Wednesday, August 29, 2012

FATCA & Multilateralism

I have suggested before that FATCA seems to me to be a bargaining chip to get other countries to negotiate on tax info exchange with the US.  The OECD seems to support this objective:
 The OECD welcomed today a new model international tax agreement designed to improve cross-border tax compliance and boost transparency.

Developed by the United States, France, Germany, Italy, Spain and the United Kingdom, the model allows the implementation of the Foreign Account Tax Compliance Act (FATCA) through automatic exchange between governments, reduces compliance costs for financial institutions and provides for reciprocity.   
...OECD Secretary-General Angel GurrĂ­a said:  “I warmly welcome the co-operative and multilateral approach on which the model agreement is based. We at the OECD have always stressed the need to combat offshore tax evasion while keeping compliance costs as low as possible. A proliferation of different systems is in nobody’s interest. We are happy to redouble our efforts in this area, working closely with interested countries and stakeholders to design global solutions to global problems to the benefit of governments and business around the world.” 

As a next step, the OECD will organise, in cooperation with the Business and Industry Advisory Committee to the OECD, a briefing session on the “Model Intergovernmental Agreement on Improving Tax Compliance and Implementing FATCA” at OECD headquarters in Paris in September 2012. The Organisation will then quickly advance to design common systems to reduce costs and increase benefits for governments and businesses alike. 
A major irony in the model agreement is that it's not at all clear to me that the US can furnish what it requires to be furnished by other countries, from the get go:

The information to be obtained and exchanged is:
(a) In the case of [FATCA Partner], with respect to each U.S. Reportable Account of each Reporting [FATCA Partner] Financial Institution: 
(i) the name, address, and U.S. TIN of each Specified U.S. Person that is an Account Holder of such account and, in the case of a Non-U.S. Entity that, after application of the due diligence procedures set forth in Annex I, is identified as having one or more Controlling Persons that is a Specified U.S. Person, the name, address, and U.S. TIN (if any) of such entity and each such Specified U.S. Person;...

This will be hard for the US to do in the face of anonymous incorporation, nor do I understand how a multilateral agreement can work if it cannot ensure reciprocity.  Nevertheless, it now begins to come clear that FATCA looks like a unilateral attempt to accomplish that which is not being  accomplished multilaterally through the usual (OECD) channels, namely, automatic info exchange with the US.  Steven Dean disagrees, though, and says the multilateralism envisioned here won't lead to more information being shared.  I hope he will weigh in and give his insights on this.

Meanwhile, one of FATCA's architects recently defended it in "A Report from the Front Lines."  Using imagery like "the front lines" gives the general idea about the tone: this is war.  He takes on the sovereignty issue as follows:
[T]he United States also has the sovereign right to protect its tax base by implementing a FATCA regime, and that if a Swiss FI does not want to be part of the regime, it is free to either avoid the U.S. financial system or incur a 30 percent withholding tax. Said differently, if tax haven and bank secrecy jurisdictions want to build their banking system to cater to tax evaders, the United States and other countries should not be prevented from taking counteractions.
He concludes with this on multilateralism:
Nevertheless, the United States needs to continue aggressively pursuing FATCA, especially in the multilateral context. Obtaining significant progress toward a multilateral FATCA regime could provide many benefits:
  • reducing discrimination against U.S. citizens living abroad; 
  • providing relatively standard customer due diligence procedures; 
  • reducing the number of investment options available to U.S. persons attempting to hide money overseas; and 
  • eliminating the complex passthrough payment rules. 
...In summary, the U.S. government has made significant progress toward addressing the use of offshore accounts to evade U.S. tax, but the war is not yet won. Much work still needs to be done. In addition to implementing FATCA in the United States, Treasury and the IRS should be pursuing an agreement among major countries as to the proper level of customer due diligence, and, ultimately, a multilateral FATCA regime involving several major countries. A multilateral approach will provide many benefits.
It is left to the reader to wonder, what benefits, and to whom?


  1. The IRS made the decision to negotiate FATCA agreements to allow for reciprocity. Now that US financial institutions are realizing the compliance burdens of their own FATCA like reporting they are not happy and are pressing the US government to eliminate the necessity to enter into these reciprocal agreements. The IRS was given the task to implement FATCA and should US financial institutions be successful in eliminating the reciprocity component, the million dollar question is: Will the IRS press forward to implement FATCA anyway, or will the IRS and congress come to their senses and recognize FATCA for the monster it is and work to repeal it?

