U.K.’s Association of Investment Companies suggests members not comply with FATCA

Financial institutions have generally fallen into two categories in their reactions to FATCA: some seem to be leaning towards trying to qualify under “deemed compliance” exceptions, while others have urged their governments to shred privacy laws so they can dump all the costs and harms of compliance onto the public. But as far as I know this is a first: an industry body suggesting that its members ignore FATCA entirely. A couple of different links to the story, in case one or the other ends up trapped behind a paywall: IFAOnline.co.uk and Investment Week. Quotes below.

“If you are not invested in the US, or have minimal exposure, it might be better to take the modest hit from the 30% withholding tax as opposed to racking up much more substantial costs from all the administration in complying,” said Ian Sayers, director general at the AIC … “For these trusts the impact would be too small, so it is not worth signing up. VCTs [ed: venture capital trusts], for example, are predominately made up of UK retail money and UK investments, so they may not have to sign up and in fact will be better off not complying.”

The AIC’s website has a few other FATCA-related items, including their June 2011 submission regarding Notice 2010-60, but nothing that would have made me suspect they’d end up take such a strong stance against FATCA. Clearly, Mr. Sayers is betting on the idea that FATCA withholding on “foreign passthru payments” to non-participating institutions is so byzantine that it will be abandoned as unworkable in advance of the current January 2017 deadline. Whether this stance will in the end prove to be brave or foolhardy, it’s heartening to see someone from the industry finally standing up to this nonsense.

Update: Just as I was posting this, John left a comment about this exact same article:

So they’re really talking about de facto disinvestment. The cost of paying the 30% is less expensive than complying with FATCA in the AIC’s eyes.

The US is in denial about the “FATCA effect” on inward investment. If many of the world’s smaller investment firms come to the same conclusion, this is an example where the loss of capital gains taxes offsets any revenue could gained via FATCA reporting.

The FATCA regime will actually cost the US money to run. But bloody minded senators like Levin know better!

Wake up Carl it takes only $53B of loss inward investment (held for more than a year 15% capital gains) to negate the $8B gain in tax revenue that FATCA allegedly provides per annum. $53B is less than a drop in the bucket – the maths say the US will lose out if it persists with FATCA.

Does FATCA give smaller investment firms any incentive to increase their holdings in the US – no.

FATCA has both fixed costs (in particular, implementation of data collection procedures and IT systems) as well as variable costs per customer or per account. John’s comments make me wonder why more smaller institutions — which have fewer customers over whom to distribute the fixed costs — haven’t come to the same conclusion as the AIC: that paying the 30% tax is cheaper, especially if that 30% tax is only charged on a small portion of your holdings — and especially if you divest yourself of those holdings before 2015 when the 30% withholding on gross proceeds paid to non-compliant institutions comes into effect.

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11 thoughts on “U.K.’s Association of Investment Companies suggests members not comply with FATCA

  1. I read this article earlier today, before coming across your comments on it. Maybe I’m missing some nuance, but to me this article didn’t scream “man the barricades!”, rather a much more a pragmatic sense of simply taking the easiest course of action. For IFAs with little to no US investment exposure, 30% withholding of a small US revenue stream is cheaper than costly compliance. Kind of like all the car parks in your town suddenly put their prices up by 10000% and making parking tickets the simpler, more convenient, and cheaper option.

    If paying the “fine” rather than complying is preferable for folk with “minimal exposure”, then how far will those with more substantial exposure be willing travel to reach “minimal” instead of paying the hefty compliance fees? Will those with “minimal exposure” will start a process of reducing it further? That, of course, is what we all wait to to find out. Not just from small players either, but also from much larger ones.

  2. @eric- I am sure that there are many small institutions who have already come to that conclusion but we will never hear from them because they are too small for anyone to care about. If you look at their collective size though you will find that they are quite large.
    This is a course of action that is not hard to see being taken by many institutions in quite a few Eastern European countries. In other words countries that play on the edge of the Western financial system and have not yet become overly dependent on it.

  3. My prediction:

    When it comes to non-U.S. financial institutions located outside the U.S., Congress cannot force compliance in a legal sense. Therefore, they are trying to get compliance through a form of extortion. It’s like that great scene from the Godfather:

    I don’t believe that enough of the rest of the world will comply. Has anybody unconditionally rolled over? FATCA assumes that the rest of the world has to deal with the U.S. This is wrong. All that will happen is that the rest of the world will develop alternatives to the U.S. financial system.

    I am also inclined to think that a lack of support from the Government of Canada will most weaken the U.S. position. Doesn’t look like that support is coming. At the end, the U.S. will have little support – They can (to use a Bushism) call their FATCA partners:

    “The coalition of the willing”.

    But, it will be thin.

    Then, the U.S. will trumpet “The coalition of the willing” to keep FATCA going (all the while encouraging and accelerating the development of a new financial world order).

    F*** the technicalities of this. The rest of the world is not going to let itself be “kicked around” by the world’s biggest debtor.

    But, it will be the lack of support from Canada that will be most damaging.

    Why can’t the U.S. see this?

    The country is living in some kind of alternative universe.

    And finally, what is the purpose of this anyway? Part of it is an extension of the idiotic concept of citizenship-based taxation. Part of it is to catch “tax cheats” who are evading U.S. taxes.

    The cost to the U.S. of implementing this is very high and the return is very low. So, why would they proceed with FATCA?

    Isn’t the better solution to:

    1. Abolish citizenship-based taxation;
    2. Keep tax rates competitive with the rest of the world.

    In other words, you can reduce crime by reducing laws.

  4. @renounceuscitizenship- it is the same legislative stupidity that gave the U.S. Prohibition and we all know how miserably that failed. The only difference being that the costs of prohibition fell primarily on the U.S. while providing money making opportunities for its neighbors such as Canada.

  5. @recalcitrant

    The long run costs will be almost exclusively born by the U.S.

    The biggest cost will be the depreciation of the American Brand associated with this stupidity. They U.S. will be left as a beggar, having to go cap in hand, to ask other countries to borrow money at high interest rates. As John Templeton once said:

    Sooner or later the spendthrifts will be owned by the thrifty.

    http://renounceuscitizenship.wordpress.com/2011/11/03/anticipating-restrictions-on-moving-capital-out-of-the-u-s/

    Anyway, I am starting to find much of what comes out of the U.S. as just plain funny.

    As Hilary Clinton said, we are “Living History”. To be specific we are seeing a day by day account of the U.S. destroying itself.

    Abraham Lincoln said:

    “America will never be destroyed from the outside. If we falter and lose our freedoms, it will be because we destroyed ourselves.”

    Right on! Carl Levin, Barack Obama, Timothy “First Tax Cheat” Geithner, John (Let’s register the yacht outside of Massachusetts) Kerry are the generals in the destruction of America.

  6. @renounceuscitizenship – Another stupid quote from Bush was when he was standing in front of WTC and said basically “you’re either with us or the terrorists.” In terms of FATCA, “you’re either with us or the tax evaders” – different time and different place. Besides all that when I flew out of the States a few weeks after 911, some Europeans were worried about the Americans over reacting Hollywood style – so goes history.

    Money is like water and it will find a way around FATCA. Look at the embargo on South Africa and more recently Cuba, it impedes but it doesn’t stop trade. Getting around FATCA will be no different. And without the governments of the world enforcing FATCA evasion, the US is cooked. REPEAL FATCA.

  7. These links deserve their own posts (outside of the pay sites, of course). A link or two, I couldn’t read… especially the FT article, but I’m very curious to read it.

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