Wednesday, December 12, 2012

IGA flurry shows US is locking down on FATCA

A recent flurry of signed IGAs and press releases on ongoing negotiations suggests the US is acting tremendously quickly and even brazenly on FATCA. Almost as if they are trying to get this all nailed down before anyone outside the US government has time to study it and think it through. This is absurd, considering the enormity of what FATCA is trying to do--an enormity that is acknowledged in the IGAs themselves merely as "issues"--issues involving taxpayers' inability to comply with US law because it would involve breaking the law in their own country. The hubris is breathtaking. But it is virtually invisible as a policy matter because it is all wrapped up in the idea that we are cracking down on the world's tax cheats, and who could be against that?

The speed and intensity on FATCA is troubling though, when we consider the lock-in nature of the agreements in terms of future flexibility on the part of the US. To see what I mean by this, let's take a look at the IGA Mexico signed on November 19.  I blacklined it against the US Model 1A (reciprocal) IGA: it reads as virtually identical. Interesting, as the agreement with Mexico has apparently been two years in the making and the model IGA came out this past July. I find it amazing that the model was apparently so easy to write and these IGAs so easy to conclude--Denmark signed one just four days earlier. Contrast that to the US model double tax agreement, which was written some three decades after its first double tax conventions appeared (and which only gets updated every six years or so) and the average five year span it typically takes to get a new tax convention negotiated and signed. In terms of Treasury resources, it looks like a lot more time is spent on FATCA these days than on new tax treaty protocols, multilateral information sharing standards, or perhaps anything else.

The first thing the parity between the model and the actual agreement with Mexico suggests is that the terms of agreement on FATCA are absolutely non-negotiable.  This is a put up or shut up, my way or the highway moment: sign our template or face sanctions in the form of draconian and even unprecedented (such as in the treatment of gross sales proceeds) gross basis withholding. That's hard enough on its own but it is also bad news for other countries that might see themselves in a position to drive a hard bargain with the US.  It is bad news not only because it looks like the US will not deviate from its chosen path right now, but also because, perversely, the US has included a "most favored nation" clause in the FATCA agreements--something almost unheard of in double tax agreements, because it makes a better deal for one a better deal for all.  The language is in article 7 of the model, and it reads virtually identically in the US-Mexico agreement, the UK agreement, and the Denmark agreement (signed Nov 15 2012).
Consistency in the Application of FATCA to Partner Jurisdictions 
1. [FATCA Partner] shall be granted the benefit of any more favorable terms under Article 4 or Annex I of this Agreement relating to the application of FATCA to [FATCA Partner]  Financial Institutions afforded to another Partner Jurisdiction ....   
2. The United States shall notify [FATCA Partner] of any such more favorable terms and shall apply such more favorable terms automatically under this Agreement as if they were specified in this Agreement and effective as of the date of the entry into force of the agreement incorporating the more favorable terms.  
The implication is that the US is tying its own hands against the possibility of making any different deal for any other country.  Now why on earth would they do that? 

Purely, I think, to drive home the unilateral message. Information sharing is no longer going to be multilateral, engaged in through international dialogue and consensus. Information is a commodity, the US can apparently afford to extract it on a unilateral basis and without regard to "issues" like other countries' domestic laws, and there will be no spoils for any other country that can't or won't submit to the US standard, even if they themselves are victims of the US' own bank secrecy & notorious apathy when it comes to things like anonymous incorporation. 

None of this is to say that bank secrecy is good, that information should not be shared among countries. This is not an apology for tax havenry.  I do think information has to be shared if we are to keep taxpayers honest the world over. But it is to say that a unilateral battering ram is not the right answer. The problem of global misconduct by wealthy taxpayers is not solved by the US strong arming to get information that serves itself alone.

If you'd like to see the blackline I ran, you can download it here. Careful readers will note that in the agreement with Mexico, some periods are followed by two spaces (old school) while others are followed by one (new school), and these are different from the US Model.  So someone somewhere is paying attention to these important details as the US rips through a century long tradition of multilateral information sharing to build its own private empire of information gathering. That's good to know. 


