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Citizenship-based Taxation and FATCA

Published May 11, 2016 - Follow author Allison: - Permalink

I am occasionally asked for a list of the things I've written or presented about FATCA and citizenship-based taxation, and decided I may as well post it here. I have a newer article on the adoption of the IGA in Canada, will post that soon and add to this list.

On the personal impact of CBT/FATCA:

Providing Legal Analysis of FATCA and the IGAs:
Videos and Podcasts:

Tagged as: citizenship FATCA scholarship tax policy



Parada: Legal Questions Surrounding FATCA-based Agreements in Europe

Published Feb 08, 2016 - Follow author Allison: - Permalink

Leopoldo Parada has recently posted on SSRN an article published last summer in the World Tax Journal, entitled Intergovernmental Agreements and the Implementation of FATCA in Europe, of interest. Here is the abstract:

FATCA is a US domestic tax policy that requires Foreign Financial Institutions around the world to provide the IRS information regarding their US clients. Recognizing this extraterritorial characteristic and the troubles associated with it, the US Treasury Department developed the Intergovernmental Agreements (IGAs), which have served the double purpose of coordinating FATCA at an international level and influencing the new international standards on automatic exchange of information. Nevertheless, the IGAs are instruments that still need to be improved, at least in order to guarantee their successful implementation in Europe. The first part of this article explores the legal nature and the characteristic of the IGAs, concluding that they possess an asymmetriclegal nature that can lead to conflicts of interpretation. Likewise, it concludes that their contribution toward international transparency is incompatible with the existence of other instruments in Europe that seek the opposite goal of protecting bank secrecy, although it recognizes the importance of the most recent achievements at the European level in order to ensure a coherent and consistent system of automatic exchange of information. The second part of this article analyses three grey areas in the IGAs implementation process in Europe (i.e., “quoted Eurobonds” in the United Kingdom; group requests under the Switzerland-United States IGA, and the “coordination timing” provision of the IGA Model 1A), concluding that there is still work to be done in order for the IGAs to grant an acceptable level of reciprocity in practice.
I was not aware of this article when I wrote on a column last fall on this very same topic, in which I called the IGAs "Hybrid Tax Agreements" and pointed out the mess created by their unprecedented legal form as treaties to the rest of the world but administrative guidance in the United States. Parada's article goes further in the analysis and lays out a number of enduring difficulties. It seems to me that governments are simply ignoring these difficult issues as inconvenient barriers to desired outcomes and courts will face the same temptation. But I don't think these issues go away with time and gradual acceptance of FATCA as an institution. Instead, I think the issue will cause systemic problems going forward, both in terms of raising endless conflicts of law, and in terms of the precedent set for international tax relations by the failure of states to challenge US exceptionalism even as it tramples on law and legal process throughout the world.

Tagged as: FATCA IGAs international law scholarship



Intergovernmental Agreements (IGAs) as Hybrid Tax Agreements

Published Oct 17, 2015 - Follow author Allison: - Permalink

I recently published "Interpretation or Override? Introducing the Hybrid Tax Agreement." Here is the abstract:

In the effort to overcome foreign law impediments to the implementation of the Foreign Account Tax Compliance Act (FATCA), the U.S. Treasury introduced intergovernmental agreements (IGAs). IGAs are hybrid tax agreements: Treaties to most of the world, in the United States they instead constitute an executive interpretation of the underlying tax treaty. This introduces a great deal of interpretive uncertainty where the terms of IGAs and tax treaties conflict. Prompted by recent queries in the EU regarding the legal nature of the IGAs, this article explores a concrete example of the legal principles at stake by examining how the public policy rules for information sharing found in US tax treaties interact with the information exchange provisions found in the IGAs.
Further in, I explain that it is difficult to understand how as a matter of international law the IGA, as a document that purports to "interpret" the underlying tax treaty, in fact obviates some of the provisions of the treaty, but do so only for the party other than the United States. I conclude:
Process matters in law. It is what makes the rule of law function as a legitimate source of authority. It is ironic that even as the United States partners with its fellow OECD members to try to address the major challenges to international taxation posed by hybrid legal entities and hybrid financial instruments, Treasury has invented the hybrid tax agreement. Conflicts resulting from this invention are inevitable and I anticipate they will be costly. I believe that Treasury took a few shortcuts around established legal precedents on the road to implementing FATCA. I understand that this may be considered expedient in the effort to get FATCA to work. But in the long run the sacrifice renders a disservice to the rule of law. That sacrifice deserves careful reflection by all those affected.
I continue to be fascinated by the rapid developments in international taxation over the past several years, in terms of both substance and process/rule of law.

Tagged as: FATCA governance IGAs scholarship tax policy treaties US



Update on the Canadian FATCA Litigation

Published Aug 07, 2015 - Follow author Allison: - Permalink

As readers may be aware, two Canadian citizens filed a lawsuit last year against the Attorney General and the Minister of National Revenue in the Federal Court of Canada (Federal Court File T-1736-14). Over the past two days in Vancouver, the parties have presented their arguments in a summary trial in front of the Hon. Luc Martineau. The summary trial involves arguments on the parties' affidavits and cross-examinations undertaken prior to the hearings--no live witnesses.

In broad strokes the suit seeks to prevent the Canadian Revenue Agency from furnishing to the US Internal Revenue Service the personal and financial account information of Canadian citizens pursuant to the FATCA IGA signed by Canada and enacted into law last year. This is not a charter-based (constitutional) challenge, rather it is a challenge that certain provisions of the IGA are unlawful based on the Canada-US Tax Treaty Act  (which in effect ratifies the US Canada Tax Treaty) and the Income Tax Act. Thus it is not about fundamental rights and freedoms at this stage, but about an interpretation of relevant laws, including the existing tax treaty.

The litigants are being funded by a grassroots group that organized itself for this purpose, called the Alliance for the Defence of Canadian Sovereignty/L'Alliance Pour la Défense de la Souveraineté Canadienne (ADCS). ADCS has many of the court filings available here and here and here, and one of the group's organizers has blogged about the proceedings here and here.  While the lawsuit made the news when it was filed, e.g. here and here among several others, I am seeing virtually no press coverage at this stage, except for one brief article here. That is a shame and I hope that journalists will renew their interest in this issue.

Long-time readers will be aware that I made a submission to the Department of Finance concerning many of the legal issues surrounding the adoption of the IGA, that I understand FATCA to be a tax treaty override that is not cured by the IGAs, and that I understand the IGAs to lack validity as legal instruments under US law. In connection with this litigation, I wrote two "expert reports" and was cross examined for purposes of the summary trial; the reports and transcript are part of the court record and mostly available at the links above, but I will also make the reports available on request. If and when additional information about the summary trial becomes available I will update this post.

Tagged as: Canada citizenship FATCA treaties



IRS claims statutory authority for FATCA agreements where no such authority exists

Published Jul 04, 2014 - Follow author Allison: - Permalink

Over at federal tax crimes blog Jack Townsend has posted a letter from the IRS to Congressman Bill Posey, in response to an inquiry the Congressman apparently made about the intergovernmental agreements ("IGAs") to implement FATCA by other governments (instead of directly by foreign financial institutions, per the law Congress enacted in 2010). Treasury says:
“Your letter also asks about statutory authority to enter into and implement the IGAs. The United States relies, among other things, on the following authorities to enter into and implement the IGAs: 22 USC Section 2656; Internal Revenue Code Sections 1471, 1474(f), 6011, and 6103(k)(4) and Subtitle F, Chapter 61, Subchapter A, Part III, Subpart B (Information Concerning Transactions with Other Persons)."
None of these sources of law contain any authorization to enter into or implement the IGAs.  It is patently clear that no such authorization has been made by Congress, and that the IGAs are sole executive agreements entered into by the executive branch on its own under its "plenary executive authority”. As such the agreements are constitutionally suspect because they do not accord with the delineated treaty power set forth in Article II. As Michael Ramsey wrote in a 1998 article, the danger is that if the president seeks to reach agreements outside of his plenary constitutional powers, the agreement lacks domestic legal effect.

