Friday, December 14, 2012

Model participating FFI FATCA agreement: a plea to readers

It really does not pay to start getting interested in FATCA because it raises all sorts of questions to which I really don't know the answers. And re-reading the statutes is not helping much. My question pertains to these "agreements" (aren't they really more like "submissions"--I assume they are one-sided) between the IRS and participating foreign financial institutions (PFFIs). The IRS apparently promised to release some sort of model PFFI agreement at some point...vague. Of course, the IRS has been so busy pushing through on the IGA front that it hasn't done that, at least, I cannot find anything like that anywhere. Notice that the deadline for FFIs to become PFFIs (and thereby avoid withholding, but not necessarily completely) by June 30 of next year? Again, one gets the feeling that FATCA is rushed and it is truly brazen given that the problems for the rule of law it poses are legion.

So my question: does anyone have (or know where I could find) an existing PFFI agreement I could look at? Or at minimum does anyone have a sense of what's in these agreements? Are they just one-sided agreements with the FFIs agreeing to hand over all the info listed in IRC s 1471, or does the IRS undertake anything therein? If you prefer not to comment in public, you can always email me via my faculty profile here.


  1. To the best of my knowledge there are not any of these types of agreements in draft form available to the public at least. Supposedly sometime early next year a draft will be released for notice and comment. Every place I have read states that a draft FFI agreement will not be available until the final rules are published. Publically the final rules are supposed to be published by the end of 2012 however, at least three or four sources have said realistically you aren't going to see this until again after the new year.

  2. thanks. i heard from a couple of others and the consensus seems to be that the agreements are out there being finalized, but treasury doesn't want to publish any model in advance of final regs, as you point out still forthcoming. PFFI date has been pushed to Jan 1 2014 as well. But even another year hardly seems like enough time. I notice in the statute that signing a PFFI requires the FFI to waive any rights "under any treaty of the United States". That suggests Congress is well aware it could have a tax treaty override problem and could even have a NAFTA problem, but anyone that signs a PFFI won't be able to complain under either. I wish I could have been a fly on the wall when they wrote THAT particular gem--what were they thinking of, I wonder.

  3. My understanding is some of the earlier drafts did have an explicit treaty override provision but these were taken out. In theory in FFI that is with witholding can apply for an after the fact refund of the amount above the applicable treaty rate. The provisions dealing with waiving treaty rights may be related to some of these earlier drafts. I don't think the Jan 1 2014 can be kept at this point although some at Treasury insist it must be kept per the statute(The statute actually says witholding is supposed to start on Jan 1 2013). One thing Canadian banks do seem to be insisting on is an 18 month mininum delay from publication of the final rules until the start of witholding. There is also a view I have heard that the will be significant pushback at this point to sign a FFI agreement with any passthru witholding provisions in it.

    In terms of NAFTA someone like Art Cockfield is probably more of a specialized expert in it. The thing to remember with NAFTA on its somewhat vague language dealing with tax is the historical context that during a period of time especially in 1960s and 1970s both Canada and Mexico used tax policy as a heavy handed way of hurting certain largely American owned companies during business in Canada and Mexico. NAFTA was written with the influence of the US of trying to block policies of this nature. A relic of this is in Canada is the policy that any non Canadian can legally own a Canadian newspaper but anyone wanting to advertise in such a foreign owned Canadian newspaper cannot deduct under the ITA such advertising expenses. A somewhat brutal way of discouraging foreign ownership of Canadian newspapers(and something permitted as a cultural sector derogation under NAFTA). So are FATCA witholding provisions cut from this same brutal cloth in my opinion yes.

    My sense is at the time Congress really didn't care whether they had a treaty override problem. My guess Treasury didn't want to support a piece of legislation with an explicit treaty override and thought it easier to "interpret" FATCA as complying with treaty obligations.

    Another NAFTA issue is whether the Title 31 FBAR filing is a trade barrier. Title 31 is not a "tax" law per say and if you look at the NAFTA agreement Title 31 and its provision were not "grandfathered" a non corforming regulation/law.

    I am actually trying to go back through my notes right now to see if their is anything that I missed.

