FATCA pursues a decidedly non-cooperative approach to foreign financial institutions to ensure that Americans don’t play hide-and-seek with the IRS. Foreign financial institutions (FFIs) of all description—banks, stockbrokers, hedge funds, pension funds, insurance companies, and trusts—will be required to report to the IRS annual information on all clients (both direct and indirect) who are US persons. The information required includes the name and address of the US client, the largest account balance during the year, and the debits and credits incurred by the account. Any FFI that fails to stand up and report will be hit with a 30 percent withholding tax penalty on all US payments of dividends, interest, and security proceeds. Under a notice issued by the IRS on July 14, 2011, FATCA will begin to take effect in stages, starting January 2013.

The withholding tax penalty in FATCA overrides multiple tax treaties, but that’s just the beginning of its non-cooperative, indeed imperial “solution” to possible tax evasion by Americans. Imagine the US reaction if a foreign power—say China, Japan, or Russia—enacted legislation requiring US financial firms to report similar information on their citizens, and imposed a stiff penalty on US firms that failed to comply. One hopes that Congress and the Administration would scream to the rooftops. That’s exactly the response of FFIs to FATCA, and once enforcement kicks in, the backlash will likely extend to political levels abroad. Not only does the FATCA legislation brush past tax treaties and foreign privacy statutes, it also imposes significant accounting costs on perhaps 100,000 foreign financial institutions. The likely result is that many FFIs will refuse accounts owned by Americans, sell any holdings of US stocks, bonds and real estate, and place new portfolio investments in more friendly locales. Along the way, foreign governments will complain bitterly about another flagrant piece of extraterritorial US legislation.