Just to be clear, the fact that a document signed by an individual might or might not bind the United States as a matter of constitutional law does not mean that the United States will not honor whatever commitments the individual makes under such an agreement. The contrary is likely the case especially given the predicament Treasury found itself in, coupled with the pitiable small promises undertaken by the US in these "agreements."

But we should be clear that the analytical terrain we should be traversing is whether the scope of the plenary executive authority can suffice to support as a matter of law the promises made in some 80 or so IGAs (many of which are currently agreements in principle only). We should not be wasting anyone's time pretending that Congress has authorized Treasury or the Secretary of State to enter into the IGAs. It has not.

So let’s take a look at what these sources actually say.

22 USC 2656 is about the power of the secretary of state. It says:
The Secretary of State shall perform such duties as shall from time to time be enjoined on or intrusted to him by the President relative to correspondences, commissions, or instructions to or with public ministers or consuls from the United States, or to negotiations with public ministers from foreign states or princes, or to memorials or other applications from foreign public ministers or other foreigners, or to such other matters respecting foreign affairs as the President of the United States shall assign to the Department, and he shall conduct the business of the Department in such manner as the President shall direct.
If that is an authorization for the IGAs, it is a vague one at best. Does an IGA constitute “correspondences, commissions, or instructions,” “negotiations”, “memorials or other applications,” or “such other matters respecting foreign affairs”? Under what interpretation of such relevant provisions? Also there is nothing here about the content or scope of the treaty power hereby implicitly authorized. Is IRS saying that with this power the Secretary of State can bind the nation at will on any matter, without the need for the President to seek advice and consent from the Senate prior to ratification? If so this is an extraordinary claim that does not scan with either historical practice or constitutional theory. 

26 U.S. Code § 1471 is, of course, part of FATCA. It is entitled “Withholdable payments to foreign financial institutions”.  It sets out the reporting obligations imposed on foreign financial institutions and states that the Secretary is authorized to treat a foreign financial institution as “meeting the requirements” of 1471 if the institutions complies with procedures or requirements set forth by the Secretary or is “a member of a class of institutions” identified by the Secretary. 

There is explicit authorization in 1471 for the Secretary to engage in agreements with FFIs to implement FATCA. However where is the authorization in 1471 for the Secretary to engage in agreements with other countries to implement FATCA? It is not in the text, certainly.

Therefore to what specific provision of 1471 could IRS possibly refer when it suggests this statute authorizes individuals to sign agreements altering the reach of FATCA on behalf of the United States? There is clearly no explicit authority. Is it implied? If so, by what?

Moreover, many or most of the IGAs have been signed by officers of the Secretary of State, ambassadors, consulates general and others, and not by Treasury. Does s1471 also impliedly delegate its implied treaty power authority to those outside of Treasury who have signed on behalf of the United States? Certainly there is no explicit delegation here.

26 U.S. Code §1474(f), also part of FATCA, is the statutory authorization for the Secretary of the Treasury to 
“prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of, and prevent the avoidance of, this chapter.” 
There is no authority expressed in this provision for the Secretary to enter into agreements with other governments. Does IRS suggest that an IGA constitutes “regulations” or “other guidance”? Under what interpretation of that characterization does the Treasury interpret the promulgation of either regulations or other guidance as an authorization to negotiate an agreement with a foreign government?

26 U.S. Code § 6011 is entitled “General requirement of return, statement, or list,” and it states the parameters under which a person must make a return “[w]hen required by regulations prescribed by the Secretary.” There is authorization in 6011 for the Secretary to require taxpayers to fulfill various reporting requirements, including electronic reporting. There is no authorization in 6011 for the Secretary to engage in agreements with other countries to implement 6011. 

What provision of 6011 is IRS suggesting confers the authority to negotiate agreements with other governments without Senate advice and consent?  Does IRS mean to imply that each and every authorization that Congress gives Treasury for the prescription of regulations is an implicit authorization for Treasury (or its implied designees in other departments) to conclude agreements with other governments? If so, this is a surprising claim of executive power that is inconsistent with the treaty power described in Article II of the constitution. I would think Congress would like to know under what interpretation of Congressional direction to the Secretary to issue guidance, IRS or Treasury would conclude that it now holds the power to make treaties on behalf of the United States.  

In other words, if IRS stands by this authorization it is suggesting that any tax code section that authorizes Treasury to regulate implicitly contains both a treaty making power as well as the power to delegate authority to departments other than that specifically charged with implementing the statute. That is not a plausible claim.

26 U.S. Code § 6103 is entitled “Confidentiality and disclosure of returns and return information” and it provides that “returns and return information shall be confidential,” with exceptions provided by statute. There is authorization in 6103 for the Secretary to engage in agreements with taxpayers to implement 6103 (for example in the case of advance pricing agreements). There is no authorization in 6103 for the Secretary to engage in agreements with other countries to implement 6103. Therefore, as with 1471 and 6011, to what specific provision of 6103 does IRS refer, and under what interpretation of the authority given by Congress in 6103 to enter into agreements with taxpayers does IRS find the authority for anyone to enter into agreements with other countries?

26 U.S. Code Part III, Subpart B is entitled “Information Concerning Transactions With Other Persons” and it contains 26 US Code §§ 6041 through 6050W—a very broad set of statutes involving information reporting, none of which explicitly grant anyone the power to bind the nation to anything. Certainly nowhere in the subpart appears any express authorization for Treasury to enter into agreements with other governments in respect of s1471 or otherwise. Therefore the same questions I have raised with respect to 1471, 1474, 6011, and 6103 would seem to arise here.

In short I see no express authorization anywhere in any of these authorities for the Treasury to enter into the intergovernmental agreements. Moreover there is no precedent for such agreements, and they are being signed by US officials who are not members of the Treasury. Does it not seem at least noteworthy that an enormous network of bilateral tax agreements has been established, a network that dwarfs the existing tax treaty network in size and scope, all without any explicit Congressional authorization, and without any regard to the Treaty power clearly laid out in Article II of the Constitution? 

And why not cite the TIEA power?

I would add that is not at all clear why any list of authorizations for an individual to enter into agreements with other governments on behalf of the United States would not include 26 US Code § 274(h)(6)(C)(f), which has long been relied upon to by Treasury to find the authority to enter into tax information exchange agreements ("TIEAs") that were not expressly authorized by the statute (because they are not listed in Section 274 as beneficiary Caribbean Basin countries).  This statute has clearly been abused by Treasury in extending it way beyond what Congress intended. However, the fact that Congress has not complained suggests that it has acquiesced to the overreach. 

That makes the TIEAs good precedent for those who want to defend the IGAs as a matter of law. In omitting this, the only plausible source of support for the authority to bind the nation without the advice and consent of Senate, does IRS suggest that Treasury now backs away from this authority? If so, why would they do that? The answer is of course that IRS believes that if necessary the TIEAs can also be considered sole executive agreements, and as such a TIEA "does not need Senate or other congressional approval." This is an official claim that the IRS doesn't think Treasury or anyone needs even s.274 as a cover: the executive can simply act alone to achieve its tax goals through international agreements.

At the end of the day, it is clear that Treasury saw a real and serious need to work with other governments to make FATCA work. There is no disputing that fact, and indeed it is a step toward multilateral cooperation which should be celebrated if only it weren’t so lopsided, and if only it weren't being accomplished via the threat of economic sanctions for all the world’s tax havens except the United States itself. But no amount of need or want can sidestep the constitutional delegation of powers among the branches, and the treaty power is no exception: nor should it be. At least one Treasury official has already conceded that the explanation for the IGAs is that they are "executive agreements”, not Article II treaties. 

IRS and Treasury should therefore just admit that the IGAs are simply “sole” executive agreements—not authorized by Congress but entered into by the executive branch under its sole discretion. 

This is a tenuous position and it ought to fail constitutional scrutiny but for the fact that in the past, Congress has acquiesced to this exercise of power by the executive and it is likely to do so again, especially given how little has been undertaken by the United States in these IGAs. As Lee Sheppard pointed out in a Tax Notes article two years ago, "An executive agreement depends on the good will of the parties to enforce it.” And as Susie Morse also pointed out in Tax Notes last year, Treasury is very likely to try to enforce their part of the IGAs. 

