The Economist - USA (2019-10-05)

The EconomistOctober 5th 2019 Finance & economics 65

1

W

hen theForeign Account Tax Com-

pliance Act (fatca) was passed by

America’s Congress in 2010, it was over-

shadowed by the jobs bill into which it had

been shoehorned as a revenue-raising pro-

vision. But of the two, fatcapacked the

stronger punch. The law, designed to stop

Americans stashing money abroad to

evade tax, ushered in a global revolution in

financial transparency. It forced banks

worldwide to start coughing up, via their

tax agencies, information on clients with

links to America. And it spawned the Com-

mon Reporting Standard (crs), whereby

over 100 countries swap data with each oth-

er to discourage cross-border tax dodging.

fatca’s detractors extend well beyond

the tax-shy, however. Sifting clients for “us

persons” has given financial firms a com-

pliance headache. Some have refused to

serve Americans living overseas for fear of

fines under fatca’s draconian provisions.

Many of the roughly 9m Americans based

abroad—including “accidental Americans”

who have spent most of their lives else-

where but face tax liabilities in America be-

cause they were born there, making them

citizens—have formed groups to lobby for

less brutal treatment.

Some critics go further, arguing that a

principle is at stake. They maintain that

fatcaand the crshave swung too far to-

wards transparency and away from privacy.

And they see potential for redress in the

European Union’s data-protection laws.

A woman known only as Jenny, repre-

sented by Mishcon de Reya, a British law

firm, is trying to raise £50,000 ($62,000)

on a crowdfunding site to challenge the

right of hmrc, Britain’s tax authority, to

pass her information on to America’s Inter-

nal Revenue Service (irs). Jenny, a univer-

sity researcher born in America but resi-

dent in Britain for nearly 20 years, claims

the transfer breaches her rights under the

eu’s General Data Protection Regulation of

2016. She argues that her information is ir-
      relevant to fatca’s objective—to catch tax
      evaders—because she earns less than
      $104,000 and thus qualifies for an income-
      tax exemption under American rules.
      Jenny is not the first to challenge fatca.
      A group called the Association of Acciden-
      tal Americans brought a case in France, but
      it was dismissed. An anti-fatcalawsuit in
      America, backed by Rand Paul, a Republi-
      can senator, was tossed out in 2017 on the
      ground that America’s constitution pro-

vides no expectation of privacy regarding

financial records. But America’s data-pro-

tection standards are significantly lower

than Europe’s, points out Filippo Noseda of

Mishcon de Reya. The French case, he

notes, focused on lack of reciprocity, not

data privacy; America has been slow to

share information on its own banks’ for-

eign clients. The eu’s executive, parlia-

ment and data-protection authorities have

all expressed queasiness over fatca.

Officials in America and at the oecd, a

club of 36 countries that oversees the crs,

brush off concerns that information-shar-

ing might undermine data security. But

such fears are understandable. Bulgaria’s

tax agency has been hacked into, exposing

the data of 5m taxpayers, including infor-

mation exchanged under the crs. Ameri-

ca’s irs has not suffered a comparable

breach but its computer systems are rick-

ety. State tax agencies, including South

Carolina’s, have had data stolen.

Mr Noseda sees Jenny’s claim as an im-

portant test case which, if successful,

could spawn others. Another client of

Mishcon de Reya has complained to Brit-

ain’s data-protection regulator about

hmrc’s data-sharing under the crs. The

law firm has also been instructed by a Euro-

pean company to look at ways of challeng-

ing national public registers of corporate

ownership. With registers “it’s the same ar-

gument but more so, since the information

is shared not just with tax authorities, but

everyone,” says Mr Noseda.

Anti-corruption campaigners pooh-

pooh such efforts, which they view as

doomed rearguard actions by a tax-averse

elite. But Mr Noseda insists it is about more

than minimising tax bills: “There is a big

tension between transparency and privacy,

and we need to find the right balance.” 7

America’s notorious tax-compliance

law faces another challenge

Transparency v privacy

FATCA chance?

M

ost museum exhibits are beauti-

ful—or at least old. But an exhibition

in 2015 at the World Trade Organisation

(wto) included 60 cardboard boxes of doc-

uments. The point was to give a sense of the

scale of two of the body’s longest and larg-

est legal disputes, over American and Euro-

pean subsidies for aircraft manufacturers.

Now the fight is moving out of the paper-

work phase. That means tariffs are coming.

On October 2nd the wto published its

decision to allow the Trump administra-

tion to put tariffs on $7.5bn-worth of im-

ports from the European Union. That is in-

tended to match the harm done to Boeing,

an American manufacturer, by the eu’s

subsidies for Airbus, Boeing’s European ri-

val. It is the largest retaliation the wto has

ever approved. Senior officials at the Un-

ited States Trade Representative (ustr)

called the victory “historic”.

The dispute has been long and bitter. In

October 2004 America complained to the

trade body about loans offered by eu gov-

ernments to Airbus on easy terms. The fol-

lowing June the eu filed a complaint about

the harm to Airbus from subsidies to Boe-

ing, in the form of tax breaks and generous

contracts with the Department of Defence.

Since then there has been enough legal

back-and-forth to bore the most ardent

plane-spotter. The wto ruled against both

subsidisers. Each made some adjustments

supposed to resolve the other’s com-

plaints—but neither was satisfied. The lat-

est judgment comes as the eu’s claim of

compliance is still being assessed. In

around eight months, the wto is likely to

authorise the eu to put tariffs on American

imports, completing the tit for tat.

In a narrow sense, this is the multilater-

al rules-based trading system working as

intended. Both parties went through the

proper channels to receive an official judg-

ment. Neither took matters into its own

hands. The tariffs America is about to im-

pose on Europe are not unilateral bullying,

but an enforcement mechanism of last re-

sort. They would probably have been ap-

plied by any president, even one less tariff-

happy than Donald Trump.

In a broader sense, it shows how vulner-

able those multilateral rules are to time-

wasters. In a sector like aircraft manufac-

turing, where subsidies are ubiquitous, it

has always been clear that America and the

eu needed to agree to mutual disarma-

ment. Instead, they have talked past each

WASHINGTON, DC

An old dispute will lead to new

American tariffs on European goods

Boeing v Airbus

Plane clash