Sunday, May 5, 2013

Correcting the record 5 ways on the stories about Sen. Paul blocking "FATCA Treaties"

Just to clarify a few matters, now that I see the Hill has picked up on this idea that somehow Senator Rand Paul is blocking something the folks at Global Financial Integrity are calling "FATCA implementation treaties":

1) There is no such thing as a FATCA implementation treaty.  There are things called "intergovernmental agreements" (IGAs) which the US has been signing with some countries, which override FATCA, making the unilateral statute less onerous than it otherwise would be.  Anyone who is "pro" anti-evasion legislation (is there anyone who isn't?) can be wildly enthusiastic about FATCA, more or less enthusiastic about IGAs (perhaps less since they tend to water FATCA down), and basically uninterested in double tax conventions, which do almost nothing to combat tax evasion. Conversely, anyone who doesn't like FATCA can be enthusiastic about IGAs because they water down FATCA and leave more room for non-compliance, and wildly enthusiastic about double tax treaties, since they do nothing, FATCA-wise.

2)  Double tax conventions are not needed to implement FATCA.  FATCA is a domestic US statute which needs no implementing anything of any kind. It is already the law, it is already in force, and it is already in action.  So let us put to rest any notion that any international agreement could have any impact on the implementation of FATCA. FATCA is going to be difficult to enforce, no question about that. But it is existing law.  Its administrative and above all political difficulties are what have led Treasury--after FATCA was already law--to start thinking about asking for help.

3) Double tax conventions are not needed to implement IGAs.  The IGAs are Treasury's way of reducing the administrative and political burden Congress created for it with FATCA. An IGA would override the FATCA statute to make life easier for both the Treasury and foreign banks. But the IGAs are most certainly not treaties, in fact, just what exactly they are is muddled indeed.  Treasury has suggested that to the extent the US undertakes anything in these IGAs (which is precious little, at best), they are "interpretive" in nature that is, they interpret existing tax treaties. Hence perhaps some confusion: if you want an IGA which involves the US giving you anything back, Treasury is suggesting you may need a treaty for the IGA to "interpret." To be sure, the idea that IGAs are interpretive in nature is a stretch: IGAs are really just sole executive agreements. Treasury is not seeking any kind of congressional approval for them. Therefore no one in congress-Sen Paul or otherwise-can block them by holding up any kind of international agreement. The only way to block an IGA would be through a direct challenge to their legitimacy given that they violate the treaty power, which is supposed to be shared with the senate. Perversely, perhaps, if the IGAs were legitimate treaties, they could be blocked by Sen. Rand. But they are not, so they cannot be.

4) Switzerland already has a double tax treaty with the USA so even if the Switzerland IGA was the kind that theoretically needs a DTT to "interpret" (namely, a Model 1-style), the treaty needed is already in place, with language on information sharing ready to be "interpreted" by an IGA. However, Switzerland has not signed a Model 1 IGA with the US, it has signed a so-called "Model 2" IGA, which is non-reciprocal and binds the US to virtually no action whatsoever. It is for this reason, perhaps, that Treasury has already claimed that Model 2 agreements do not even need a treaty to interpret: that is, the Treasury has suggested that even non-treaty countries can get a Model 2 IGA.  So you never need a treaty with Switzerland to implement the proposed IGA.  Blocking the Swiss treaty may do a lot of things, but stopping the FATCA IGA is most certainly not one of them

5) Hungary and Luxembourg also already have DTTs in place. They are both old (Hungary-1979, Lux-1962) but each has info exchange language (Hungary-art 23, Lux art 28) so Treasury could again "interpret" these with an IGA, again by the logic that the IGAs are interpretive in nature. Of course, there is no IGA yet for Hungary that I know of, and Luxembourg is still mulling things over. If either goes with model 1, fine, DTT already in place. If they go with model 2, see above re Switzerland. Therefore there is no blocking of FATCA, an no blocking of FATCA IGAs, with respect to either of these countries, either.

Summary: IGAs are wholly unconnected to DTTs. The mistaken connection being made between these two completely unrelated legal instruments is understandable: it has been borne of Treasury's attempt to cast the IGAs as interpretive in nature, which at best is an ad hoc attempt to fix a legal impossibility of congress' own creation, without actually explaining their legal pedigree.  But DTTS are in no way necessary to the implementation of FATCA.


  1. One thing I will add is notwithstanding the fact that FATCA is already law in the US if PFFI status is in legal conflict for FFI's in their country of operation there is nothing the US Congress can do change that. I find amusing the recent outrage on Twitter from homelander Americans that people with US status outside the US might be lobbying their home country governments not to enter into IGA's and not to change their laws to allow PFFI status for their FFIs.