Since the US side of the IGAs is to deliver very modest undertakings that Treasury also believes can be done without congressional approval (namely, extending the longstanding s. 6049-based information exchange with Canada to other countries), this is probably true; all IGA promises to alter the law in the future should be seen as what they are, unenforceable promises that are beyond Treasury’s control and so won’t be delivered. 

Therefore honesty is still the best policy for Treasury. Instead of citing non-existent statutory authority that is easily refuted by simple reading, Treasury should own what it is doing outright. These are sole executive agreements, they lack statutory approval, they undertake very little on the part of the United States, but they are an effective way of pretending to be cooperative so that other countries can save face as they submit to the threat of economic sanctions that is FATCA. There isn’t really any reason why Treasury shouldn’t acknowledge this reality, since it is, strictly speaking, of Congress’ own making.

Tagged as: FATCA rule of law Tax law tax policy u.s.



Bruce Zagaris on US Perspectives on Information Exchange

Published Jun 17, 2014 - Follow author Allison: - Permalink

Bruca Zagaris has a two-part article on U.S. policies on the exchange of information in tax matters, published  by Tax Analysts on June 9 and  June 17, of great interest (but gated, unfortunately). He provides an overview of the applicable treaties (bilateral and MAATM), TIEAs and IGAs, and discusses the various forms of information exchange. He gives a nice level of detail on how information exchange requests are processed in the US and how the US achieves its information goals vis a vis other countries. He goes through the legal structures and the developments at the OECD and EU. He then provides a series of detailed hypotheticals focusing in on US information exchange policy with respect to Latin America. Bruce is very clear about the lack of reciprocity that characterizes the US position toward information exchange and notes, rightly, I believe, that this position is sure to lead to conflict going forward.

His conclusion is rather bleak but I don't disagree with anything he is saying. Here are a few excerpts:

The U.S. budgetary problems, the pay-as-you-go system, the revenue estimates obtained for the anti-tax-haven bills, and the proclivity of some members of Congress to focus on tax enforcement and compliance directed at U.S. taxpayers concealing money abroad ensures that the anti-tax-haven bills will constantly be appended to appropriations legislation in this session of Congress and in future sessions. There are so many anti-tax-haven initiatives and the lack of actual reciprocity by the U.S. government, as opposed to the rhetoric, may well lead to dispute resolution proceedings soon and to disagreements within the international initiatives of the OECD and FATF, as a result of the perceived lack of a level playing field. 
A global trend toward criminalization of tax compliance and enforcement will continue.... Governments will continue to try to privatize tax enforcement by deputizing FIs and service providers regarding reporting, ethics, and a range of other requirements. Criminal investigations and prosecutions of noncompliant institutions and service providers will continue. 
... Disagreements are likely to continue among the OECD and developing countries about the proper financial architecture, not only in tax policy, but also financial regulation. If possible, the G-8 countries will try to continue to centralize decision-making in elite informal groups, such as the G-20, the Financial Stability Forum, and the OECD and the groups it controls, such as the Global Forum on Taxation. 
... OECD and Latin American governments, including the United States, Argentina, Mexico, and Brazil, will continue to impose sanctions through blacklists and countermeasures against small financial center jurisdictions, both unilaterally and through international organizations (for example, the OECD and IMF) and informal groups (for example, G-20, FATF, and Financial Stability Board), even though small-state offshore financial centers do a much better job of enforcing the prohibition on anonymous companies and bank accounts than do large OECD countries, and the United States is the main offender in failing to enforce the international standards prohibiting anonymous companies 
The biggest potential impediment to the United States achieving its global tax priorities is the political gridlock, especially regarding the budget, spending, raising taxes, and raising the debt limit. ... 
The upshot of globalization and increased penalization of international tax and money movement flows is increased pressure on financial intermediaries, including lawyers, trust companies, banks, accountants, and other wealth management professionals who must advise clients. Increasingly, tax authorities, law enforcement, and regulators will be acting to obtain information and bring administrative and criminal cases for reporting violations, nonpayment, nonfiling, and allegedly fraudulent activities, or conspiracy to do the same.
All in all this is a tremendous resource for anyone wanting to understand information exchange from the US perspective. I hope that others will undertake similar analyses for other countries, so that we can start to understand what tax information exchange actually looks like now, and what it will likely look like going forward. The combination of non-reciprocity, a starved administration, and political gridlock in the US with a continued policy jealousy on the part of the US and its close "elite" allies that Bruce describes portends deep trouble ahead for the rest of the world, especially as these countries continue to reserve their own rights to act as tax havens.

Tagged as: FATCA information institutions international law Tax law treaties u.s.



FATCA non-delay delay

Published May 03, 2014 - Follow author Allison: - Permalink

Treasury playing a little game here: keep driving forward yet refrain from actually imposing FATCA's sanctions, except in those countries it is publicly acceptable to sanction. As an important aside, if there was ever any doubt as to the nature of FATCA's "withholding tax" before, that should now finally be put to rest. This is not a tax, it is an economic sanction to coerce persons outside the jurisdiction to comply with domestic information gathering goals, which can also be used to inflict punishment for other, unrelated offences. But what does it mean for the rule of law and for taxpayer expectations to have the threat of economic sanctions held steady with the release trigger depending on the IRS' 'sense' of taxpayer efforts? How will withholding agents interpret their obligations as of July 1? The below notice will require some very close reading by a great number of people.
Notice 2014-33; 2014-21 IRB 1 
Further Guidance on the Implementation of FATCA
and Related Withholding Provisions


This notice announces that calendar years 2014 and 2015 will be regarded as a transition period for purposes of Internal Revenue Service (IRS) enforcement and administration with respect to the implementation of FATCA by withholding agents, foreign financial institutions (FFIs), and other entities with chapter 4 responsibilities, and with respect to certain related due diligence and withholding provisions under chapters 3 and 61, and section 3406, that were revised in regulations issued earlier this year as referenced in section II of this notice. This notice also announces the intention of the Department of the Treasury (Treasury) and the IRS to further amend the regulations under sections 1441, 1442, 1471, and 1472, as applicable, to provide: (i) that a withholding agent or FFI may treat an obligation (which includes an account) held by an entity that is opened, executed, or issued on or after July 1, 2014, and before January 1, 2015, as a preexisting obligation for purposes of sections 1471 and 1472, subject to certain modifications described in section IV of this notice; (ii) additional guidance under section 1471 concerning the requirements for an FFI (or a branch of an FFI, including a disregarded entity owned by an FFI) that is a member of an expanded affiliated group of FFIs to be treated as a limited FFI or limited branch, including the requirement for a limited FFI to register on the FATCA registration website; (iii) a modification to the standards of knowledge for withholding agents under § 1.1441-7(b) for accounts documented before July 1, 2014; and (iv) a revision to the definition of a reasonable explanation of foreign status in § 1.1471-3(e)(4)(viii). Prior to the issuance of these amendments, taxpayers may rely on the provisions of this notice regarding these proposed amendments to the regulations.

The transition period and other guidance described in this notice is intended to facilitate an orderly transition for withholding agent and FFI compliance with FATCA's requirements, and responds to comments regarding certain aspects of the regulations under chapters 3 and 4.