  1. According to Phil Hogden(former head of CA Bar Tax Section and one of my "sources")ALL of the time of Treasury and IRS is being spent on FATCA and not on regular TIEA's, or tax treaties or anything else. In fact FATCA is increasingly causing other countries to spend all of their time on FATCA instead of other issues. Although I note Canada seemed to have found time for to conclude a DTT with Hong Kong(albeit with the personal involvement of Flaherty and Harper).

    On the broader subject of tax treaties I think the blame on this has to be laid at the feet of the lawyers and the non political professionals at Treasury. Yes, they will say the Senate won't ratify treaties we negotiate however, I don't really buy this, The Senate may ratify treaties "slowly" in fact very slowly but their is nothing I can see that would actually prevent a substantial increase in the number of US tax treaties if the Executive Branch and staff at Treasury wanted to do so.

  2. You've raised perhaps the most critical point of all here. These IGAs are NOT treaties as such. Rather, they are authorized by the tax treaties. So if you don't already have a tax treaty or TIEA with the US, you can't get an IGA, you'll have to go through the treaty ratification process. But wait, there's more: if you get an IGA through a TIEA, you're already working with an agreement that also isn't a treaty under US law, rather it's what they call an executive agreement, which is (usually, but not always) pre-authorized by congress. So neither senate nor full congress will have signed off on the particular TIEA, ergo neither would have signed off on the IGAs. It doesn't matter from the other country's perspective--it's all international law in that sense. But there is a huge difference in terms of working through the legislature between a treaty and an IGA. IGAs are basically carte Blanche under US tax treaties, I.e., the competent authorities are given surprisingly, even shockingly broad powers. It's a case of mission creep for the treaties/TIEAs, I think. Another reason perhaps why countries really ought to be wary about signing these things. But I digress.

    Your main point is that all resources are going to FATCA right now, possibly even around the world. That just seems so incoherent. I know we have a major tax crisis going on, but is it not quite obvious that the big stories are the giant multinationals running around transfer pricing themselves into 2% tax rates? If the US put half as much effort into that piece of the compliance equation, could we not see some sense come back into income taxation? Ad if all the fuss over FATCA is pointless, in that nothing new will ultimately come to pass (eg check out the model 2 form in the Swiss agreement), then what.

  3. From the standpoint of the "other" country as I understand it will have to go thru a formal ratification process. In Canada or the UK for example it must be put on the order paper for 21 House siting days(Just as TIEA agreements need to go throw this process even though no changes are required to the Income Tax Act). Additionally it won't come into force until implementing legislation has been passed in the partner country. The UK however, has indicated that the implementing "legislation" will be part of a larger "omnibus" tax bill so the IGA won't really be voted up or down by the UK Parliament. The 21 days siting day requirement is actually a real issue in Westminister Parliaments because parliament doesn't sit the entire year. In Canada for example Parliament will break on Friday and not be back until Febuary.

    In the US however the IGA's are strictly "executive" agreements without any consent required by Congress. For this reasons it is impossible for the IGA to provide any reciprociocity beyond the IRS normal witholding and reporting powers under Chapter 3.

    The Swiss Agreement(and Japanese too) is interesting on the one hand it in theory requires the same level of information reporting as the original Model 1. However, it as I read it the case of Switzerland it is dependent on the new treaty protocol being held up in the Senate by Rand Paul. The IGA is dependent on Switzerland allowing "group requests" on "recalcitrant" customers which the current treaty doesn't allow for. Just to show how small a world we live in I saw a letter online from a US citizen living in Switzerland having a hard time getting a bank account who just happened to be registered to vote in Kentucky. Doing the normal citizen thing the effected person sent a letter to their Senator, Rand Paul describing their issues and to their shock actually got back a personal response from Paul indicating his opposition to FATCA and describing with great pride his efforts to "hold" the Swiss Treaty protocol. As unbelievable as this might seem I am personally certain this is a real story. I also have heard the pressure on Paul as of yet to release his hold is coming from the Swiss Government not US Treasury. Now if the treaty protocol doesn't pass this year and I have to say it is looking doubtful then the protocol will have to start from stratch including new hearings next year.