    My hunch is that many FATCA proponents like Itai Grinberg knew that FFI's would be unhappy with the law but in the end would go along. They did not anticipate the persons with US status outside the US would lobby against FATCA to their home country governments and overturn the apple cart so to speak. Now something that was supposed to be implemented quietly without a lot of public fuss is the center of intense public debate.

  2. There is nothing the US Congress can do to change what foreign governments will do, but to be very cear: what foreign governments do does NOT in ANY way impact whether FATCA is implemented. Treasury might not WANT to enforce it's own law, i.e., bring down the withholding hammer (because terrible for US market) but that is what the law says will and must happen if FFIs are not PFFIs by a certain date. We must surmise then that this is therefore what will and must happen if, by that certain date, other governments don't submit to IGAs and FFIs themselves cannot (because of existing laws preventing them) comply with FATCA's demands. It is the Treasury's decision--not Senate, not Rand Paul, not foreign governments, but Treasury's alone--whether or not to implement the law, that is IRC s1471, as written and as interpreted by their own regs.

    I further surmise that Treasury's many timing delays have come about precisely because Treasury itself does not want to implement the withholding provisions.

    I agree with you that the justified reaction from people who live and work in other countries--who have now found out that because they were born in the US or born of parents who were Americans, are to be considered tax evaders and cheats because they have not filed forms for 20+ years that, until recently most had never even heard of and the US itself had all but completely ignored--has been a source of surprise and dismay for US tax policy observers. I still hope and choose to believe that these people's neighborhood checking and retirement accounts were not and are not the targets of FATCA. I am very sympathetic to the anguish they feel when they see themselves called tax cheats and lumped with the worst abusers of the tax system in the minds of the casual american observer, and sometimes treated in that manner by the IRS. I am sympathetic to the fear created by the IRS's betrayal in the OVDP, especially for those just coming to realize what the law requires, who want to be compliant, but who see that there is no way to do that without paying life-altering sums to accountants and to the IRS, and to do so under a cloud of wrongdoing despite their basic innocence. I hope that American policymakers and policy observers can be sympathetic as well, and understand that to see that FATCA is doing emotional and financial violence to a lot of innocent people is not to be pro-tax evasion or anti-tax/anti-government.

  3. "I hope that American policymakers and policy observers can be sympathetic as well, and understand that to see that FATCA is doing emotional and financial violence to a lot of innocent people is not to be pro-tax evasion or anti-tax/anti-government."

    Great comment, Mrs Christians.
    But how can the message be passed to the right people in Washington?
    So far, the IRS has totally ignored the pleas of all the people who have brought it to their attention: some lawyer groups, ACA and the National Taxpayer Advocate.
    I think Tim mentioned that President Obama will meet with people in the Canadian government later this month. Hopefully, the right message will be passed and heard, and that the right actions will follow.

  4. Thanks,

    Anyone who knows me in person knows that I am not a "difficult" person and I am not trying to be "difficult" in my commentary here. I do think though there is increasingly a bunker mentality among observers and practioners of US tax and policy in refusing to acknowledge there is a problem in this area. I don't know if it that there is still a lack of awareness or something more sinister(I am not sure it is being sinister as so much as being arrogant).

    One question I have of you is what exactly is Treasury's power NOT to enforce the law. Can the executive branch simply refuse to enforce a valid law passed by Congress? I get the sense on one hand Treasury doesn't want to delay FATCA again if only to avoid the perception that the law the will never be implemented and all FFI's and foreign govs need to do is continue to drag this out. On there otherhand if it looks like they will be unable to substantially increase the number of signed IGAs they are not going to want a massive train wreck that could effectively lead to the whole law being repealed.

  5. The following quote from an article released today is a classic example of the arrogance of the US practioner community on this issue:

    “I just returned from a nine-day swing in Asia where I met representatives of the financial community in Singapore, Hong Kong and Seoul, and in my view, there is some momentum in favour of the IGA concept,” says Scott Michel of US Tax and legal firm Caplin & Drysdale.

    “It lessens compliance costs for the affected institutions, operates, to a large extent, within existing information exchange rules, and allows the counterparty regulatory authority to enforce most of Fatca’s provisions. I would not be surprised if within a year, all three jurisdictions, including China (overarching Hong Kong), have signed IGAs.

    "There is a somewhat begrudging acceptance that Fatca is here to stay. As to the financial entities themselves, they seem to be heavily engaged in system modification and training, and appreciate that Fatca will largely take effect next year.”

    First, if there is a major "trainwreck" FATCA will most certainly not be here to stay. It is not up FFI's whether to IGA's it is up to governments and in the end citizens of other countries whether to approve IGA's.