A. Final and Temporary Regulations under Chapter 4

On March 18, 2010, the Hiring Incentives to Restore Employment Act of 2010, Pub. L. 111-147 (H.R. 2847), added chapter 4 to Subtitle A of the Code. Chapter 4 generally requires withholding agents to withhold at a 30 percent rate on certain payments to an FFI unless the FFI has entered into an agreement (FFI agreement) to obtain status as a participating FFI and to, among other things, report certain information with respect to U.S. accounts. Chapter 4 also imposes on withholding agents certain withholding, documentation, and reporting requirements with respect to certain payments made to certain non-financial foreign entities (NFFEs). 
On January 17, 2013, Treasury and the IRS published final regulations under chapter 4 (TD 9610, 78 Fed. Reg. 5873) (final chapter 4 regulations). Following the publication of the final chapter 4 regulations, Treasury and the IRS issued Notice 2013-43 (2013-31 I.R.B. 113) to preview, among other things, a revised timeline for implementation of the FATCA requirements. On February 20, 2014, Treasury and the IRS released temporary regulations under chapter 4 (T.D. 9657, 79 Fed. Reg. 12,812) (temporary chapter 4 regulations) that clarify and modify certain provisions of the final chapter 4 regulations, including incorporating the revised timeline for the implementation of FATCA set forth in Notice 2013-43. The temporary chapter 4 regulations accordingly require that withholding agents (including participating FFIs, qualified intermediaries, withholding foreign partnerships, and withholding foreign trusts) begin withholding with respect to withholdable payments made on or after July 1, 2014, unless the withholding agent can reliably associate the payment with documentation upon which it is permitted to rely to treat the payment as exempt from withholding under chapter 4. On February 20, 2014, Treasury and the IRS also released temporary regulations under chapters 3 and 61, and section 3406 (T.D. 9658, 79 Fed. Reg. 12,726) (temporary coordination regulations), to coordinate those regulations with the requirements provided in the final and temporary chapter 4 regulations.

To date, the IRS has published updated final versions of all forms in the Forms W-8 series and certain instructions to these forms to incorporate the documentation requirements of chapter 4. The IRS expects to publish all of the remaining instructions in this series in the near future.

B. Intergovernmental Agreements (IGAs)

During 2012, Treasury first released Model 1 and Model 2 intergovernmental agreements (IGAs) to facilitate the implementation of FATCA and to avoid legal impediments under local law that would otherwise limit an FFI's ability to comply with the requirements under chapter 4. On April 2, 2014, Treasury and the IRS published Announcement 2014-17 (2014-18 I.R.B. 1001), providing that the jurisdictions treated as having an IGA in effect would include jurisdictions that, before July 1, 2014, have reached agreements in substance with the United States on the terms of an IGA and that have consented to be included on the Treasury and IRS lists of such jurisdictions, in addition to jurisdictions that have already signed IGAs. An FFI that is resident in, or organized under the laws of, a jurisdiction that is included on the Treasury and IRS lists as having an IGA in effect is permitted to register on the FATCA registration website and is permitted to certify to a withholding agent its status as an FFI covered by an IGA. As of May 1, 2014, Treasury had signed 30 IGAs, and had agreements in substance with 29 jurisdictions. A complete list can be found on Treasury's website, available at

Calendar years 2014 and 2015 will be regarded as a transition period for purposes of IRS enforcement and administration of the due diligence, reporting, and withholding provisions under chapter 4, as well as the provisions under chapters 3 and 61, and section 3406, to the extent those rules were modified by the temporary coordination regulations. With respect to this transition period, the IRS will take into account the extent to which a participating or deemed-compliant FFI, direct reporting NFFE, sponsoring entity, sponsored FFI, sponsored direct reporting NFFE, or withholding agent has made good faith efforts to comply with the requirements of the chapter 4 regulations and the temporary coordination regulations.

For example, the IRS will take into account whether a withholding agent has made reasonable efforts during the transition period to modify its account opening practices and procedures to document the chapter 4 status of payees, apply the standards of knowledge provided in chapter 4, and, in the absence of reliable documentation, apply the presumption rules of § 1.1471-3(f). Additionally, for example, the IRS will consider the good faith efforts of a participating FFI, registered deemed-compliant FFI, or limited FFI to identify and facilitate the registration of each other member of its expanded affiliated group as required for purposes of satisfying the expanded affiliated group requirement under § 1.1471-4(e)(1).

An entity that has not made good faith efforts to comply with the new requirements will not be given any relief from IRS enforcement during the transition period. Further, the IRS will not regard calendar years 2014 and 2015 as a transition period with respect to the requirements of chapters 3 and 61, and section 3406, that were not modified by the temporary coordination regulations. For example, the IRS will not provide transitional relief with respect to its enforcement regarding a withholding agent's determinations of the character and source of payments for withholding and reporting purposes. The transition period for compliance provided in this notice is similar to other transition periods that the IRS has provided when it has introduced or significantly revised due diligence, reporting, and withholding rules. See, e.g., Notice 98-16 (1998-15 I.R.B 12), Notice 99-25 (1999-20 I.R.B 75), and Notice 2001-4 (2001-2 I.R.B. 267).


A. Chapter 4 Regulations

Under the chapter 4 regulations, withholding agents (other than participating FFIs and registered deemed-compliant FFIs) are generally required to implement new account opening procedures beginning on July 1, 2014. A participating FFI is required to implement new account opening procedures on the later of July 1, 2014, or the effective date of its FFI agreement, and a registered deemed-compliant FFI is required to implement new account opening procedures on the later of July 1, 2014, or the date on which the FFI registers as a deemed-compliant FFI and receives a global intermediary identification number (GIIN). 
Comments received after the publication of the temporary chapter 4 regulations have indicated that the release dates of the final Forms W-8 and accompanying instructions present practical problems for both withholding agents and FFIs to implement new account opening procedures beginning on July 1, 2014. In consideration of these comments, Treasury and the IRS intend to amend the chapter 4 regulations to allow a withholding agent or FFI to treat an obligation held by an entity that is issued, opened, or executed on or after July 1, 2014, and before January 1, 2015, as a preexisting obligation for purposes of implementing the applicable due diligence, withholding, and reporting requirements under chapter 4. The proposed amendments to the chapter 4 regulations described in this section IV will be available only to obligations held by entities. The proposed amendments to the chapter 4 regulations will not be available for obligations held by individuals because the procedures for documenting individual accounts are less complex than those for documenting entities for chapter 4 purposes and the Form W-8BEN (for withholding agents to document individuals) and its accompanying instructions were published in final form on March 3, 2014.

More specifically, the proposed amendments will allow withholding agents and FFIs to treat any obligation held by an entity that is issued, opened, or executed on or after July 1, 2014, and before January 1, 2015, as a preexisting obligation for purposes of the due diligence and withholding requirements applicable to preexisting obligations described in §§ 1.1471-2(a)(4)(ii), 1.1472-1(b)(2), and 1.1471-4(c)(3), except that an FFI may not apply the documentation exception under § 1.1471-4(c)(3)(iii).

As a result, a withholding agent that treats an obligation described in this section IV as a preexisting obligation will have the additional time provided in § 1.1471-2(a)(4)(ii) or § 1.1472-1(b)(2) in order to document an entity that is a payee or account holder of the obligation to determine whether the entity is a payee subject to withholding under chapter 4. For example, a withholding agent may document an entity that is a payee of an obligation issued, opened, or executed on or after July 1, 2014, and before January 1, 2015, by December 31, 2014, if the payee is a prima facie FFI, or by June 30, 2016, in all other cases (as provided in § 1.1471-2(a)(4)(ii)). A withholding agent would otherwise be required to document the entity by the earlier of the date a withholdable payment is made or within 90 days of the date the obligation is issued, opened, or executed.

An FFI that is a participating FFI or registered deemed-compliant FFI may also treat an obligation held by an entity that is issued, opened, or executed on or after July 1, 2014, and before January 1, 2015, as a preexisting obligation to document the obligation for chapter 4 purposes within the period permitted under § 1.1471-4(c)(3)(ii) as if the effective date of its FFI agreement or the date on which the FFI registers as a deemed-compliant FFI and receives a GIIN is June 30, 2014, and may not exclude such accounts from review under § 1.1471-4(c)(3)(iii).

The proposed amendments to the chapter 4 regulations described in this notice will not otherwise affect the timelines provided in the final and temporary chapter 4 regulations for due diligence, reporting, or withholding and will not modify the starting date for an FFI to implement new account opening procedures with respect to accounts maintained by the FFI that are held by individuals. For example, if a withholding agent treats an obligation held by an entity that is issued, opened, or executed on or after July 1, 2014, and before January 1, 2015, as a preexisting obligation and receives a Form W-8BEN-E from the entity to document its status as a nonparticipating FFI, the withholding agent must begin withholding and reporting under chapter 4 when otherwise required for a preexisting obligation under the chapter 4 regulations.

