A Corporate-Welfare Bonanza for Tax-Compliance Firms
Recently I launched the Campaign to Repeal Fatca—the Foreign Account Tax Compliance Act. The 2010 law, which purports to track down tax cheats hiding money abroad, forces foreign banks and other financial institutions to disclose Americans’ accounts to the Internal Revenue Service.
Threatened with U.S. sanctions if they don’t comply, banks around the world have rushed to submit to Fatca. Foreign governments have hastened to abrogate their domestic privacy laws. Fatca, it seems, has been a big success. But who really benefits?
Not the U.S. budget. The IRS claimed last October that Fatca has helped it to collect $10 billion since 2009 from “taxpayers coming back into compliance.” But that figure lumps in penalties for filing deficiencies and money from all offshore enforcement programs. William H. Byrnes, a law professor at Texas A&M, believes the actual net recovery attributable to Fatca (subtracting IRS enforcement costs) may be closer to $200 million a year and possibly as low as $100 million.
That isn’t enough to fund the federal government for more than half an hour. It is far less than was expected at Fatca’s enactment, since the law was scored as bringing in $800 million a year. Excepting penalties, writes Mr. Byrnes, Fatca could “soon cost more money than it brings in.”
That meager gain must be weighed against the law’s costs. Fatca adds one more onerous and expensive reporting obligation for American taxpayers who hold any asset abroad. It largely duplicates existing mandates, notably the Report of Foreign Banks and Foreign Accounts, and the penalties for error are draconian. The Tax Foundation estimated in 2016 that complying with Fatca each year takes almost 4.5 million hours and costs $166 million.
But the really big boodle goes to the accounting, law and software firms that help foreign financial institutions sift through millions of client accounts looking for American “indicia.” Although there is no official figure for the cumulative world-wide cost, the magnitude can be extrapolated from piecemeal disclosures by banks and the companies selling them services. These expenses, as Mr. Byrnes writes, are “staggering.”
In 2014 Thomson Reuters surveyed some 300 financial institutions, 27% of which expected their annual Fatca compliance costs of between $100,000 and $1 million. The same year, The Wall Street Journal reported that Canada’s five biggest banks collectively had spent about 750 million Canadian dollars (US$693.5 million) on initial Fatca compliance expenses. That included some C$100 million spent by Bank of Nova Scotiaalone as of 2013.
Mr. Byrnes cites KPMG and Deloitte estimates that more than 250,000 foreign financial institutions are affected by Fatca, with costs for some of the larger ones reaching more than $200 million. The representative of Banco Bilbao Vizcaya Argentaria , a large Spanish bank, said in a paper released in 2014 that compliance costs could range from $8.5 million for a local entity to $850 million for a global one. The British government estimated the aggregate initial costs to U.K. financial institutions at $1.1 billion to $1.9 billion, with a continuing cost of $60 million to $100 million a year.
Thus there are plausible projections that the law’s aggregate global cost is anywhere from $60 billion to $170 billion. That money comes out of the pockets of consumers, depositors and perhaps shareholders.
There’s no question where this money goes—not to the U.S. government but to the bottom line of the vendors. Fatca had barely passed when massive compliance practices sprang up, offering their services and advising that repeal of the law wasn’t in the cards. “Fatca is here to stay,” experts from KPMG, Deloitte, Ernst & Young and PricewaterhouseCoopers rushed to pontificate.
Fatca was not subjected to a cost-benefit analysis before it was enacted, but the results are now in. As a revenue tool for the public purse, the law is a failure. Instead it offers a windfall of corporate welfare for the compliance industries. That’s no reason to keep it.
Mr. Green is founder and CEO of deVere Group, a world-wide financial consultancy.