement the IRS expects all foreign financial institutions (FFI) are expected to report on US persons who hold accounts. If they do not correctly identify all their US persons; if they make mistakes, then the FFI face terrible penalties. The cost of FFI compliance and the penalties have led many institutions to just not want to do business with US persons. That burns me up. If I lived in Switzerland, I'd be frothing at the mouth, because the discrimination would be extended to my spouse, who is not a US person. With an IGA, especially the Model II, the FFI report on US persons to their own government agency, which then reports to the IRS. Not only that, there are pages of particular rules pertaining to the country and, for France, that includes a list of types of accounts that the FFI will not have to report on, at all, and a time-table to introduce increasing amounts of information to be reported. 

In summary, from the AARO meeting last week in which John Fredenburger presented the IGA, it is set to take effect “when their necessary internal procedures for entry into force have been completed”. So, when is that? Is it a treaty that has to be ratified or does agreement mean something else? Assuming things are in place, the reported information with increase over a three year period from 2014 to 2016. The required due diligence on account ID is different below and above $1,000,000 worth. And most savings accounts, the kind with (French) tax incentives, the most common in France, including the work-related ones, are excluded from being reported by the FFI. There are still some questions about a very popular type of savings/investment account called Assurance Vie. Other accounts, like checking accounts an investment accounts, if they have above the threshold amount in them, will be reported. 

Now, the FFI in France will be reporting on some, but not all accounts. That doesn't mean that I, as the US tax-filer, will not have to report them on my FBAR and form 8938. It just means that the FFI have less reason to reject US persons as customers. I think that most Americans in France have checking accounts and maybe a few of the excluded accounts. Long-term residents, like me or the children, might have the Assurance-Vie or other investment accounts. For my part, I have made sure that I have nothing that is hard to declare on my own -- simple "mono-support" Assurance-Vie with no fund-like investments that are a major headache to declare and require the help of a tax professional. Actually, once this FATCA thing gets off the ground, we should be getting the paperwork reflecting what is reported to the IRS, so that we can fill out our tax forms more easily.

I started out saying "US citizenship-based taxation being what it is; FATCA, being what it is". What I would like is change in what is. If the US were to conform to the world-wide norm of residence-based taxation, most Americans overseas would not have to deal with filing US taxes, filing an FBAR to the US, or having FATCA-related discrimination. Only those with US source income would have to deal with US taxes. ACA, with AARO support, has proposed this change to residence-based taxation. Unfortunately, with the US Congress in such dysfunctional mode, I don't think the proposal will go anywhere, soon. There is renewed interest on the part of Republicans to push for it, but I believe such radical rethinking of US doctrine will need bi-partisan support.

What can be done in the mean time? Well, a more realistic and lenient approach to allow Americans overseas to become compliant if they haven't been, so far. The first step would be to inform Americans going overseas that, should they stay abroad, they remain US taxpayers and must file..... They could put a paragraph about that on the inside passport cover! 
They could inform the parents of children born in the US that their children are Americans. If you are not American, you might not realize that quirk of US citizenship because in so many other countries "droit du sol" is not the norm. An editorial change to birth certificates to "declaration of birth and US citizenship" would take care of that. They could allow parents to disavow or renounce US citizenship for their minor or mentally incapacitated children, so that this citizenship does not become a burden on people made no effort to gain it and did not live for any significant length of time in the US. 

They could bring the FBAR threshold amounts for reporting up to the FATCA thresholds. AARO has been working to that end for years, even before FATCA -- just bring up the FBAR thresholds. If they were linked to inflation, they would be up there!

It's nice to think they could get rid of FATCA, but they won't. Let's face it, there are people who used off-shore accounts to amass undeclared income because the FFI did not have the document matching requirements that have existed in the US for decades. But let's face it, too, they are, for the most part, US residents. Now that this FATCA thing has been invented, other countries, all interested in collecting more income, think this is a great thing, so it will become, global, whether we like it, or not. Of course, a country like France is only interested in the foreign accounts of residents of France.

Barring a change to residence-based citizenship, which would be so simple, why not say that all accounts in one's country of residence are treated as "home" not "foreign" accounts, thus getting rid of FBAR and FATCA reporting on "home" accounts?

As things stand, now, in many countries, US citizenship has become a burden. It explains the current explosion in renunciations. Even I have considered it. As a member of AAWE and AARO, I was part of the efforts to make sure my children are American. I had no idea that what we had done gave them automatic US citizenship, whether we declared their birth at the embassy, or not. I thought it was their right to citizenship, but that it had to be requested (and I did, and my children have been very happy to be Americans). It turns out, I was wrong. I have learned of the case of a Canadian woman, who had knowingly relinquished her US citizenship and whose citizenship was reinstated without her requesting it and knowing it, and since renounced, has a child, now an adult, a Canadian, who is now, all of a sudden, told he is an American, too. With all those tax filing obligations. To add to the distress, he is unable to renounce this citizenship and the consulate will not allow his mother, who is responsible for all decisions, cannot renounce on his behalf. He is entrapped. If it were any other country, this would not be such a problem.

Here are the US and French versions of the IGA:

If you live in a country with an IGA, how do you feel about it? What's in it that is good or bad or unclear?


KP said...

Well..we should all vote for the other party which we hope to repeal this law. Great blog.

Anonymous said...

I am a French citizen but now a US Person and Resident. I (unfortunately) have an "Assurance Vie" in France and I am very confused about how to report it on my tax return. Do you have any hint to share?