ABBL

13 December 2011 – Invited as guest speaker by Democrats Abroad, Jean-Jacques Rommes, CEO of the Luxembourg Bankers’ Association, provided an insight into FATCA and its consequences for the benefit of those most directly concerned by the legislation: US citizens living abroad.

As Americans living in Luxembourg, the audience was thus keen to hear how FATCA will affect them and their families. Although the actual implementation measures are not yet known, FATCA will have considerable negative consequences for any US citizen abroad. Yet, as Jean-Jacques Rommes illustrated, not only for them, but also for countries around the world, for banks and financial intermediaries and their customers (US or not), and, finally, also for the US itself.

For European states, FATCA represents a real slap in the face of their national sovereignty. Indeed, the US completely bypasses governments and existing international or bilateral treaties in order to directly enter into agreements with individual banks. Unfortunately, as Rommes points out, European governments have grasped the real stakes of FATCA far too late, despite the banking sector’s efforts to raise awareness. Applying US law extraterritorially, banks will essentially be forced to collect taxes for the US and report extensively to the US tax administration. By doing so, banks will enter into conflict with national and EU rules on data protection, information gathering, anti-Money laundering, closure of account practices and with double taxation agreements their countries have signed with the US. In the middle of the extraterritorial claims of the US and the national legislations of their country, banks find themselves caught between a rock and a hard place.

And even European states that may think that this indiscriminate exchange of information is a good idea will soon come to realise that there is absolutely no reciprocity involved. In fact, European governments will continue to find it very difficult to get information on their taxpayers in return from the US. FATCA is thus an economic burden on countries without any corresponding benefits in return.

Banks, in particular, will be footing the bill, since FATCA represents enormous implementation costs and administrative burdens. Not only will they have to identify all US persons amongst their client base, they will also have to look through layers of intermediation to root out any physical or legal person that may be connected to the US. In addition, banks will have to get waivers from all their US clients consenting to exchange information. With huge investments in IT, Compliance and human resources, FATCA will cost a large cross-border bank on average 150 million dollars. Since a FATCA compliant bank has to calculate a “passthru” percentage based on the total US assets it is holding, a percentage that is used to determine the amount of a payment subject to the withholding tax of 30%, the best way to lower its Compliance risks is simply to reduce the amount of American assets. In other words, divest from the US market, in general.

On a personal level, US citizens living and working abroad will be the first to bear the brunt of FATCA, regardless of whether they have just moved out of the US or whether they have not been back to the US since they were born.

Because of FATCA, US persons will become what Rommes called “toxic liabilities”. As is the case with US assets, the more US clients a bank has, the higher its Compliance risks. It is thus in their best interest to get rid of existing US clients and to refuse to open accounts. This is already happening, as many people in the audience could testify. But non-US persons will also become victims of FATCA, since they will have to prove to their bank that they are, in fact, not a US person.

Jean-Jacques Rommes concluded by saying that FATCA should be regarded as anti-American. Not only because the US discriminates against its own citizens who happen to live abroad, essentially turning them into pariahs. FATCA will also trigger a slow, yet massive divestment from the US. International financial institutions will gradually get rid of their US securities and divest entirely from the US market. Thus, contrary to what it hopes to achieve, FATCA will eventually reduce tax revenues for the United States.

Related files: 

Power point presentation on FATCA