  2. FATCA's architects is advocating federal crimes against US persons by encouraging banks to refuse to finance the mortgages of US citizens simply because of their national origin. HUD writes: "Housing discrimination based on your race, color, national origin, religion, sex, family status, or disability is illegal by federal law. If you have been trying to buy or rent a home or apartment and you believe your rights have been violated, you can file a fair housing complaint." As such, FATCA is officially a federal crime.

  3. I'll make a few comments in dribs and drabs as I am busy with other things at the the moment. One thing I would like to know is whether the US really put any effort before enacting FATCA in pushing the OECD towards a standard of Automatic Exchange of Information. There does not appear much public evidence of the US trying to do so and in fact the US' own record on this subject is quite poor. Second I would like to hear from Steven Dean too about what his thoughts are too. I get the sense that his argument is that FATCA really has nothing to do with existing system of tax treaties, information exchange agreements, or current internatonal norms of taxation. It is simply a direct unilateral method to enforce US tax law. If this is the case I think it opens a real can of worms. To the extent there is no precedent under international law for legislation such as FATCA I would argue other countries are free to retaliate as they please without precedent. Here is an interesting scenario of international that I think should focus the minds of the architects of FATCA. Canada for example has raised significant objections to FATCA if those objections are not heeded below I propose a rather interesting and cruel way of retaliation the Parliament of Canada could undertake that would be no more against the norms of international law than FATCA is.

    Through a Private Members bill(This proposed legislation would be in all likelihood a Bill of Attainder which would require suspension of the Standing Orders however, this "still" can be done under Canadian law) lets say the Parliament of Canada could force Transport Canada to force any airline travelling through Canadian Airspace to subject the top officials responsible for designing FATCA in the US government to a humiliating strip and full body cavity search ala Rick Mercer( on any flight they are flying on that travels through Canadian Airspace. Now one might say well I guess these "officials" won't be travelling to Canada any time soon. Except that many of these same officials travel frequently to OECD headquarters in Paris which poses a problem because if you go to and search for flights between Washington Dulles and Paris CDG one will notice that most/all travel through Canadian Airspace during their journey. (Look at United Flight 147 right now as I write this traveling between Paris and Washington that entered Canadian Airspace over Saint Anthony Newfoundland and crossed into the US over McAdam New Brunswick) While under international aviation law/treaty airlines such as United have the right of "transit" through Canadian Airspace however, overall they and their passengers and cargo are basically subject to full force of domestic Canadian legislation while within Canadian airspace. As such one of three things might happen United Airlines could simply reroute all of their flights to Europe around Canadian Airspace(becoming a non participating FFI/Airline essentially) however, the fuel and time costs to do so would be enourmous and thus they would be unlikely to do so just for the benefit of less than a dozen people(No matter how "important" they are in the US Treasury Department Tax Policy Division and IRS). Thus the next two options would be to conduct the required strip and body cavity search of the aforementioned officials upon boarding their flights to Paris to travel to the OECD HQ at Dulles Airport or if it was felt that doing so would violate some type of US law simply deny them carriage as most airlines have given themselves the right to do under their contract of carriage(as of course has been happening to many US Citizens residing in Switzerland with their local banks).

  4. Now what I proposed above is pretty outrageous however, their is no "direct" prohibition against it under international aviation law as agreed to by Canada's Parliament and in recent years with things such as the no fly list and international flights being blocked from entering US Airspace in air because of certain passengers onboard would not be a huge jump from existing practice(along with proposed Magnitisky Law). I suspect ten years ago FATCA would have seemed pretty outrageous too however, if we continue to go down the same path I suspect what just proposed might not seem so outrageous in the future. If such legislation the aforementioned US government officials would actually have a very easy legal remedy. As the Canadian Charter of Rights and Freedoms protects ALL individuals whether citizens or residents or non-residents of Canada from certain arbitrary and capricious actions of government such individuals could bring suit in Canada seeking the courts from preventing the Government of Canada from enforcing such laws and they would most surely be sucessful however, given such of officials current efforts to enact and administrate FATCA during their "day jobs" it would be a rather "interesting" twist of fate.

  5. I suspect Arthur Cockfield is really starting to get on the nerves of some people in Washington and I suspect Paris too. He seems to now be the biggest critic of FATCA out there which is especially biting because he has participated in much of the OECD's work on information exchange for many years now.

  6. Arthur Cockfield was on CTV News a few days back discussing this issues(As I said I wonder if he is really starting to get on some people nerves in DC). Link below: