Editor's note: This commentary is by Norman B. Solomon, a retired businessman and CEO and former director of the World Economic Forum in Geneva. He is now the co-owner of Windmill Hill Alpaca Farm and Artisanry in Brookline.
Many U.S. firms, both in manufacturing and services, derive a substantial portion of their revenues from business conducted outside of the United States. Whether through international trade or direct foreign investment, maintaining a presence in the countries of interest is a prerequisite to sustaining a competitive position in today’s global economy.
One would assume that the current Washington administration would have understood this reality when it created the Foreign Account Tax Compliance Act (FATCA 2010); evidence suggests otherwise. FATCA requires that every financial institution anywhere in the world report to the IRS all transactions involving American citizens.
FATCA evolved as a direct result of wealthy Americans transferring millions of dollars to offshore safe havens. Translation: out of reach of the IRS. The U.S. government had good reason to seek recovery of the billions of dollars linked to this willful tax avoidance.
The problem: the system implemented by the IRS is having a devastating impact upon the 7.5 million ordinary American citizens who, according to the State Department, live and work in over 160 countries around the world. Thirty thousand of those Americans live in Switzerland, the first country targeted by the IRS. Its fabled banking secrecy has always created an aura of mystery, a derivative of its culture of privacy, sovereignty and independence. Unquestionably, the banking system has been exploited by many residing outside of the country.
According to the U.S. State Department, the number of Americans seeking expatriation during the second quarter of 2012 increased by 66 percent over the prior year.
Switzerland’s central European location, its high standard of living and quality of life, and its political and economic stability make it ideal for accessing European markets. It is a highly desirable location for Americans to live and work. Many relocated with their families, established new roots and relationships and built a lasting trust in their community.
Why, then, has the Japan Times (Aug. 20, 2013) stated that “… for the banks, Americans have become toxic.” Der Spiegel (Germany, Dec. 14, 2011) writes: “European banks are dumping clients with U.S. citizenship.” Financial institutions worldwide have decided it is not worth the costly, complex and time consuming administrative task demanded by FATCA compliance, requiring the recording and reporting of every American transaction to the IRS. Swiss banks, for example, are cancelling all American accounts including insurance, mortgages, loans, investments, etc., and have refused to open accounts for anyone even remotely linked to an American citizen. Similar actions are taking place in other countries as they sign the FATCA agreement with the U.S. Even “accidental” Americans living outside of the U.S. (those born to foreign parents residing temporarily in the U.S.) have been thrust into a financial black hole. Pending marriages between U.S. and non-U.S. citizens have been placed on hold as couples evaluate the impact of the financial impasse likely to occur.
Americans living and working abroad are now at risk, weakening the direct link between their business and its markets. This limits the company’s ability to respond to the unique social, political and cultural aspects of the “foreign” environment.
Some Americans are packing up and going home. Others are renouncing U.S. citizenship. According to the U.S. State Department, the number of Americans seeking expatriation during the second quarter of 2012 increased by 66 percent over the prior year. The London Economi (Oct, 12, 2013) reported the view of an American recently losing her account with DeutchBank in Germany: “When you are locked out of basic financial services, renouncing citizenship can be a matter of survival.”
On Jan. 29, 2013, the Swiss online newspaper Genevalunch.com published a letter from a Vermonter, (William Olenick) who lives with his Swiss wife in Zermatt, Switzerland. He had lived previously in Wilmington and Hardwick, Vt. Mr. Olenick spent the last 20 years based in Switzerland opening niche markets for American products in Europe, North Africa and the Middle East.
The breaking point that triggered his decision to return to Vermont, was notification from his bank that, as an American, he could no longer wire transfer funds back to the United States, thus cutting him off from his suppliers. This was FATCA rearing its ugly head again, indiscriminately disrupting the lives of Americans as the IRS continues its reckless search for hidden assets globally. Mr. Olenick concludes: “Whatever happened to the pursuit of life, freedom and happiness, as delineated in the Constitution?”
Foreign governments favor FATCA because they might be able to negotiate reciprocity for their country. The private sector, however, is outraged at the audacity of the U.S. making private companies (financial institutions) agents of the IRS: Le Monde (Paris, France, Aug. 10, 2012) “FATCA, is a new extraterritorial law whereby Washington demands that the rest of the world submit information to the IRS,” Periodicos Chile (Santiago, Chile Feb. 16, 2012) “FATCA is one of the most arrogant pieces of legislation ever conceived,” Forbes magazine (Nov. 20, 2012) “FATCA is an especially egregious example of this misguided approach.”
Americans abroad are asking: “Is the chaos due to the law of unintended consequences” or is it really the intended consequences of FATCA to bring Americans home (along with their “hidden assets”). Even before FATCA, Americans and American businesses have always been at a competitive disadvantage because the United States is the only country in the world (except for Eritrea) that collects taxes based on citizenship rather than residency. Americans pay taxes both to the host country where they live and work and to the United States.
There is likely to be 7.5 million Americans around the world who are less enthusiastic about their home country policies, which could impact their implicit role as “roving” ambassadors for the United States.
The IRS should pay attention. FATCA implementation seems to be the perfect example of “throwing out the baby with the bathwater.”
A cynic might interpret the message coming from Washington to Americans living and thriving outside of the United States, as follows: “If you like your life and job outside of the United States, you can keep your life and job outside of the United States.” Period.*
*Contact IRS for clarification.