Monday, March 4, 2013

IRS brushes aside the constitution to make way for FATCA

In a Tax Notes International article [gated] today, Lee Sheppard discusses remarks about FATCA by Jesse Eggert, Treasury associate international tax counsel, at a March 1 IFA meeting. The most troubling aspect for me comes in the last part, when Sheppard describes a Q&A over the intergovernmental agreements and the IRS rep casually dismisses any constraints on the Treasury's attempt to bind the US with these documents as a matter of international law. There are two main questions here and both answers strike me as deeply problematic. First, there is this:

Can there be an IGA with a country that has no treaty or tax information exchange agreement? Yes, Eggert responded. It would have to be a Model II or nonreciprocal Model I . Amendments would have to be made to add information protections and assistance provisions.
With respect, this does not accord with what we have been given to understand so far about these IGAs. One need only read the preambles to the IGA models and signed agreements and consider the treaty power briefly to see that there is a very large legal difficulty here. As I have said before (and have a feeling I will be saying repeatedly), the Executive Branch cannot simply bind the US to any agreement it wants to without doing violence to a constitutional process that has been expressly laid out and subject to decades of analysis and debate by the country's most preeminent legal minds.

This is why the IRS has been very quietly implying that the IGAs interpret existing treaties. I don't agree on the merits that this could possibly be true, but the IRS needs it to be true because if it is not true, the only alternative is that the IGAs are sole executive agreements entered into by the executive branch with no congressional oversight whatsoever. That puts them on the most precarious legal ground in terms of foreign policy power in the US, and by this statement Eggert pushes them closer in that direction.

Second, there is this:
Does Treasury have authority to make IGAs? Eggert argued that IGAs are within Treasury's statutory authority to make FATCA regulations (section 1471(b)). Treasury and IGA signatories are discussing how to make domestic implementing laws consistent.
Again with all due respect, this just simply is not true as a matter of US law. The executive branch does not have the power to authorize itself to enter into treaties without congressional oversight. It is the constitution that provides the treaty power, and Congress is expressly involved. Congress could have granted the executive specific authority in this case, as it has done in other cases, but it clearly did not do so here. It is not clear what Eggert means by "making domestic implementing laws consistent." Maybe that refers to the domestic laws of treaty partner countries, which will have to change their data privacy laws to accomodate the information sought by the IRS. If so, that has nothing to do with the US. From what we have seen so far, it seems clear that the IRS is treating the IGAs as operational once the other country so indicates it is operational from their perspective (cf Mexico).

Arguing that the authority is implied within Congress' mandate to Treasury to issue regulations under 1471 is blowing a hole through the treaty power. It argues that Congress empowers the Executive Branch with treaty making authority with each and every directive to enact regulations. It makes a farce of the congressional executive agreement process that has been begrudgingly accepted as authentic by most constitutional scholars today. And never mind the old standard, the Article II treaty power. By this logic if the President wants an international agreement--any international agreement of any kind--he never needs to consult the Senate again, he can simply find some reference by the Congress directing his regulators to regulate. If Eggert is right in this assessment, it is not a stretch to see this as the beginning of the end of the Article II treaty ratification process in the United States. In other words if this works, then it's anything goes when it comes to the Executive Branch overriding domestic law with an international agreement.

Finally, I note that one other Q&A Sheppard mentions is also intriguing, though on the surface it seemed uncontroversial:
Existing IGAs will be interpreted to say that countries may choose the definition of an item in the final regulations which came later in time. Treasury will not amend IGAs wholesale when regulations change, Eggert explained.
This may seem benign--it provides flexibility despite the apparently rigid parameters of the documents (which are treaties, after all, and not so easy to just unilaterally alter at whim). But this is in fact very interesting as a legal matter because it quietly moves the world a little closer to yet another US tradition that many people in other countries find odd if not outright incompatible with international law, namely, the treatment of treaties as equal in legal status to other laws, including statutes and case law, so that treaties can be overridden at any time by a new statute or judicial decision. But it goes a further step to include regulations within that overriding scope--where they might not so clearly belong even under US law.

In other words, the IRS is saying that not only does the "last in time" rule apply to IGAs (as they would to any US international agreement), but we'll apply the last in time rule to other countries too (even if under their own laws the treaty would override later-enacted domestic laws); moreover the last-in-time rule is now extended to treasury regulations (a unilateral law that will be used to "interpret" a bilateral agreement, yet another controversial treaty interpretation position), and finally we are going to make it the treaty partner's choice to pick among the regimes to get the best result (which treats treaty partners not as negotiators in a bilateral agreement but rather in the same way as taxpayers subject to an elective regime).

It is getting progressively more difficult to keep up with the sheer volume of violations of laws and norms being undertaken by the IRS in order to get FATCA to work. It is rather disheartening (in the sense of being a scholar who studies legal process as though it matters) to realize that to many or most people involved in this project, all of these violations are just technicalities and semantics getting in the way of a result everyone wants.


  1. Where I am genuinely lost in this discussion is understanding who or what could be in a position to challenge what the US government is doing? How might one go about mounting a legal challenge? Is it even possible?

