9/13/2016 Update: Less than a week later, Israel has caved in: /2016/09/13/israel-caves-into-fatca/
It's Israel versus FATCA. A true David and Goliath story, and we're rooting for David.
FATCA's Global Reach
We've talked extensively about FATCA's effect on US taxpayers, especially those living and working overseas. It's an intrusive law requiring US taxpayers to report certain foreign financial accounts and offshore assets to the IRS. But FATCA is more than just that; there is now officially a requirement that affects international financial institutions. Effective September 30, 2016, all non-U.S. financial institutions globally have to report to the IRS the financial information of American clients and U.S Green Card holders who have accounts holding more than $50,000.
Israel Steps Up
All along, we've been hoping that some country, any country, would stand up to the U.S. We thought for sure that the invasive nature of the program plus the extremely expensive costs of implementation would cause some kickback. Compliance costs are estimated to be anywhere from$2 billion to $10 billion a year for each country; no one really knows exactly how much. FATCA is actually causing citizens in other countries to unknowingly pay for compliance through higher fees for their investments, banking and other services.
But the IRS knows how to play the game well. They made high stakes; the penalties for non-compliance are steep. There will be a 30% withholding tax applied to most U.S. sourced income payments to any financial institution that does not comply. Plus there's the unwritten penalty of the stigma of not being FATCA compliant. This could easily cause other financial institutions to be hesitant of doing business with them.
When we saw countries like Switzerland and the U.K. give in — or when the Vatican got on board — it seemed like everyone was simply too afraid to fight the Superpower bully.
Just days prior to the program going into operation, Justice Hanan Meltzer ordered officials to stop work leading up to implementation. Meltzer, a judge in the Supreme Court of Israel, made his decision because of Rinat Schreiber. Schreiber, a dual citizen of the US and Israel, filed a tort claiming that FATCA violated the nation’s Basic Law on Human Dignity and Liberty. His argument is that the reporting requirement contradicts rights to privacy, property, and equal treatment.
I think that Nigel Green, CEO of the deVere Group, said it best:
"The temporary injunction imposed by the Israeli High Court against the Foreign Account Tax Compliance Act (FATCA), should act as a wake-up call for other countries to rethink enforcing this toxic piece of legislation."
I sincerely hope that the gallant action taken by Justice Meltzer will encourage other influential people across the world to reconsider FATCA. Indeed, this move undertaken by Israel’s High Court of Justice could be a breakthrough moment within the fight to repeal this highly-controversial, detrimental law.
Right now, everything is on hold until September 15th. There is an emergency hearing scheduled to discuss the issue. I don't know how much luck they will have, but I wish them the best. I'll be following the issue closely, so check back for updates.
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