B. Intergovernmental Agreements

The Model 1 and Model 2 IGAs contain a provision that allows a partner jurisdiction that has entered into an IGA to receive the benefit of certain more favorable terms that are set forth in a later signed IGA, including revisions to the procedures under Annex I of an applicable IGA, unless the partner jurisdiction declines in writing to adopt the update (the "most-favored nation" provision). With respect to FFIs covered by an IGA, Treasury intends to update the due diligence procedures described in Annex I of the Model 1 and Model 2 IGAs to incorporate due diligence procedures consistent with this notice.
Thus, it is expected that Annex I of future Model 1 and Model 2 IGAs will include a new due diligence procedures for an entity account opened on or after July 1, 2014, and before January 1, 2015, to allow an FFI covered by a Model 1 IGA or Model 2 IGA to treat such an account as a preexisting entity account, but without permitting application to such accounts of the $250,000 exception for preexisting entity accounts that are not required to be reviewed, identified, or reported. A partner jurisdiction with an IGA that has been signed or that has reached an agreement in substance will be permitted to adopt the revised due diligence procedures described above pursuant to the most-favored nation provision contained within its IGA, once an IGA with the revised procedures has been signed with another partner jurisdiction.

Annex I of the Model 1 IGA contains a provision that allows a partner jurisdiction to permit a reporting Model 1 FFI to rely on the procedures described in relevant U.S. Treasury regulations to establish whether an account is a U.S. reportable account or an account held by a nonparticipating financial institution. Annex I of the Model 2 IGA contains a provision that allows a reporting Model 2 FFI to rely on the procedures described in relevant U.S. Treasury regulations to establish whether an account is a U.S. reportable account or an account held by a nonparticipating financial institution. Prior to the publication of the proposed amendments to the chapter 4 regulations, a partner jurisdiction may rely on the provisions of this notice to permit a reporting Model 1 FFI to apply the due diligence procedures for documenting entity accounts described in this section IV. Similarly, prior to the publication of the proposed amendments to the chapter 4 regulations, a reporting Model 2 FFI may rely on the provisions of this notice to apply the due diligence procedures for documenting entity accounts described in this section IV.


A. Background on Reason to Know

The temporary coordination regulations, among other things, revised the reason to know standard under § 1.1441-7(b) to provide that a withholding agent will have reason to know that documentation establishing the foreign status of a direct account holder is unreliable or incorrect if the withholding agent has a current telephone number for the account holder in the United States and no telephone number for the account holder outside the United States, or has a U.S. place of birth for the account holder. See § 1.1441-7(b)(5) and (8). The addition of rules concerning a U.S. telephone number and a U.S. place of birth as U.S. indicia to the standards of knowledge for withholding agents was made in the temporary coordination regulations to coordinate with the standards of knowledge applicable to a withholding agent's reliance on a payee's claim of foreign status for chapter 4 purposes. The temporary coordination regulations also provide a transitional rule to allow a withholding agent that has previously documented the foreign status of a direct account holder for chapters 3 and 61 purposes prior to July 1, 2014, to continue to rely on such documentation without regard to whether the withholding agent has a U.S. telephone number or U.S. place of birth for the account holder. The withholding agent would, however, have reason to know that the documentation is unreliable or incorrect if the withholding agent is notified of a change in circumstances with respect to the account holder's foreign status or the withholding agent reviews documentation for the account holder that contains a U.S. place of birth. See § 1.1441-7(b)(3)(ii).

B. Modification of the Standards of Knowledge

Commentators have noted that the transitional rule for preexisting obligations described in § 1.1441-7(b)(3)(ii) has limited use for withholding agents because it is tied to a withholding agent's reliance on documentation obtained from an account holder prior to July 1, 2014, and may therefore not include cases in which a withholding agent renews a withholding certificate or documentary evidence on or after July 1, 2014, under the requirements of § 1.1441-1(e)(4)(ii)(A) (referring to the time period for renewal of certain withholding certificates or documentary evidence). Commentators further note that because of the extension until December 31, 2014, provided in the temporary coordination regulations for withholding agents to renew withholding certificates and documentary evidence that would have otherwise expired on December 31, 2013, withholding agents will have a significant number of accounts that were documented prior to July 1, 2014, but that will need to be re-documented by December 31, 2014, at which time they will no longer be able to rely on the transitional rule in § 1.1441-7(b)(3)(ii) even if the renewal documentation does not include any information indicating a change in circumstances. See § 1.1441-1(e)(4)(ii)(A) for the extended renewal allowance for withholding certifications and documentary evidence otherwise expiring on December 31, 2013.
Accordingly, Treasury and the IRS intend to amend the temporary coordination regulations to provide that a direct account holder will be considered documented prior to July 1, 2014, without regard to whether the withholding agent obtains renewal documentation for the account holder on or after July 1, 2014 pursuant to the requirements of § 1.1441-1(e)(4)(ii)(A). Therefore, a withholding agent that has documented a direct account holder prior to July 1, 2014, is not required to apply the new reason to know standards relating to a U.S. telephone number or U.S. place of birth until the withholding agent is notified of a change in circumstances with respect to the account holder's foreign status (other than renewal documentation that is required under § 1.1441-1(e)(4)(ii)(A)) or reviews documentation for the account holder that contains a U.S. place of birth. See § 1.1441-7(b)(3)(ii).


A. Background on Reasonable Explanation Supporting a Claim of Foreign Status

The final chapter 4 regulations in § 1.1471-3(e)(4)(viii) and the temporary coordination regulations in § 1.1441-7(b)(12) each provide that a withholding agent may rely on the foreign status of an individual account holder irrespective of certain U.S. indicia if, in certain cases, the account holder provides a reasonable explanation supporting the account holder's claim of foreign status. Section 1.1441-7(b)(12) describes a reasonable explanation supporting a claim of foreign status for chapter 3 purposes as either a written statement prepared by an individual or a checklist provided by a withholding agent stating that the individual meets the requirements described in § 1.1441-7(b)(12)(i) through (iv). Section 1.1471-3(e)(4)(viii) also describes a reasonable explanation supporting a claim of foreign status by an individual account holder for chapter 4 purposes, and it is substantially similar to the description under § 1.1441-7(b)(12), except that it limits the contents of a reasonable statement provided by an individual account holder to the explanations permitted on the checklist. Thus, unlike the description provided in the temporary coordination regulations, the description provided in the final chapter 4 regulations does not permit an individual to provide a written explanation other than an explanation that the individual meets the requirements described in § 1.1471-3(e)(4)(viii)(A) through (D).

B. Revision of Reasonable Explanation Prepared by an Individual

Commentators have noted that the description of a reasonable explanation of foreign status in the final chapter 4 regulations differs from the description provided in the temporary coordination regulations. Treasury and the IRS intend to amend the final chapter 4 regulations to adopt the description of a reasonable explanation of foreign status provided in the temporary coordination regulations, which permit an individual to provide a reasonable explanation that is not limited to an explanation meeting the requirements of § 1.1471-3(e)(4)(viii)(A) through (D). 

A. Background

The final and temporary chapter 4 regulations require that for any member of an expanded affiliated group (as defined in § 1.1471-5(i)(2)) to obtain status as a participating FFI or registered deemed-compliant FFI, each FFI member of the expanded affiliated group must have a chapter 4 status of a participating FFI, deemed-compliant FFI, exempt beneficial owner, or limited FFI. The final chapter 4 regulations also provide in § 1.1471-4(e)(2)(iv) and (3)(iii) that an FFI or branch of a participating FFI must be registered with the IRS and agree to certain conditions in order to be treated as a limited FFI or limited branch. The conditions for limited FFI or limited branch status include, among other things, that the FFI or branch not open accounts that it is required to treat as U.S. accounts or accounts held by nonparticipating FFIs, including accounts transferred from any member of its expanded affiliate group.
The IRS's FATCA registration website, available at, serves as the primary way for FFIs to register for status as a participating FFI, registered deemed-compliant FFI, or limited FFI. The FATCA registration website allows FFIs that are members of an expanded affiliated group to designate a lead financial institution (Lead FI) to identify member FFIs that will register as participating FFIs, registered deemed-compliant FFIs, or limited FFIs and to perform certain functions with respect to member FFIs. A Lead FI is not, however, required to act as a Lead FI for all FFIs within an expanded affiliated group.

