Has Fatca Arrived Stillborn?

The first sign of life in the process of implementing the Foreign Account Tax Compliance Act (Fatca) by January 1, 2013 (when the first set of rules, focused on identifying US accounts, takes effect), happened last week, as the US Internal Revenue Service (IRS) issued proposed rules for Fatca.

At the same time, it emerged that five European nations had agreed to work with the US to share information on US citizens investing in foreign accounts.

On first glance, this appears to be a positive development for US interests, but taking a second and third look makes one wonder just how effective Fatca can be in the end. China, Japan, Switzerland and Canada have lined up to oppose it or say they will not cooperate, and that's just the countries that are vocal in their opposition—common sense makes you wonder how effective an effort to claw back tax revenue for the US can be without dealing with Bermuda, the Cayman Islands, etc.

As Virginie O'Shea, analyst at consultancy Aite Group, points out, an unexpected effect of Fatca could be giving non-US financial institutions an unfair advantage, since they would be unencumbered by the Fatca rules US financial firms would have to follow for investing abroad. Although there is the promise of reciprocity in the agreement reached with the five European countries, that is not yet affirmed.

Unlike legal entity identifier (LEI) compliance efforts, which could in the long run yield business benefits for firms, Fatca compliance has no such silver lining, as O'Shea sees it. It's also far more likely to have recalcitrance when it comes to compliance with Fatca than with issuing LEIs.

But non-compliance has its price, as Denise Hintzke, global tax leader for Fatca at Deloitte, explains. If a foreign financial institution does not sign on to the Fatca-required agreement with the US, it can be subject to a punitive 30% withholding tax, she says.

Would that be enough to keep Fatca from becoming trivial in the long run? As firms work to prepare data collection systems or innovations for compliance, it's something to think about.