December 16, 2023
FACTA Economic Perils Becoming Apparent

by Denis Kleinfeld

Denis Kleinfeld considers the potential pitfalls countries may face complying with the US FACTA legislation.

The economies of the world run best on the free flow of capital through the global financial system. This integrated system, it is reasonable to say, is suffering from considerable damage as a result of poorly conceived governmental tax, compliance, and regulatory policies and legislation. With the enactment of the Foreign Account Compliance Act (‘FACTA’) by the United States, the economics of the world’s financial and related systems are exposed to further extremely grave difficulties.

Not too long ago the OECD unilaterally took the position that offshore tax havens were causing the tax shortfall being experienced by the industrial countries. The OECD even created lists for countries – placing them on either a ‘white’ or a ‘black’ list. Of course, countries like the United States, the heavy weight of tax havens, were conspicuously left off the list. This then started the ball rolling with OECD’s attempt to eliminate ‘tax competition’ in favour of ‘tax harmony’. The goal of the OECD was to activate tax transparency and organise financial matters so that the government and others who are dependent got its ‘fair share’. I consider this the battle between the free market and a socialist market.

The implementation of this effort created considerable controversy that has yet to end; the impact is just becoming apparent to a wider variety of people and institutions. Under the guise of tax compliance, FACTA is the newest and most intense of a long list of US and other OECD country’s efforts to bring the financial world under their control.

The ‘qualified intermediary’ rules imposed by the US was a small step that tested the world’s tolerance for economic control via the tax system. The so-called ‘QI’ rules certainly created serious problems and costs for foreign financial institutions operations but they still went along without much fuss. Tax information agreements have proliferated along with treaties with extensive limitations of benefits articles and numerous other mechanisms have been instituted to achieve OECD dictated goals on the rest of the world.

What exactly are the actual goals of the OECD governments?

In 2009, a meeting was held in Mexico City by the OECD. The goal of the meeting as reported by the Brussels Journal was to create a global high-tax cartel. While the OECD claimed to be in favour of transparency and global economic growth, their actions seemed unmistakably contrary. Clearly, in order to create a govenmental tax cartel, the OECD needed to have tax information freely shared among the OECD members and other countries.

At that 2009 meeting, the OECD managed to get some 87 jurisdictions to sign on to its new global ‘tax standard’. According to the OECD, that also meant that the US should be sharing tax information with all cooperating countries, including those who are non-Democratic and/or corrupt.

With the passage of FACTA, it appears that the new tax world order is becoming, possibly, a reality right before our eyes. Without going into too much detail, FACTA now requires a laundry list of non-US organisations referred to as foreign financial institutions (FFIs) to enter into an agreement with the Internal Revenue Service to provide extraordinary detailed information. This will effect customers of these FFIs, which includes business types that one would not normally think of as financial institutions, even where their involvement may only be indirectly connected with the United States. Compliance officers love it and relationship officers hate it.

This is not happening in a vacuum. At the same time that FACTA is beginning to be implemented, certain difficulties of the Internal Revenue Service have become well documented by the United States General Accountancy Office, the Taxpayer Advocates Office, the Inspector General of the Internal Revenue Service and the General Accountancy Office (GAO). In brief, all the reports essentially find that the Internal Revenue Service has deep and continuing systemic problems.

Of significant importance is, for example, that for the past 15 years the IRS has failed to have sufficient books and records from which the GAO could run an audit. Taxpayer identification theft has, according to testimony and a recent Congressional hearing, become so prolifically rampant that it is, perhaps, unstoppable. With privacy and confidentiality of financial information being of heightened concern, there is a widespread belief among many tax professionals and data security experts, that there is no assurance that information provided to the Internal Revenue Service can not be leaked.

A key development in the FACTA story, impacting the worldwide financial industry, is that the United States, France, Germany, Italy, Spain, the United Kingdom and Mexico have entered into an agreement to reciprocate and implement FACTA. This is a significant move in establishing a global focus on tax information exchange. Depending on how you look at it this, it is either tax transparency or the elimination of the universal human right to financial confidentiality or privacy. As impacting the United States, basically, the world contains foreign FFIs to the US, and now the US has FFIs to the world.

The Mexican Tax Administration Service, for example, can access information on thousands of US bank accounts held by Mexican citizens “automatically” under this new collaboration with the Internal Revenue Service according to a recent BNA Daily Tax Report. Tax professionals, bankers, insurance companies and other bodies considered to be FFIs, particularly in Texas, Arizona, New Mexico and California, are just beginning to consider this impact.

Is there something fundamentally wrong with the income tax system itself? Is the emphasis on enforcement counter-productive to the mobility of capital in the financial market-place? It seems to me that if a country has to declare 300,000 or 400,000 of its citizens as tax criminals, then either a lot people woke up one morning and decided to become tax evaders as a career choice, or there is something wrong with the system itself. I leave that for you to consider.

It is clear that FACTA and the reciprocal agreements being entered into by other countries pose great economic problems, whether intended or not. Each country proceeds from this point forward, forewarned that they are pursuing their tax compliance policies to enforce an income tax system at the risk of significant peril to their economies.