B. Relief from Limited FFI and Limited Branch Restrictions on Account Opening.

FFIs and other stakeholders continue to express strong support for IGAs as a way to facilitate effective and efficient FATCA implementation while avoiding conflicts with local law. While Treasury stands ready and willing to negotiate IGAs based on the published models, commentators have expressed practical concerns about the status of FFIs and branches of FFIs in jurisdictions that are slow to engage in IGA negotiations and that have legal restrictions impeding their ability to comply with FATCA, including the conditions for limited FFI or limited branch status under the chapter 4 regulations. Specifically, comments have noted that the restrictions imposed by the final chapter 4 regulations on a limited branch or limited FFI on opening any account that it is required to treat as a U.S. account or as held by a nonparticipating FFI hinders the ability of an FFI to agree to the conditions of limited status due, for example, to requirements under local law to provide individual residents with access to banking services or to the business needs of the FFI to secure funding from another FFI in the same jurisdiction with similar impediments to complying with the requirements of FATCA.
In response to these comments, Treasury and the IRS intend to amend the final chapter 4 regulations to permit a limited FFI or limited branch to open U.S. accounts for persons resident in the jurisdiction where the limited branch or limited FFI is located, and accounts for nonparticipating FFIs that are resident in that jurisdiction, provided that the limited FFI or limited branch does not solicit U.S. accounts from persons not resident in, or accounts held by nonparticipating FFIs that are not established in, the jurisdiction where the FFI (or branch) is located and the FFI (or branch) is not used by another FFI in its expanded affiliated group to circumvent the obligations of such other FFI under section 1471. This modification is consistent with the treatment of related entities and branches provided in the model IGAs.

C. Registration of Limited FFIs.

Commentators have also stated that certain jurisdictions are explicitly prohibiting an FFI resident in, or organized under the laws of, the jurisdiction from registering with the IRS and agreeing to any status, including status as a limited FFI, regardless of whether the FFI would otherwise be able to comply with the requirements of limited FFI status. Treasury and the IRS intend to amend the final chapter 4 regulations to provide that, if an FFI is prohibited under local law from registering as a limited FFI, the prohibition will not prevent the members of its expanded affiliated group from obtaining statuses as participating FFIs or registered deemed-compliant FFIs if the first-mentioned FFI is identified as a limited FFI on the FATCA registration website by a member of the expanded affiliated group that is a U.S. financial institution or an FFI seeking status as a participating FFI (including a reporting Model 2 FFI) or reporting Model 1 FFI. In order to identify the limited FFI, the member of the expanded affiliated group will be required to register as a Lead FI with respect to the limited FFI and provide the limited FFI's information in Part II of the FATCA registration website. If the Lead FI is prohibited from identifying the limited FFI by its legal name, it will be sufficient if the Lead FI uses the term "Limited FFI" in place of its name and indicates the FFI's jurisdiction of residence or organization. 
By identifying a limited FFI in the FATCA registration website pursuant to this subsection VII.C, the Lead FI is confirming that: (1) the FFI made a representation to the Lead FI that it will meet the conditions for limited FFI status, (2) the FFI will notify the Lead FI within 30 days of the date that such FFI ceases to be a limited FFI because it either can no longer comply with the requirements for limited status or failed to comply with these requirements, or that the limited FFI can comply with the requirements of a participating FFI or deemed-compliant FFI and will separately register, to the extent required, to obtain its applicable chapter 4 status, and (3) the Lead FI, if it receives such notification or knows that the limited FFI has not complied with the conditions for limited FFI status or that the limited FFI can comply with the requirements of a participating FFI or deemed-compliant FFI, will, within 90 days of such notification or acquiring such knowledge, update the information on the FATCA registration website accordingly and will no longer be required to act as a Lead FI for the FFI. In the case in which the FFI can no longer comply or failed to comply with the requirements of limited FFI status, the Lead FI must delete the FFI from Part II of the FATCA registration website and must maintain a record of the date on which the FFI ceased to be a limited FFI and the circumstances of the limited FFI's non-compliance that will be available to the IRS upon request.


The principal author of this notice is Tara N. Ferris of the Office of Associate Chief Counsel (International). For further information regarding this notice, contact Ms. Ferris at (202) 317-6942 (not a toll-free call).
For a couple of instant reactions from the compliance industry: KPMG; Deloitte.
In the media: Accounting Today; Reuters.

Tagged as: FATCA institutions tax policy u.s.



FATCA in Canada-constitutional challenge mounting

Published Feb 28, 2014 - Follow author Allison: - Permalink

A group of Canadians has put together a campaign to explore the constitutional violations posed by FATCA in Canada. Some of these issues were raised by pre-eminent constitutional scholar Peter Hogg, in this letter to Finance. Others arise because of the adoption of the intergovernmental agreement (IGA), which bypasses data protection laws and lacks even the minor anti-discrimination clause seen in other IGAs.

I've been asked if these issues are serious. I think they are. The issue FATCA raises for me is not so much sovereignty--though I perfectly understand the instinct on that front--but rather it is the problem of serious mismatch between the goals targeted and what will be attained by FATCA when law on the books meets law in practice. The constitutional challenge is a signal that something is seriously awry with FATCA. As with most activism, this effort demonstrates that a not-small number of people are experiencing some not-small violation of fundamental principles, and in light of government failure to respond, are forming grassroots responses in an effort to achieve a remedy.

Let's have a look at why this might be so.

The goals of FATCA are clear and the law writes a clear narrative that is palatable to the public: we must stop tax evasion. Who would possibly speak out against that goal? I don't know too many people that would.

However, the law in practice is a completely different story, with a normative dimension unique to the United States. This dimension has, as far as I can see, been completely ignored by lawmakers both in America and internationally. It involves the attempt by the United States to impose taxation of persons based on their legal status instead of their actual inclusion in American society.

I know that this s difficult to understand conceptually. An example might help.

A was born in Illinois to a Swedish mother and an American father. The family moved to Sweden when A was 6 months old, and she spent her whole life in Sweden, working there, paying taxes there, using the schools and the health care system there, and getting married to a fellow Swede. A is a US national, and therefore subject to US taxation as if A had done all of those things in America. A has always been subject to US taxation, and FATCA doesn't change that in the slightest. But A never paid any attention to US law or politics, decisions of the US Supreme Court, or Congressional hearings. Why would she? She is a resident of Sweden paying high taxes and living her life. A has bank accounts at her neighbourhood bank, and tax-deferred savings account sponsored by her government.

In the eye of FATCA, A is an offshore tax evader.

Since she is an evader, she must be monitored to ensure she is caught and brought to justice, and further that she goes forward in full compliance with all US tax laws. Since she cannot be trusted to come forward, her bank must disclose her personal and financial information, and that of her spouse (guilty by association), to the IRS. Since the bank has no incentive to do that, it must be threatened with sanctions if it fails to do so. Since banks don't want to work under that threat, Sweden must be compelled to step in and facilitate the data transfer.

As I have said often, this is an extraterritorial jurisdictional claim that requires the help of other countries. Getting help is not a choice, it is a necessity. One country simply cannot assert its jurisdiction over people who live in another country, without that other country's help. American scholars know this, and they say America should ask for the help it needs. The problem that we have seen FATCA reveal is that this help necessarily involves America's needs trumping domestic laws that apply to targeted persons in the country of their residence.

I do not think America should be demanding help from other countries in taxing the residents of those countries. America needs to learn to tax its own residents, like every other country must do. If the world's biggest economy cannot figure out how to make its own people pay for their own public goods, it is difficult to see why other countries should be enlisted to help it along.

