FATCA: A Ticking Time Bomb for the Economy

The following article appeared in the American Thinker this morning:

FATCA: A Ticking Time Bomb for the Economy

Peter W. Dunn

Buried in an ostensible jobs bill signed by President Obama last year is a little-noticed job-destroying government regulation that threatens to trigger a massive outflow of capital from the American economy.

The US economy is in bad shape.  Many want the federal government to fix it — to end the deficits, create jobs and get America back onto the track of growth and stability.  President Obama came to Washington with great promises: to restore international respect for the United States and to bring back the jobs.  When signing the HIRE Act of 2010 on March 18, 2010, President Obama said:

A consensus is forming that, partly because of the necessary — and often unpopular — measures we took over the past year, our economy is now growing again and we may soon be adding jobs instead of losing them. The jobs bill I’m signing today is intended to help accelerate that process.

Now the HIRE Act of 2010 contains a time bomb called FATCA (Foreign Account Tax Compliance Act), which has indeed accelerated a process. Unfortunately that process is not job generation but job destruction caused by an exodus of capital from the United States.  Investment means jobs; a departure of investment capital means job losses.  Thus, the HIRE Act is really the “FIRE Act”.

The Background of FATCA and FBAR

FATCA (Foreign Account Tax Compliance Act) is the brood of FBAR (Foreign Bank Account Report).  FBAR requires that US persons divulge foreign accounts to the Treasury Department, but few knew about or ever complied with it (see When Government turns Predator).  To stanch the bleeding of US capital into secret bank jurisdictions like the Cayman Islands and Switzerland, Congress introduced FATCA into law as part of the HIRE Act.  FATCA requires that Foreign Financial Institutions (FFIs) reveal the accounts of US persons to the IRS.  The FFIs will then have to collect tax withholdings for the IRS from these clients.  If by January 1, 2014 the FFI is unwilling to reveal their US clients’ accounts, the IRS will impose a punitive 30% withholding on all payments to the FFIs, on dividends, interest and gross sales of stocks, bonds, and financial derivatives.

A sample transaction

Let’s suppose a foreign investor trades stocks on a US exchange, but his broker is FATCA non-compliant.  One day he buys 10,000 shares of XYZ at $25 per share, and the next day, he takes advantage of a nice uptick of $1.00 in XYZ and sells at $26 per share.  He makes a tidy profit of $10,000.  But because his broker is non-compliant, the IRS now withholds 30%, not of the profit but of the gross proceeds of the sale!  So the client now receives the sum of $260,000 minus 30%.  The foreign investor is unhappy because his $250,000 investment has become $182,000.  If he wants his money back, he must file a US tax return.

No investor would accept such conditions.  Hence, an FFI must either comply with the invasive regulations of FATCA or simply abandon the US markets.

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FATCA will violate the Ontario Human Rights Code

This morning has appeared my article on FATCA at the American Thinker:  FATCA: A Ticking Time Bomb for the Economy, which I will be posting here later as well.  Thanks American Thinker for publishing this and thanks for helping us sensitize readers about what we US expats are going through.

There is now quite another reason to think that FFIs cannot implement FATCA:  It is a violation of the Human Rights Code.  Renounceuscitizenship reminded me of this particular legal argument.  I had commented the following:

The Canadian government has to do something. You can’t simply allow another country to come in and pick your citizens’ and residents’ pockets. It is a theft and a threat to Canadian sovereignty. It is a casus belli.

But furthermore, if the US were to go and occupy Canada and force its citizens to pay tribute, that would be one thing. That would be a consequence of losing a war to a hostile country. But I thought that the US and Canada are allies. You don’t treat your friends this way, only your conquered foes. Obama is a disgrace. I am utterly disgusted by this government.

Renounceuscitizenship responded:

Agreed. In addition, there is the issue of FATCA and the Canadian banks. The Canadian banks should take a principled stand and not comply with FATCA. Compliance with FATCA is completely optional. If the Canadian banks comply it is because they have made a decision that profits are more important than principles – unless of course the only principle is profit.

To turn over client information to the IRS based on citizenship is arguably a violation of Canadian (Federal and provincial human rights legislation). The Ontario Human Rights codes prohibits discrimination based on citizenship.

Here is what the Ontario Human Rights Code reads in relation to discrimination in relation to services:

http://www.e-laws.gov.on.ca/html/statutes/english/elaws_statutes_90h19_e.htm

Preamble

Whereas recognition of the inherent dignity and the equal and inalienable rights of all members of the human family is the foundation of freedom, justice and peace in the world and is in accord with the Universal Declaration of Human Rights as proclaimed by the United Nations;

And Whereas it is public policy in Ontario to recognize the dignity and worth of every person and to provide for equal rights and opportunities without discrimination that is contrary to law, and having as its aim the creation of a climate of understanding and mutual respect for the dignity and worth of each person so that each person feels a part of the community and able to contribute fully to the development and well-being of the community and the Province;

And Whereas these principles have been confirmed in Ontario by a number of enactments of the Legislature and it is desirable to revise and extend the protection of human rights in Ontario;

Therefore, Her Majesty, by and with the advice and consent of the Legislative Assembly of the Province of Ontario, enacts as follows:

PART I
FREEDOM FROM DISCRIMINATION

Services

1. Every person has a right to equal treatment with respect to services, goods and facilities, without discrimination because of race, ancestry, place of origin, colour, ethnic origin, citizenship, creed, sex, sexual orientation, age, marital status, family status or disability. R.S.O. 1990, c. H.19, s. 1; 1999, c. 6, s. 28 (1); 2001, c. 32, s. 27 (1); 2005, c. 5, s. 32 (1).

Obviously a competent lawyer is required to frame the arguments, but I would expect any Canadian bank that starts reporting information to the IRS based on the citizenship of an individual, would and should be hauled in front of the Human Rights Commission to seek a remedy. What remedy? This seems to be in S. 46

Civil remedy

46.1 (1) If, in a civil proceeding in a court, the court finds that a party to the proceeding has infringed a right under Part I of another party to the proceeding, the court may make either of the following orders, or both:

1. An order directing the party who infringed the right to pay monetary compensation to the party whose right was infringed for loss arising out of the infringement, including compensation for injury to dignity, feelings and self-respect.

2. An order directing the party who infringed the right to make restitution to the party whose right was infringed, other than through monetary compensation, for loss arising out of the infringement, including restitution for injury to dignity, feelings and self-respect. 2006, c. 30, s. 8.

The banks will have to choose between obeying a U.S. law (and kowtowing to the IRS) or obeying the law of Ontario. They are caught between a rock and a hard place. Surely, it should be made more expensive for the banks to violate the rights of Canadians than to disobey an attempt to by the U.S. government to extend its law into other countries.

Yes, I agree that it is time for the Government of Canada to get involved and put its foot down. The fact is that: nothing less than Canadian sovereignty is at stake here!

Others have made this argument at the Canadian Expat Forum, but I hadn’t actually seen the wording of the Ontario Human Rights Code, which would clearly forbid banks from discriminating against clients because they are citizens of the US, as FATCA requires.  Indeed, Canadian banks will have to choose between the laws of Ontario (and Canada) or the laws of the United States.