  2. It's a great question and unfortunately I'm just not knowledgeable enough in this area to answer it. I see the violation because I am familiar with the treaty power in the tax area, having studied it some years ago. But I don't see a ready remedy in law. One would think that the Senate, being passed over in its advice and consent role, might object, or Congress, whose statute is being overridden after all, could step in. An individual would have to pass the standing threshold, which I take it would be complicated to say the least, after all, ostensibly the IGA is meant to alleviate burdens.

  3. Thank you for the reply. It is quite a conundrum for those of us who are trying to fight this- what is the most effective way to go about it? Public opinion in many countries seems to be against us, governments (host and home) seems to be thrilled to get on the FATCA bandwagon and it's not clear how it could be fought through the courts (US or others). I'm thinking that the most likely legal challenge would come through a dual citizen (US/European) but that would have to wind its way through the local courts before it ended up in the European Court of Justice. It's quite possible that this will happen but it will take years.
    So given that all these avenues are pretty much closed to us what is left? I see only two answers: renunciation of US citizenship or civil disobedience - neither of which are palatable to many of us.

  4. A choice between two bad options, I agree. But remember, even if FATCA was repealed the problem you identify would not be solved. In effect, FATCA made citizenship-based taxation a reality when previously it was mostly aspirational on the part of the US, ignored for the most part by uninformed citizens all over the world. Citizenship-based taxation has always been controversial, but up until FATCA it was also not at all feasible, so it was a dormant serpent. Laying there in wait, yes, but if ignored it would in most cases not strike. FATCA woke both a beast and its prey, as it were--possibly inadvertently. But even without FATCA all holders of US status are subject to US tax, so the choice you describe continues to exist. So the real challenge here is citizenship-based taxation, because I believe that without it, FATCA would not be quite as odious (at least if it were actually reciprocal, but that is another story).

    So, how to go about dealing with citizenship based taxation? Litigation, whether based in constitutional law in the US, based in international law, or based in constitutional protections in other countries would be extremely costly, extremely lengthy, and with the most uncertain of outcomes. That doesn't mean it shouldn't be attempted, but it does mean it shouldn't be the only thing that is attempted. Ask yourself, WWLD (what would lobbyists do? They would go to every lawmaker they could get their hands on and make the case for competitiveness, a level playing field, killing US business in the global economy, stifling growth, etc etc. There are some people campaigning in favor of a switch to residence-based tax in the US, so you should certainly be paying attention to that effort. (Ironic, really, given that at the same time in the US the big push is for territorial tax....for corporations. Not for humans! But I digress).

    There is also the National Taxpayers Advocate, Nina Olsen. I would think that if I had a story to tell like one of the many I have heard in the past year of inadvertent noncompliance with potential for disastrous human consequences, I would write it down (on paper) in a letter that I would send to her (in a paper envelope with a stamp), to ask for her advocacy. She has taken note of FATCA's onerous fallout on ordinary US citizens living and working abroad, and she may be in a position to compile these many stories and make the case that real harm is being done here to regular people, not tax evaders, people for whom the prospects of a $10,000 or $50,000 fine is a life-altering event.

    Ultimately, unless you can separate US citizens living and working abroad from the category of "possible tax evaders," you'll find it difficult to gain any public sympathy from anyone. Americas living in the US jus't don't "get" the problem--I've been asked, for example, "why are Americans living in Canada so reluctant to file their taxes?" You see the framing there, that Canadian citizens living in Canada who have US status are "Americans" who are willfully failing to do their patriotic duty like all the other good Americans. You have to change that basic story first, and that is proving to be a terribly difficult thing to do.

  5. I will probably end up making a whole bunch of posts on this subject but I will try to at least share a few nuggets of where I have been coming from on this subject.

    My sense is right now it is going to be difficult to get public support in the US on this issue. In terms of other countries it depends a lot on the country. Clearly to the extent a proposed IGA violates Constitutional and Civil Rights law it is challengable in court. The question is does it? In Canada I personally think there is a pretty good case that it does and there is existing case law such as Minister of Revenue vs Chua that backs this up. There is also the circumstance that Canada has twenty times the number of US citizens living there than the UK for example. The statistic I always like to give is 32 million people live in Canada 19 million people voted in the last election and about 1 to 2 million people in Canada are of American lineage(and many of these are Canadian citizens). So at the voting booth this group of people has a lot of political pull to the extent they stick together on this issue.

    *The Canadian Constitutional law issue in Chua is you can't subject certain classes of taxpayers to different tax law requirements and policies. The Canadian Parliament for example cannot impose a tax just on Chinese People or women or gays only. The argument to the extent Canadian law is changed to implement an IGA the Canadian government would be treating people born in the US or US Canadian citizens as a seperate unequal class of citizens to normal regular native born Canadian citizens. Even if implemented under the government powers to impose taxation it is still ultra vires under the Section 15 of the Canadian Charter of Rights and Freedoms. I know several of the best and I mean best Constitutional lawyers in Canada have warned the government that it could be subject to litigation if it was to implement an IGA. Now would some of these lawyers or the Canadian Civil Liberties Association take a case pro bona based on these issues. Hard to say but I wouldn't want to bet against them. My personal opinion is really good lawyers aren't in it for the money they are in it to break ground in law.

