Canada is going to sign a deal on FATCA “before too long,” Finance Minister Jim Flaherty told reporters earlier this week. In case you don’t know, FATCA stands for Foreign Account Tax Compliance Act, which requires financial institutions to disclose to the IRS foreign accounts held by U.S. citizens and permanent residents worth more than U.S. $50,000.
If you have heard anything about FATCA, it’s probably been bad—and no wonder. The original aim of the Act was to consist of a few “commonsense measures,” as President Obama put it in 2009, that would enable the IRS to more effectively crack down on tax havens. But, in keeping with most U.S. reforms these days, those good intentions soon turned into a bureaucratic monstrosity: 500-plus pages of new rules, regulation so complex that foreign banks are kicking out U.S. customers rather than comply with it and Americans abroad are renouncing their passports in droves in order to escape the reach of the IRS. Meant to catch the guy with the Cayman Island account, FATCA turned into a sweeping pursuit of every American, anywhere in the world, who might have, wittingly or unwittingly, messed up his or her U.S. tax returns—likely with steep implementation costs for the U.S. government itself.
You’ll probably hear more bad things about FATCA when it takes effect, likely in July of next year, and the horror stories about average taxpayers falling into the regulatory booby trap start rolling in. Before that happens, though, I’d like to point out two good things about FATCA.
The first is that FATCA contributed to resuscitate a fledgeling OECD effort to get countries to collaborate more closely on catching tax cheats and do so according to internationally accepted standards. Earlier this month the G-20 pledged to begin automatically sharing tax information by the end of 2015. The deadline seems utterly unrealistic, but the development is undoubtedly a positive one: It’s time for tax law to catch up to globalization.
The second good thing about FATCA will probably serve as a good example of what not to do. Already there are plenty of lessons to be learned. For example, cost-benefit analyses are good:
It might be better to focus on the big fish, even if it means some small-time cheats get away with it. Legislative over-reach drains government coffers, which is the exact opposite of what tax reform aims to do.
Not all offshore accounts are created equal. Not everyone who has a bank account in a foreign country is rich. Penalties aimed at millionaires can erase regular folks’ lifetime savings.
Privacy. It’s probably better to let governments handle the information exchange rather than require banks to do so.
Erica Alini is a reporter based in Cambridge, Mass., and a regular contributor to CanadianBusiness.com, where she covers the U.S. economy.