If US law is imposing onerous requirements on European financial institutions who wish to deal with European citizens, then it is perfectly reasonable for the EU to negotiate that matter with the US. It is not 'dictating' US policy to seek a negotiation on the terms of US laws, anymore than any international agreement which touches upon domestic policy is 'dictating' that policy. One can argue that increasing the ease of renouncing US citizenship isn't the right solution, but that's about the substance of the negotiations, not whether they should take place at all.
The question of whether or not FATCA regulations are onerous is an interesting one. Certainly, banks will say they are. However, when you consider that banks will complain about any compliance requirement, that FATCA is functionally identical to the European-driven CRS scheme, and that nations that have put resources into FATCA and CRS compliance generally have experienced smooth rides, the complaint that FATCA requirements are particularly onerous seems a bit faulty. It might instead be looking at how enforcement of FATCA and CRS differs to see why European banks are complaining about FATCA. We might find the real compliant is not about the regulation itself, but about how good the US is at enforcing it.
Banks think FATCA compliance is onerous. Of course they do. Mine owners think safety regulations are onerous; factory management thinks union contracts are onerous. Everybody thinks the regulations and external obligations with which they must comply for the benefit of others are onerous. Boo hoo. Take what the claims of interested parties that something is grotesque burden upon their businesses with a grain of salt, particularly when the regulation in question is designed to rein in things like tax avoidance schemes.
More informative is whether FATCA is relatively more burdensome than its sister, the European-driven Common Reporting Standard (CRS). It isn’t. CRS is based on FATCA. From the perspective of banks conducting this form of reporting, CRS is functionally the same as FATCA. The differences in reporting and compliance responsibilities can be counted on two hands, and even then you’d still be able to operate a pair of chopsticks. So if FATCA reporting is onerous then so too is CRS. To put it another way, if the EP thinks that FATCA is a step too far then it should also be calling for changes in CRS. But it isn’t, so we can assume that CRS isn’t onerous which means FATCA isn’t onerous either. For the EP to condemn the US’s FATCA system for its reporting obligations while tacitly permitting CRS is hypocritical.
Europe isn’t monolithic in its response to FATCA, so it’s worth examining what some countries have done. The ministries of finance for some European countries, like Ireland, the United Kingdom, and Luxembourg, have jumped feet-first into this stuff. As a result, these nations have high rates of compliance from their banks for FATCA and CRS reporting (collectively called AEOI reporting). The ministries of finance and their analogs in these nations have promulgated regulations to support AEOI, disseminated information to affected banks, and establish the information technology infrastructure to conduct AEOI reporting. All that graft has paid off with good rates of compliance for their banking sectors. This compliance has allowed the UK’s HMRC, for example, to obtain a vastly superior understanding of the overseas assets held by British citizens then was possible ten years ago, which, in turn, permits more effective tax administration. So the countries that buy into AEOI reporting, including FATCA, will reap the dividends of superior tax administration thereby serving the public good far more than noncompliance ever would.
So let’s not be too hasty in condemning FATCA for being onerous. Those complaints aren’t coming from neutral, disinterested parties but rather from those have a vested interest in not spending money on compliance costs. Where the EP has singled out FATCA, we should be skeptical because the same complaint about compliance costs can be laid at the door of CRS. What’s more, compliance with AEOI manifestly serves the citizenry by making the administration of tax laws more effective and efficient and thereby helping to ensure that a few bad eggs cannot easily evade their tax responsibilities.
You may be wondering now why banks and the EP are complaining about FATCA in particular if the compliance requires are appreciably the same as those of CRS. I submit that the primary concern is not about how hard it is comply with FATCA, but how effective the US is enforcing the law.
The US is tops in tax administration, particularly and especially for federal taxation. It has some of the best and most effective tax administration of any nation. This is not to say that the US’s tax rules are fair, or correct, or right (you can make very good cases that they are not). Rather, the US is excellent at applying those rules to taxable parties. The US’s rate of tax compliance are the highest in the world.*
That effectiveness is reflected in the enforcement of FATCA. Permit me to explain first how CRS enforcement works to better establish the contrast with FATCA. If a French bank does not report to Denmark the holdings of a Dane as required by CRS then the French bank could be subject to fines from the French government. Denmark doesn’t have any direct recourse against the French bank directly, it would need to go through the French government to do anything at all to bring the bank into compliance. If the French government was recalcitrant in regulating its banks then Denmark could go to the OECD to black list France for noncompliance, but that’s really for only when a government is being a serious burden to the scheme; one bank not giving up information wouldn’t justify that.
So let’s say this non-reporting French bank also has a US account holder, and it isn’t reporting to the US either. Again, the bank would be subject to fines from the French government, but the US could also withhold 30% of US-sourced income paid into that bank, right off the top. That income isn’t gone, it’s just held by the IRS until account holders can prove its theirs, but it’s a huge stick to wave against the bank. All US-sourced income paid to all of the bank’s account holders gets held because of the bank’s non-compliance. And again, the US has the most effective tax administration on the planet so the IRS is more likely to find out about non-compliance other governments.
I believe that’s why we’re seeing pushback against FATCA, not because the cost of compliance are any higher than CRS but because the US is way better are tracking down banking ne’er-do-wells and has the stick to hit them in the pocketbook.
To reiterate what I’ve discussed before, where any of this is a problem, the problems are best addressed through nations improving their banking laws rather than attacking US citizenship laws. Probably the best solution is to do what the HMRC has down and leverage AEOI reporting to improve tax efficiency and crackdown on evaders, but it might be simpler to simply ensure banking services are available to all citizens, even those holding dual citizenship with the US.
I hope this provides helpful information on the topic at hand.
*It is true that US total dollars in taxes evaded are also among the highest in the world, but that is a reflection of the enormous size of the US economy, the biggest in the world. To give you an example, the US has a GDP of $19.39 trillion. Germany, the largest European economy, has a GDP of $3.68 trillion, about 20% the size of the US economy. The US has a total tax loss, that is taxes evaded, of $337.3 billion; Germany of $215 billion. If Germany was of the same economic size as the US, it would have a tax loss of $1.07 trillion, almost four times that of the US. Germany, for what it’s worth, also has an effective tax administration system relative to the rest of the world. Most countries are less effective than Germany.
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BvBPL:
I think I lost something in translation. Are the EU banks complaining that the US regulations (over their own citizens) too onerous, and thus causing the EU banks to refuse certain customer classes? Wouldn't then the fastest step be to cut away at the underlying cause of those regulations?
I’m not sure I fully understand your question in that I’m not sure who is taking that fastest step. Assuming you’re talking about the banks then, yes, the fastest step to compliance with FATCA is to purge your US account holders. But that’s not a great idea because it denies banking services to nationals with dual US citizenship. The EP is right that this issue needs to be addressed, but it is best addressed through better domestic banking laws, not through saying US citizenship laws should change.