  4. I will add on Title 31 Canada does have an equivilent law called the Proceeds of Crime Act which requires reporting of suspicious transaction to FINTRAC by Canadian Banks but unlike US Title 31 their is now Canadian FBAR. There is T1135 under the ITA for Canadian tax residents.

  5. I don't have the Treaty text at my fingers(It is a real pain to find) at the moment but the old US Canada Treaty in force from 1942 to 1984 actually had specific automatic exchange of information provision right in the treaty text in terms of the competetant authorities exchanging specific information for specific time periods. They information specified to be exchange in the treaty was based solely on residency(Essentially Chapter 3 Witholding Forms). There was no information exchange regarding US Citizens resident in Canada. So when people say automatic exchange of information is "new" they are actually wrong.

  6. OECD Commentary:

    A number of Articles of the Convention limit the right of a State to tax income derived
    from its territory. As noted in paragraph 19 of the Commentary on Article 10 as concerns
    the taxation of dividends, the Convention does not settle procedural questions and each
    State is free to use the procedure provided in its domestic law in order to apply the limits
    provided by the Convention. A State can therefore automatically limit the tax that it levies
    in accordance with the relevant provisions of the Convention, subject to possible prior
    verification of treaty entitlement, or it can impose the tax provided for under its domestic law and subsequently refund the part of that tax that exceeds the amount that it can levy
    under the provisions of the Convention.

  7. More commentary continued:

    If a refund system is need, it should be based on observable difficulties in identifying entitlement to treaty benefits. Also, where the second approach is adopted, it is extremely important that the refund be made expeditiously, especially if no interest is paid on the amound of the refund, as any undue delay in making the refund is a direct cost to the taxpayer.

  8. What about WTO. Not my area, by any means. Has Art or anyone written on tax challenges in NAFTA or WTO?

  9. Well in terms NAFTA the answer is yes challenges on the basis of tax law changes that are deemed to result in expropriation can be made. In fact their are special procedures that give the "Tax" competant authorities six months to come to agree before the dispute if it is of a tax nature goes into a regular dispute settlement mechanism. I will look for more tax law challenges under NAFTA.

    These are the letters back and forth from the competant authorities agreeing their was no basis for the expropiation claim on tax law changes.

    You do get the feeling the competant authorities don't really want "tax" issues to be litigated in a NAFTA DSM. However, I think FATCA is different. For one thing as I commented earlier the actual legislation plays very fast and loose with the OECD commentary. One of the provision I didn't mention is the grace period the IRS doesn't have to pay interest on excess witholding is extended from 45 days to 120 days. That is not really at all in the spirit of the commentary. Plus their is really no question of treaty eligibility. An institution such as Royal Bank of Canada is clearly "resident" in Canada for purposes of the treaty. RBC can quite easily provide certification from CRA of that fact. It is not a "hybrid" entity or something along those lines that is being used for persons to gain improperly treaty benefit or not fully subject to Canadian tax. Mutual and other investment funds do have any exempting from Canadian income tax but no different than US Mutual funds have special treatment under the US IRC. It is hard for me to see that any of the justifications given by tax profs other the years for treaty overrides(If you can consider FATCA to be one and for all intensive purposes it is) applies at all in this circumstance.

  10. Not a tax issue. FATCA, as US says repeatedly, is not primarily a WH rule but a reporting rule. So challenge would be compliance costs for FFIs as against US FIs. Problem is statute allows FFIs to opt to be treated as US FIs, not sure how that would work out in practice but it is an escape hatch for disparate treatment claims.

  11. Well for one thing is if you do get stuck with full 30% witholding in my mind it could be considered an expropriation. You are also correct about the opt to be as US FI thing.

  12. Interesting and radical thought. Should Canada not just try to get rid of FATCA but also the QI program for example by passing a law prohibiting Canadian institutions from participating in QI notwithstanding the fact it has been around for over decade. Could the US go back to the pre 2000 pre QI witholding rules which I am not all that familiar with. I am right now hearing the sound of just about every US tax prof having a heart attack at the thought of going back to pre QI witholding rules.