    I know the lawyer I linked to below is heavily involved right now in looking at the Constitutional implications of an IGA between Canada and the US.

  6. Second comment:

    I am going to try not step on too many toes but I am going to say some thing that might seem pretty harsh. As someone who has dealt with lawyers from time to time in my life not all lawyers do the same thing. In fact very FEW lawyers are actual litigators like Peter Hogg or Joseph Arvay(another Canadian constitutional lawyer with anti FATCA IGA views. In my personal opinion Hogg and Arvay are the top two litigators in Canada).

    Top 25 lawyers in Canada
    At my count at least seven of the top 25 I know from different sources have made objections to a FATCA IGA

    Now on the otherhand most if not at all of the attendees of the OECD FATCA conference are mainly interested in complying with laws such as FATCA not fighting them or spending time litigating them. I doubt there was a single lawyer at the OECD FATCA that have stepped foot in a courtroom to litigate a case. Their view of the world is "compliance" not litigation. Even among tax lawyers and tax law professors FATCA seems to be pretty low level and obscure. Whether lets say capital gains should be taxed as regular income or not is a much more substantive question than FATCA issues.

    The issue is to the degree FATCA has been left to the bottom tier of the legal community to implement it has been done in a very dangerous and reckless fashion without any understanding of the very deep, historical, and substantial legal precedents it is smashing against with sparks flying all around. Precedents that I suspect people like a Peter Hogg, Alan Tonks, or Joseph Arvay if they were actually consulted with on the implementation of FATCA would be far more cognizant of. Instead the "compliance" lawyers at the Big 4 would rather cover their ears.

  7. You are absolutely right about the issue being citizenship-based taxation. My take on it is that we are not well-served when it comes to lobbyists. As a diaspora Americans Abroad are a rather toothless beast. Not only are we not loved by our home country but we are not sufficiently united to be able to put effective pressure on the home country government. If you look at the different groups that are fighting this, they have different agendas, different arguments and different solutions. Some are fighting for residency-based taxation while others are encouraging renunciations. Not one group I've seen has a strong enough voice, the numbers or the funding to make a lobbying effort successful. There is also a lack of any real pressure points on the US government since it's not as if Americans abroad are sending back remittances to the home country or have any other concrete contribution to the home country they can point to (or threaten to withdraw). I fear that Scheffer was right when he called us a "proto-diaspora" with lots of unrealized potential though I think progress has been made. Isaac Brock, for example, is a phenomenon that would have been inconceivable even 2 or 3 years ago. I don't think it's enough though to make a difference.

    More and more I think Peter Spiro is right. He's said that he thinks that many Americans abroad will choose "none of the above." In his words, " I suspect that there’s a hidden third group, one that would be understandably shy with NYT reporters: those who are non-compliant but holding on to their US citizenship, giving rise to a new class of “secret Americans.” These are people who will not come forward and who will find ways to stay under the radar of the US government without ever formally renouncing their citizenship. It may not be very comfortable but clearly even with FATCA it's possible. Take on a second citizenship, throw that US passport in a drawer, avoid traveling to the US, find a local bank (a local credit union) that will do business with you, put your money in your spouse's name and so on. It's all doable and in the end I think many will choose this route even it does cause them some inconvenience. These people will never join ACA or write the TAS or post at Isaac Brock so we will never know how many of them there are. Might not be feasible for Americans living in countries close to the US like Canada or Mexico but what about those in Thailand or Belize or Russia or China or Africa? Realistically how is the US going to find them and would they even try? Given the paltry amounts of revenue that could be generated, the fact that many have no assets or income in the US to be seized, the US would clearly have to spend enormous amounts of money to find them (not to mention having to go through the local courts to get liens put against their foreign incomes and properties) for a very uncertain return and the potential for all kinds of trouble. It's a very passive form of resistance but I honestly think many will go that route and simply wait for better days or just have the satisfaction of passing on this dormant citizenship to their children who can take advantage of it or not as the case may be.

  8. I posted this comment on another thread, but it looks like it belongs here:

    This article (Fatca vs Philippines-US Tax Treaty) raises similar points to the ones you talked about in this post:
    It talks about tax treaty override, the last-in-time US policy.
    Interestingly, it mentioned that even if the US supreme court held that if a treaty is inconsistent with an act of legislation, the one last in date will control the other, the last-in-time rule, however, may have little effect outside the US. Under international law, a state party may not invoke the provisions of its internal law as justification for its failure to perform a treaty.

    What is a country's recourse, under international law, when a treaty is not respected?

  9. Christophe, it seems clear that the sole recourse in international tax agreements is diplomacy, and this is the same as saying that the sole enforcement mechanism for these agreements is geo-political power. You could read that to say that the answer is "might makes right."