    Second, as to whether IGA's will be signed within a year with most Asian countries. Treasury doesn't have a year they have a little over seven months including the summer months or else they will have to delay FATCA AGAIN.

  6. Really outstanding post, Allison. When I saw the headlines excoriating Paul for blocking FATCA treaties, I really didn't understand what they were talking about. Your explanation is clear and precise and indeed those journalists did not do their research. Thanks for clarifying things.

    @Tim, Just my .02 here but laws get passed and ignored all the time. It can be foot dragging by a bureaucracy or law enforcement deciding to just let it go because it's too damn hard to make a law stick (or they don't really agree with the law in the first place). Scott says that such "spaces of disobedience" are quite common and when I look around me I can see that he's right. Not far from my house a homeless person has taken over a small roofed bus stop. He's been there for at least 5 years. What he is doing IS illegal and the local authorities have every right to remove him. But they don't and the world continues to turn.

    I think of citizenship-based taxation as a former "space of disobedience" where government ceded that space because it could not hope to enforce it effectively without incurring great costs. That changed and they have decided to take it back. Alas for them implementation is going to be tough and enforcement will still be costly. I think Allison is right and Treasury really doesn't want to start that 30% withholding - people all over the world are going to scream. Other governments may choose to retaliate. And the people who really want to hide their money will put it in a country that can thumb its nose at the US (China).

    Just my take on it.

  7. Hello

    English is not my mother tongue so I would like to be that I fully get your article.

    You are saying that the fact that Sen. Paul blocks the 2009 protocol to the DTT between Switzerland and the US will not affect the efficiency of the whole thing ?

  8. I don't know what you mean by "efficiency" in this case. But it is without any doubt the case that FATCA relies on no treaty of any kind for implementation.

  9. Senator Paul has an OP-Ed out this morning explaining his position.

    Earlier this week, I introduced a bill that would reform the Foreign Account Tax Compliance Act (Fatca).

    Originally tacked on as the "pay-for" to a 2010 bill to incentivize hiring, Fatca was intended to crack down on overseas tax evasion.

    That's not been the reality, however.

    Instead, the Treasury Department has chosen to manipulate Fatca to establish an international financial snooping scheme that violates the Constitution, disregards the mutual respect of sovereignty among nations, increases the national debt, and threatens America's economic competitiveness.

    Fatca, with little fanfare, made sweeping changes to privacy laws.

    It required every non-American financial institution — banks, credit unions, pension funds, stock and investment firms, etc. — to register directly with the U.S. Internal Revenue Service (IRS) and agree to provide specified financial data on the accounts of any "U.S. Person."

    What came next was all too predictable: rather than expose themselves to Fatca's new withholding penalties, these overseas financial institutions simply began shutting down the accounts of their American depositors and selling off American investments.

    However, once this initial coercion effort by the IRS began to backfire, the Treasury Department decided to work around the problem by cutting deals with foreign governments instead of each individual foreign financial institution.

    These deals, known as "intergovernmental agreements," are not nearly as innocuous as many Fatca supporters would have you believe. Indeed, they are a significant departure from normal standards and practices.

    Before, the IRS would exchange financial data with overseas revenue services once some sort of "suspicious activity" signaling tax evasion had been identified.

    The intergovernmental agreements that Treasury is now negotiating (again, under the guise of Fatca) would erode this already dubious standard even further by agreeing to share any and all information that "may be relevant" to an investigation.

    This phrase — "may be relevant" — actually replaces the suspicious activity standard with no standard at all, and provides no protections regarding what information may be exchanged with a foreign government.

    In other words, the Treasury Department, without the consent and authority of Congress, will force U.S. financial institutions to provide the bank account information of private customers to foreign nations upon demand.

    This is a blatant betrayal of privacy, and it must not stand. These intergovernmental agreements automatically assume that any individual who holds an asset in a foreign institution is trying to evade taxes.

    The IRS cannot be allowed to betray the confidence of the American people in this way without (at the very least) the assent of their elected representatives in Congress.

    Congress has never authorized the Treasury Department to make such all-encompassing commitments on behalf of the United States, under Fatca or any other law.

    It is an abdication of duty for Congress to stand by idly while the Treasury Department unilaterally rewrites our tax treaty obligations and compromises the private data of millions of law-abiding Americans.

    This is why I have for many months objected to the passage of the U.S.-Switzerland tax treaty: the U.S. Senate is not the Treasury Department's rubber stamp.

    By introducing this bill to repeal part of Fatca, I am not championing "offshore tax evasion" by rich American "fat cats." Nor do I oppose legitimate tax enforcement.