As I watch the IGA spectacle unfold, I have the feeling that other countries don’t understand citizenship-based taxation. They don’t understand that by employing citizenship-based taxation, they are really asking other countries to identify lawful residents of their countries, and help the U.S. collect tax from them. This tax collected as at the expense of the country where those US citizens reside. All penalties paid under the OVDP and OVDI penalty programs erode the tax base of the country where the U.S. citizen abroad resides. Because no other country (except Eritrea) imposes citizenship-based taxation, reciprocity (even if the U.S. could be trusted, which it clearly can’t) would not mean that the US would report on citizens of other countries. At best, the US would report on residents of other countries that have bank accounts in the US. The point is a simple one:
A FATCA IGA does not require the US to erode its own tax base in any significant way.
Why is there this imbalance? The answer is simple. Only the US employs citizenship-based taxation. The US employs citizenship-based taxation as a weapon against not US citizens abroad, but against the countries where they reside.
Therefore, at the end of the day, if the US is going to get “FATCA Co-operation” from the rest of the world, it must stop citizenship-based taxation.
Interestingly this necessity seems to have been recognized in an academic paper – FATCA: Toward a Multilateral Automatic Information Reporting Regime by Joanna Heiberg. I highly recommend this article.
She writes in part: