Tax administration is experiencing a global upheaval. The 2010 passage of the Foreign Account Tax Compliance Act (FATCA) – which includes costly demands on foreign financial institutions to report information on US clients to the IRS and large penalties for noncompliance – marked a new era of fiscal imperialism. Wealthy nations taking it upon themselves to define the rules by which the rest of the global community must abide are now declaring victory in their quest to establish a new global tax regime. Deputy Secretary Neal Wolin, for instance, cheered the recently finalized FATCA rules as “a critical milestone in international cooperation.” But the celebration is premature, as significant obstacles stand in the way of the global tax elite’s quest to eradicate tax competition.

Following closely on the heels of FATCA, the G20 and the OECD started developing their own new tax information sharing standards. Recently, the OECD finalized a Common Reporting Standard, which would require the routine sharing of bulk financial information between governments. OECD Secretary-General Angel Gurría trumpeted the standard as “a real game changer” that would allow governments to “ramp up international tax co-operation” in order to “fight tax evasion.”

Combating tax evasion was the stated purpose behind FATCA as well, though there is plenty of reason to question how effective the legislation will ultimately prove.

Before its passage, the Joint Committee on Taxation estimated FATCA would collect just $800 million per year over the next decade, a far cry from the $100 billion the President and other evasion hawks claim is lost overseas each year, and relative pennies compared to the $3.5 trillion spent in fiscal year 2013. It’s also far less than is being spent by Treasury, financial institutions and taxpayers in order to implement and comply with the law. This is because FATCA, rather than target individuals or areas particularly at-risk for evasion, uses a dragnet, NSA-like approach guaranteed to catch mostly law-abiding citizens in its net, such as the millions of overseas Americans who quite sensibly choose to bank where they live and work. Nevertheless, Treasury asserts that the responsibility is on Congress to ensure that the costs of the law do not outweigh the benefits.

Despite multiple delays in the law’s original timeline, the Treasury Department is pleased with its efforts to implement FATCA. When FATCA required foreign institutions to violate local privacy laws, Treasury improvised – without express authorization in the statute – and created intergovernmental agreements (IGAs) that would allow foreign governments to collect the information from their institutions to pass along to the IRS. In return, the IRS promised to share similar information with foreign governments. Members of Congress have raised questions about the legal authority behind these agreements, and it’s unclear whether the administration sought legal advice.

While the IGAs solved one problem with the law, they have also created new obstacles. The promise of reciprocity used to entice foreign governments to enforce FATCA requires new rules for domestic institutions, which again are not expressly authorized by FATCA.

Treasury officials acknowledge new legislation will be required in order to completely fulfill the promises they have made, as much of the information required by FATCA is not similarly asked of foreign investors in the U.S., but there is little chance of such legislation passing the current Congress. Domestic financial institutions are a much stronger constituency than FATCA’s original targets, and lawmakers are unlikely to jump at the idea of adding yet more costly burdens to the American economy. It is unclear how long foreign governments will tolerate a lack of reciprocity from the US as they work on behalf of the IRS.

The new OECD standard for automatic transmission of taxpayer information will face similar obstacles. Treaties and other agreements ought in theory to be mutually beneficial, but the OECD rules provide little advantage for low-tax nations that attract capital to their economies by choosing not to double tax savings and investment. These nations have no interest in hounding their citizens all across the globe simply to prolong the grand illusion that their bloated welfare states are sustainable.

The OECD rules benefit exclusively high tax nations seeking to prevent the flow of capital away from onerous tax rates and toward more attractive destinations. This global flow of investment toward more pro-growth tax rates pressures high tax jurisdictions to refrain from extracting as much wealth from the productive sector of the economy as they would otherwise wish, and is thus the primary benefit of tax competition. As nations acquire the means to enforce tax collection outside their borders, tax competition will suffer and its benefits for the global economy will be reduced.

In the past, the OECD has used pressure and coercion to compel low-tax jurisdictions to agree to rules against their own economic interests. It is unclear how well such tactics will work in this instance, however, as the new rules impose a much more significant cost by signifying an end to the idea that nations can attract investment by offering more competitive tax systems than those of the high-tax welfare states. With so much at stake for jurisdictions that rely on attracting investment in order to thrive in the global economy, the punishments threatened by the OECD to force compliance will have to be significantly more stringent than those of the past. It remains to be seen whether sufficient political will exists to enforce such a regime.

Both FATCA and the OECD take an enforcement über alles approach to tax evasion, choosing to pursue every potential tax dollar regardless of the costs imposed on financial institutions, taxpayers and the global economy. A more sensible and pragmatic approach would be to address factors proven to instigate tax evasion, such as excessive tax rates and code complexity. While the global tax elite are busy celebrating their ability to reach agreement on rules for which the rest of the world must comply, they may soon find that successfully implementing and enforcing a massive new global tax information regime is another matter entirely.

https://freedomandprosperity.org/2014/opinion-and-commentary/the-foreign-account-tax-compliance-act-will-fail-to-curb-tax-evasion/