Thanks for the heads-up concerning the scheduled hearings.

Please note, however, that these hearings are not solely focussed on the FBAR but rather on the newly introduced S.1934 and HR 3933. These contain new foreign account reporting requirements under Title 26 which, according to the Joint Committee’s Technical Explanation, are intended to be IN ADDITION to the existing Title 31 FBAR – even though the information is about 90% the same and the threshold requirement under Title 26 will be 5X larger than under FBAR.

The newly introduced “Foreign Account Tax Compliance Act of 2009″ (that I have dubbed “FATCAT”) contains some pretty amazingly stupid stuff – and not all of it FBAR related.

There appears to be no limit to the willingness of the US Congress to sacrifice the interests of the US in order to pander to the (perfectly understandable) desire of their great unwashed constituents to see rich tax-evaders get their comeuppance – especially during hard times like these.

By abolishing the portfolio tax exemption exception on certain bearer bonds, FATCAT will effectively make it impossible for the US government or US corporate borrowers to tap this particular source of foreign capital. And why? Just to prevent some miscreant US taxpayer from using an undisclosed foreign account to buy said debt and thus avoid the US taxes which existing US tax law did not foresee being taxed by the United States in the first place.

The provisions modifying the Qualified Intermediary regime are the most interesting because these have the possibility of becoming a watershed in international taxation.

Here, it will be the reaction of foreign banks to FATCAT that matter the most.

Contrary to much of what is commonly believed about the QI, its original purpose had nothing to do with enforcing US tax compliance against US citizens. Rather, the QI regime was a useful compromise with foreign banks that allowed them to offer their non-resident alien clientele convenient access to US publicly traded debt and equity markets. It allowed such investors to claim their respective treaty benefits without having to reveal their individual identity to the IRS. This was a marketing advantage for the foreign bank that simultaneously advanced the greater goal of making investment in the United States more attractive to foreign capital. Catching the occasional US tax cheat was never the primary goal of the QI.

The changes ordained by FATCAT, however, place the original goals of the QI regime at risk in the hope of advancing what the IRS ultimately hopes will become a worldwide system of universal tax information reporting adopted by all countries.

FATCAT represents a wager by the United States that convenient access to US debt and equity markets is a thing of such great value that the commercial greed of foreign financial institutions will cause them to do one of 2 things in order to retain their ostensible competitive advantage:

a. The foreign bank will knuckle under and tamely submit to the added cost of becoming, in effect, an electronic handmaiden of the IRS and adjunct of the US banking system, or

b. The foreign bank/insurance company/fund organizer/etc. will agree to the new “prime directive” in principle but ferret out every potential “US Person” holding any interest in any account or fund sponsored by said bank and terminate them.

Either way, the US would be the “winner”, since it would either provide the IRS with a digital record of income that it currently cannot obtain through cooperation with foreign governments or – same result: it will force US Persons to “buy America” when purchasing financial service providers.

What the IRS is gambling that the foreign banks will not do is what one Swiss bank has already done: tell the United States to take a hike and tell its customers that there are a lot more safer and remunerative alternatives for their investments than the United States.

My guess is that foreign governments will be watching this experiment very closely. Few foreign countries rely on electronic enforcement of their tax laws to the extent practiced in the US. Indeed, the IRS has been gradually forced by Congressional panderers over the years to rely so heavily on electronic invasion of the financial privacy of its citizenry that it is for all intents and purposes it is deaf dumb and blind to any income not reported to its computers. The “carbon based units” at the IRS have become essentially peripheral devices to the silicon that is now their heart.

FATCAT represents a first effort by a single nation state to extend silicon-based enforcement of its tax laws beyond its own borders.

In doing so, it is by-passing – for the moment at least – the possibility of “automatic information exchange” with its tax treaty partners. The simple reason for this is that, unlike the US, those countries do not permit their governments to engage in the kind of massive invasion of financial privacy that is tolerated in the US and instead still rely upon “carbon based units” to enforce the tax obligations of their citizenry. In short, automatic information exchanges are useless to the US because most other countries have no data in digital form to offer.

That, however, is changing. Germany, for example, has introduced a single Taxpayer Identification Number system. It has not yet begun requiring financial information to be linked electronically to that number but the day is fast approaching when it will be – perhaps “compelled” by a new tax treaty obligation to exchange such information with the USA.

I hope these hearings will at least cause the elimination of the nonsensical FBAR requirement if the reporting and penalty regime of FATCAT becomes law. That would be the intelligent and wise thing to do but it would also cause job losses in Sen. Levin’s benighted and down-and-out Detroit backyard so you can guess what that means . . . .

Cheers from Frankfurt am Main

John Nolan