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Akin to Chitty Chitty Bang Bang

Kitty Miv, Editor
11 October, 2018

Banks and financial institutions the world over were worried about the legal and reputational costs of falling foul of FATCA (the United States Foreign Account Tax Compliance Act) from the outset. However, what if an entire country ends up missing a FATCA deadline? And this is no mere hypothetical question either. It's happened. Recently it emerged that the Caribbean territory of Saint Vincent and the Grenadines has requested a 60-day extension from the reporting deadlines under FATCA.

So what will happen? Will SVG now be hauled over the coals by the United States Department of Justice and the Internal Revenue Service? I doubt that, but we'll have to wait and see. I think it's probably the territory's financial institutions that are sweating the most.

Then again, things have gone remarkably quiet on the FATCA front. Successful FATCA-related prosecutions have been very few and far between. In fact, only one individual has been successfully prosecuted in the United States for failing to comply with the law. According to the Justice Department's September 11 announcement, this involved the former chief executive of a bank with operations in Hungary and, coincidentally, Saint Vincent and the Grenadines, who agreed to bypass FATCA reporting regulations for potential clients who turned out to be undercover agents.

Perhaps the key word here is "successful." Does this mean any other FATCA cases have been unsuccessfully prosecuted? Surely by now, thousands of tax-malcontents should have been scooped up by FATCA and subjected to the full wrath of the authorities? Maybe even the odd bank or two as well. Intriguing...

This raises further questions: is FATCA doing the job it's supposed to do – i.e. make sure people with cross-border financial affairs pay the correct amount of tax? Or is it failing to do its job? Has FATCA just added to the regulatory burden of the global finance industry, the Internal Revenue Service and other revenue authorities for no meaningful gain? Or is it purring away in the background like a well-oiled machine?

Questions aplenty. Revenue figures might enable us to ascertain whether FATCA is the Ferrari of anti-avoidance laws, or more akin to Chitty Chitty Bang Bang. But they're not readily available.

However, a recent report by TIGTA, the US Treasury watchdog, suggested that FATCA has rather stuttered into life from an enforcement viewpoint. This concluded that the IRS has taken "limited or no action" on enforcing the law, despite spending USD380m on implementing it. TIGTA observed that, based on revenue estimates by the Congressional Joint Committee on Taxation when the law was passed, FATCA should have enabled the IRS to collect an additional USD4.8bn by now. TIGTA's report infers that this has been significantly undershot.

Not that the blame should be entirely laid at the IRS's door if FATCA is failing to live up to its original billing. Frankly, the agency has enough on its plate. Handing it FATCA to implement and administer is a bit like walking up to Sisyphus and saying: "Look, I know you've got your hands full there, but I've got something I need you to take up that hill. Yes, it is quite big isn't it?"

Based on this evidence, and until we get a fuller picture of how FATCA is performing in the field, Chitty Chitty Bang Bang it is. And sorry FATCA. We don't love you.

Moving on to carbon taxes now. (And as an aide, I'm sure Chitty Chitty Bang Bang would struggle to meet modern emissions standards!) However, the global carbon pricing campaign appears to have reached something of a crossroads if recent developments are any guide.

Carbon taxes and carbon trading schemes have proliferated rapidly over the past few years after governments arrived at the consensus that putting a price on carbon was the only realistic way to reduce emissions. But, as with other multilaterally inspired tax initiatives, they have done so in an uncoordinated way. For businesses operating in multiple jurisdictions, this is a problem.

The OECD is doing its best to steer the carbon pricing ship, as it is attempting to do with BEPS and digital taxation. But governments just don't want to listen anymore, or so it would seem. They want to do things their way.

Twice in quick succession towards the end of September the OECD issued warnings that governments are failing to meaningfully tax carbon emissions. However, the OECD is beginning to resemble the sort of kindly, soft-mannered teacher that quickly loses control of the classroom.

Canada is a demonstration of this in microcosm. One the one hand are those provinces which diligently put in place carbon taxes long ago, like British Columbia. And on the other, the provinces who simply don't want to, and don't' see why they should. Last year, Principal Ottawa stepped in and laid down the law. "Carbon taxes are not an option," it said. "Well, that's what you think," replied Manitoba, Saskatchewan, and Ontario. Cue court cases, recriminations, and federal backpedaling. Like the global carbon pricing tax scene, it's a bit of a mess.

I have some advice for the OECD and Trudeau's administration. Ultimately, governments, at all levels, are like children. They don't like being told what to do. You can't simply brow beat them into doing something, you have to be a bit cuter than that. Massage their little egos. Use the carrot as well as the stick. Make them think that the task required was actually their idea in the first place. Then you might, just might, start to get somewhere.

Tags: Treasury | Taxation | Banks

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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