  4. It was my understanding that countries agreed to these IGAs in the CA provisions in tax treaties (i.e., like any other CA agreement), so neither would have to go thru approval. Are you sure that's the case for Canada as well? I am not at all sure that I am right in thinking this, but I am not sure the IGAs are even EAs for US purposes--they could simply be CA agreements, which are authorized by the tax treaties as a matter of CA discretion. Because if they were CA agreements, we might not even be hearing about them, they would just appear a a done deal if they got published at all (not a foregone conclusion). I need to look more closely at this. As I wrote in a recent article:

    The product of competent authority resolution may take [the form of] a non-taxpayer-specific, generalized competent authority agreement. [This] is a generalized statement, typically characterized as procedural, and is meant to "clarify or interpret treaty provisions." [It] results in public documents meant to be relied upon by other taxpayers.' Finally, generalized competent authority agreements comprise a tiny minority of all competent authority agreements; the United States currently has just thirty-three published agreements with just fourteen countries.

    If any or all of that is right, and if the IGA is presented seen as flowing from existing authority under tax treaties, then why would the IGA not be a CA agreement. In other words, what in fact are these IGAs. Are they diplomatic agreements between two treasury officials, not subject to legislative oversight at all? I think not but admit I don't know as yet, and it is definitely not obvious from the IGAs themselves. I'll investigate further.

    As to the Swiss agreement-it seems nonsensical though, doesn't it. Switzerland FIs will ask their clients to waive confidentiality laws, if not, the gov will collect the info and turn it over incl under these group requests. I don't know what to expect there.

  5. If you look at the UK Foreign and Commonwealth Office they are definately considering the FATCA IGA as a Treaty as a matter of UK law.

    Here is the explantory memorandum which I personally think is a piece of garbage.

    I also don't have a lot of respect for David Guake given the enormous administrative problems the UK is having right now with in my mind is basic tax collection.

  6. Additional. This is the text below of the draft UK "legislation" to be passed by UK Parliament to implement the FATCA IGA. Again very vague.

    The Treasury may make regulations for the purpose of giving effect to or enabling effect to be given toê
    the agreement reached between the Government of the United Kingdom and the Government of the United States of America to improve international tax compliance and to implement FATCA, signed on 12 September 2012;
    any agreement modifying or supplementing that agreement;
    any other agreement between the Government of the United Kingdom and the government of another territory which makes provision corresponding, or substantially similar, to that made by an agreement within paragraph (a) or (b).
    Regulations under this section may in particularê
    authorise HMRC to require persons specified for the purposes of this paragraph (årelevant financial entitiesç) to provide HMRC with information of specified descriptions;
    require that information to be provided at such times and in such form and manner as may be specified;
    impose obligations on relevant financial entities;
    make provision (including provision imposing penalties) about contravention of, or non-compliance with, the regulations;
    make provision about appeals in relation to the imposition of any penalty.
    Regulations under this section mayê
    make different provision in relation to different periods of time;
    make different provision for different cases or circumstances;
    contain incidental, supplemental, transitional, transitory or saving provision (including provision amending any enactment).
    In this sectionê åFATCAç means the provisions commonly known as the Foreign Account Tax Compliance Act in the enactment of the United States of America
    called the Hiring Incentives to Restore Employment Act; åHMRCç means Her Majestyãs Revenue and Customs; åspecifiedç means specified in regulations under this section.
    The power conferred by this section is without prejudice to any other powers conferred by or under any enactment.
    The power of the Treasury to make regulations under this section is exercisable

  7. Quite so--rules for international agreements vary widely and i am not surprised to hear that the UK will need to go through parliamentary procedure while the US senate need never get their hands on it--so much the pity for the Ron Pauls of the world.

    Question: why is that UK explanatory note so ridiculously formatted-it looks like the product of multiple photocopies using a xerox machine. from 1960. I can't cut and paste. It's very vexing. Despite the obstacles to understanding unnecessarily thrown up in my path, I will read and comment on that in another post.

  8. Good Question. In Canada Explanatory Memorandums are even worse as in not available on the web. To get one you need either to go a University Library which has a subsciption to the Sessional Papers or get a friend MP to send you a copy.

    As I said earlier I am not impressed by the UK on this or David Gauke.

  9. this is just another example of why the rule of law is such an apparition. we would all like to believe we are governed by rules that apply equally to everyone. one need not delve too far to find how wrong that is.