This is why the mismatch between the law on the books and the law in practice is so troubling in the case of FATCA. Looking past the use of legal status instead of residence as a jurisdictional claim, a regime that requires financial institutions to report nonresident accounts to these account holder's home countries is absolutely necessary to protect the income tax base from widespread tax evasion facilitated by foreign bank secrecy laws.  Of that there is simply no doubt. To the extent FATCA can do that, it is to be applauded and most of all extended globally because this is a global issue. I explain and advance this argument here

Most countries cannot act alone in instituting this necessary regulatory structure, since foreign financial institutions would simply shun a given market rather than comply. This is the potentially positive side of what makes the United States different from most, maybe all, other countries. This also explains why the OECD is very very quickly trying to ride the coattails of FATCA (before it is too late and the US changes its mind about being part of a global data exchange system, as it has before), by gearing up to create a global FATCA, or call it a GATCA

GATCA is FATCA minus two key aspects: the normatively unjustifiable legal-status based tax, and most of the economic sanctions. The UK has done something similar with those same parameters with respect to a selected list of countries. (The OECD's GATCA is also fully reciprocal, but that deficiency in FATCA is another issue). These differences make a GATCA supportable exactly where FATCA is not (both systems have other major flaws but we can leave those aside for the big picture here).

FATCA's enforcement of legal-status based taxation renders it normatively unjustifiable. It violates the residence principle, which Reuven Avi-Yonah has gone so far as to call an international customary law. It is also of course completely unworkable on a global scale: imagine if other countries decided to learn from the US example and started smoking out their own disapora to enforce their own FATCA regimes. It is unimaginable that if the OECD countries got together and seriously debated status-based taxation, they would agree on a global standard to enforce it for all countries. The common reporting standard GATCA they have devised, which is so obviously based fundamentally on the residence principle, shows that the OECD recognizes that enforcing status-based taxation is not and should not be a goal of any project to counter tax evasion.

Yet no conversation is being had about the outlier, whose demands will make enforcement of GATCA more extensive and more expensive for every other country.

Residence based taxation is not perfect by any means but it is the least worst alternative if governments want to continue to use personal income taxes in a world in which individuals are to be allowed the freedom to move. FATCA deserves to fail to the extent it ignores this reality. A constitutional challenge will at minimum open a desperately needed political conversation about why this is so.

Tagged as: Canada citizenship FATCA international law Tax law tax policy



OECD's Plan for Global Tax Info Exchange: Could be Deja Vu All Over Again

Published Feb 14, 2014 - Follow author Allison: - Permalink

The OECD has released its "Common Reporting Standard," a.k.a. a global "Standard for Automatic Exchange of Financial Account Information." The plan more or less tracks the so-called "intergovernmental agreements" (IGAs) that the US Treasury is using to try to get the Foreign Account Tax Compliance Act working. But the OECD's model for the world differs in two critical respects:

  1. it is based on the global standard of residence-based taxation
  2. it would require reciprocity

One obvious question is whether the US would sign on to this standard, since it represents a major reduction of the massive expansion of the US taxpayer base contemplated by FATCA. If not, can one really envision a world in which everyone shares data reciprocally except the United States, which not only does not share data reciprocally but also places the most expansive demands on everyone else? (For those not following along, the US claims people based on their legal status in the US as well as their actual residence, in contravention of the global norm reflected in the OECD standard, which rejects the former claim in favor of the latter. In terms of reciprocity, what the US calls reciprocal with respect to data sharing is so far reciprocal in name only).

A related issue that already exists under FATCA and will be expanded exponentially under the OECD plan is that reciprocity means every government bears the cost of incorporating expansive financial surveillance (in the case of the US, far beyond that required for all other countries) yet as the Tax Justice Network points out, this formal equality in fact introduces substantive inequality and potentially great harm to poorer countries.

Readers of my prior work (on soft law, on the OECD's norm-creating role, and on its grappling with the issue of sovereignty) will know that I am cautious about the premise of accepting proclamations of the OECD about "global" tax norms.

In the case of residence-based taxation, however, this is not an OECD-created norm but one that dates to the very beginnings of modern income taxation and while flawed is the best available structure if more than one country in the world is going to have an income tax and people are going to be allowed to leave their countries freely if they so choose. Relax either of those assumptions and legal status-based taxation might become technically feasible, though it would still be fundamentally unjust. Neither is the reciprocity norm an OECD invention: instead, its roots trace back to post-Westphalian fundamental international legal principles.

The OECD's forging ahead with a plan that more or less relies heavily on US acceptance is eerily reminiscent of the last OECD attempt to curb tax evasion, via the harmful tax practices initiative. The US first supporting and then completely reversing course eviscerated that effort, thus cementing the status quo we witness today.

US exceptionalism with respect to who should be considered its residents and what it can be compelled to share with other countries cannot help but perpetuate a grave reciprocity imbalance that will only be exacerbated if the US does not sign up to the OECD standard, and the OECD accepts a carve-out to accommodate it.

Given that efforts toward a repeal of FATCA and an ongoing legal challenge to data reporting by US banks are currently unfolding in the US, the OECD's report comes at an interesting juncture in the process of picking up where the harmful tax practices project left off. It could unfortunately foreshadow a repeat of the events that unfolded in that project circa 2001. Or, more optimistically, it could be that the OECD report is a means of giving the US a reason and the political cover to bring its antiquated status-based tax regime up to date with the global residence-based standard, and its one-sided view of the value of data sharing in line with how the rest of the world views things. That would make global automatic data exchange of offshore financial accounts a much more clearly positive development overall, leaving room to focus on solving the other outstanding issues. Only time will tell which way this will unfold.

Tagged as: FATCA international law OECD tax policy



FATCA Q&A--A Work in Progress

Published Dec 08, 2013 - Follow author Allison: - Permalink

Just a few questions I get a lot, together with some of the answers I typically give. This is not an exhaustive account of anything, nor is it legal advice. If you have or think you have FATCA-related problems, you need to consult legal counsel.
What is FATCA?
  • FATCA is the Foreign Account Tax Compliance Act. It is law in the United States, enacted as part of the Hiring Incentives to Restore Employment Act, (HIRE Act), which was signed into law by President Obama on March 18, 2010. (It is found at §§ 501-531, Pub. L. No. 111-147, 124 Stat. 71 (2010). It has been codified in scattered sections of the Internal Revenue Code.
  • In brief, the law requires foreign financial institutions (broadly defined) to identify any of their accounts (also broadly defined) held by "US persons" (expansively defined) and then furnish the US with periodic reports on those accounts including identifying information and amounts of transfers in and out of the accounts. Targeted institutions that fail to comply are to be penalized with a 30% toll charge on all of their US-source payments (again expansively--not just payments connected to targeted accounts).
  • There are numerous rules and exceptions and exceptions to the exceptions applicable to the above statement.
  • "US person" includes everyone in the world who is a US citizen, whether or not that person lives or has ever lived in the US and whether or not that person is also a citizen of somewhere else. The US is the only country in the world that taxes its citizens on this basis. Citizenship-based taxation violates the membership principle as well as the global standard of residence-based taxation, and has therefore been denounced as unjust or bad economic policy or both by most academics, including Reuven Avi-Yonah and myself among others.
  • The US considers any account to be foreign if it is not in the US, so for people who live in other countries, their neighbourhood bank where they have their checking account in the local currency is "foreign."
Why was FATCA part of the HIRE Act?
  • The HIRE Act was a jobs bill that included payroll tax holidays and other credits for employers. FATCA was unrelated to this purpose, but was included in the form of revenue-raising “Offset Provisions”. The Chair of the House Budget Committee claimed that the HIRE Act was a responsible piece of legislation that “was fully paid for… by cracking down on overseas tax havens." Congressional Record (4 March 2010) page H1152 (statement of Sen. Allyson Schwartz). However, no cost-benefit analysis appears to have been undertaken, and pursuant to CBO projections, the sums to be raised under FATCA could do little by way of offset, even if they were fully implemented (see below, What is the cost/benefit of FATCA).
  • The placement as a revenue raiser tacked onto a bill aimed at unrelated objectives has been viewed by opponents of FATCA as a sign that its passage was undertaken with some degree of stealth. See, e.g., Recovery Partners, “FATCA: The Empire Strikes Back” (4 July 2011); Koshek Rama Moorthi, “FATCA: Obama’s New Year Surprise Against American Expats” (30 November 2012), The Examiner; American Citizens Abroad, “ACA’s Voice in the News” (October 2012) online. The addition of unrelated riders and last minute addenda, especially revenue raisers, is a standard feature of US lawmaking, though it may appear anomalous to observers from other countries. For a brief discussion of how reconciliation and pay-as-you-go rules and standards affect tax policymaking in the US, see Center on Budget and Policy Priorities, “Policy Basics: Introduction to the Federal Budget Process” (3 January 2011).
  • Presented as a revenue offset at the tail end of a long, complex, and contested piece of legislation did allow FATCA to pass with minimal debate or discussion in 2010. But the seeds for FATCA had been sown in earlier (failed) legislative attempts, both in Senator Levin’s Stop Tax Haven Abuse Act of 2009 and Senator Baucus’ stand-alone FATCA Act of 2009. See Carl Levin, “Summary of the Stop Tax Haven Abuse Act” (2 March 2009); H.R. 3933 (111th): Foreign Account Tax Compliance Act of 2009 (27 October 2009); See also Douglas Shulman, “Prepared Remarks of Commissioner Douglas Shulman before the 22nd Annual George Washington University International Tax Conference” (10 December 2012) (stating that “the Administration and the IRS are focused on a multi-year international tax compliance strategy…to put a serious dent in offshore tax evasion” and expressing support for the FATCA Act of 2009).
Why was FATCA created in the first place?
  • The clear impetus for FATCA was the UBS scandal, involving thousands of bank accounts held in Switzerland by Americans living in the United States. It seems clear the target was rich tax cheats who live in America but don't want to pay taxes there, and who have been helped in that quest via unscrupulous sales pitches by offshore bankers offering banking secrecy as a shield against taxation by the USA. The legislation failed twice as stand alone bills (see above), and was tacked on to another, unrelated bill in 2010 (the HIRE act) as a revenue raiser, without any discussion or much analysis by US legislators. Many appear to have never even heard of FATCA.
  • A lot of people seem to think FATCA was intended to smoke out and punish Americans who live permanently in other countries and who have not kept up with their US tax obligations out of ignorance or otherwise. I do not think that is the case. I think these Americans have become collateral damage of FATCA.
What is the cost/benefit of FATCA? 
  • To my knowledge, no cost analysis has been undertaken with respect to FATCA.
  • Amounts expected to be raised by FATCA were projected to be $343 million, $448 million, and $710 million, for 2010, 2011, and 2012, respectively. See Congressional Budget Office (18 February 2010) “Letter and Table Outlining Budgetary Effects of HIRE Act” ). The HIRE Act was expected to produce a revenue deficit in the amount of $4,380,000 despite the bold claim that it was "was fully paid for… by cracking down on overseas tax havens." See Congressional Record (15 April 2010) page S2368 “Budget Scorekeeping Report: Table 2: Supporting Detail for the Current Level Report for On-Budget Spending and Revenues for Fiscal Year 2010, as of April 9, 2010. 
  • This precarious budgetary situation was aggravated by the fact that while the spending provisions of the HIRE Act were apparently immediately implemented, most of the FATCA provisions have yet to be enforced. For example, the disclosure of US accounts by foreign financial institutions was, according to the statute, to begin after December 2012, but the enforcement has been delayed more than once. See IRS, “Notice 2012-42” (24 October 2012) (which delayed the implementation of information reporting until 31 March 2015 and gross withholding until 1 January 2017); see also chart of initial and revised implementation times, DLA Piper, “Comparison of FATCA Timeframes” (October 2012).
  • I have not found any information about whether any amount of taxes or penalties has been collected pursuant to FATCA to date.
What is an IGA?
  • An IGA is an "intergovernmental agreement." The US has been signing these with some countries and is looking to sign a lot more with a lot more countries. 
  • There are two categories of IGAs. In one category, the foreign country agrees to change whatever domestic law exists that might bar their financial institutions from complying with FATCA (e.g., consumer privacy protection laws). In the other category, the foreign country agrees to act as intermediary, collecting the info the US wants and handing it over as a government-to-government exchange. This typically bypasses any privacy protection regimes that might exist as people don't generally have privacy protection as against their own government's tax authority.
  • IGAs are not treaties from the US perspective, in fact, just what exactly they are is a mystery. Treasury has implied that to the extent the US undertakes anything in these IGAs (in fact, precious little), they are "interpretive" in nature that is, they interpret existing tax treaties. Hence perhaps some confusion: if a country wants an IGA which involves the US providing anything in return, Treasury is suggesting a treaty will be needed for the IGA to "interpret." In my own view the idea that IGAs are interpretive in nature is a stretch: IGAs look like sole executive agreements to me. Treasury will not be putting them through any ratification procedures. Other countries have been typically (but not universally) treating these as they are, which is to say they are new treaties that require internal ratification procedures to place in force.
What are the IGAs for?
  • In general the purpose of the IGA is to override the statutory structure of FATCA, making the unilateral statute less onerous than it otherwise would be, and to overcome domestic consumer privacy protections to enable institutions in other countries to pass personal financial information to the IRS. Thus, IGAs are a way of reducing both the administrative and the political burden Congress created for Treasury with FATCA. 
How does or will FATCA impact non-US financial institutions? 
  • I can only speculate on this as I am not a compliance expert. However, it is to be expected that at minimum, compliance costs and risk of penalty from the US goes up, and if other counties implement their own regimes as the UK is currently doing, the costs and risks will be multiplied. 
  • It seems to me possible that financial institutions face litigation risk with respect to customers who are mistakenly identified as having US indicia and whose information is turned over to the IRS, or whose accounts are closed, or who are asked for personal information that is not required to be asked or not allowed to be shared with third parties under domestic banking laws, whatever those may be. It seems possible that this risk might make an IGA seem more palatable than direct compliance with FATCA, from the perspective of a financial institution.

How will FATCA impact consumers? 

  • Again I can only speculate, based on what people tell me. 
  • First, a generalized fear seems to be setting in about US surveillance and a powerful and determined IRS that is interested in imposing, anywhere it can, enormous penalties all out of proportion to any taxes that might have been owed. The US Taxpayer's Advocate has expressed dismay at this state of affairs.
  • Second, it is likely that everyone will see increased costs for financial services across the globe, even for those with no ties to the US of any kind, as compliance will have to be done on every account and institutions can be expected to pass on these costs in the form of higher fees and charges. 
  • Third, it seems that data security risks rise as bulk data including social security numbers, account numbers, financial transactions, and other personal information is collected and shared with the IRS. If the info will be shared with other US federal agencies, as Senator Levin has suggested ought to be the case, this seems to compound the data security risk. 
  • Fourth, there appears to be no remedy for error, compounding the problems noted above. If an institution flags a person as a "US person" in error, that person seems to be caught in a system with little or no review mechanisms in place. I am not sure how a person manages a case of mis-characterization. 
  • Finally tax compliance is extremely costly when you live in another country, so as more Americans try to get compliant the global personal compliance industry (e.g. tax accountants and lawyers with US expertise) stands to profit handsomely. This is another payoff in the form of rent seeking courtesy of the regulatory state. This is also a boon to the institutional compliance industry, i.e., software and systems designers, auditors, risk assessors, and so on, who will benefit from selling their products and services to financial institutions. It also seems to be a boon to people who know how to help one expatriate from the US--which is neither a straightforward nor cheap option.
What should people who are worried about FATCA do? 
  • I cannot and do not give legal advice on this. I urge those who are or may be harmed by the injustice of US citizenship-based taxation on themselves, their children or parents or other loved ones, to contact their local government representatives and the senators and congress members of any state to which they have any ties in the USA, to tell their stories and ask why the USA wants to tax their children's education savings plans or other government-sponsored savings plans in the countries where they live, why it is in the interest of the US to make life so difficult for Americans and dual citizens who engage in small businesses in other countries, why the US is so hopelessly out of step with international standards which impose taxation based on actual residence rather than inherited nationality, and why the US expects all of its citizens no matter where they live to fulfill tax obligations yet withholds tax benefits that help the poorest, such as the earned income tax credit. 
Send me additional questions in comments or by email and I will update this post.

Tagged as: FATCA