Spiro on Citizenship Overreach

The always excellent Peter Spiro has recently posted this new article on SSRN, of interest. Abstract:

This Article examines international law limitations on the ascription of citizenship in the context of U.S. taxation of non-resident citizens. U.S. citizenship practice is exceptionally generous, extending citizenship to almost all persons in its territory at the moment of birth. At the same time that it is generous at the front end, U.S. citizenship is sticky at the back. Termination of citizenship on the individual’s part involves substantial fees and tax compliance. It is difficult to shed a citizenship one may never have wanted in the first place. 

This stickiness would be inconsequential if few costs were associated with the status. But the United States taxes its citizens on a worldwide basis. The 2010 enactment of the Foreign Account Tax Compliance Act has ramped up historically lax enforcement and imposes substantial administrative burdens on even middle-earner citizens abroad. 

In this frame, U.S. birthright citizenship and expatriation regimes may violate international norms, especially with respect to those "accidental Americans" who departed the United States as children. Even in the context of extremely relaxed historical constraints on state nationality practice, there were acknowledged nineteenth century limitations on the extension of citizenship to individuals with insufficient connection to a state -- citizenship over-claiming, as it were. The article also describes the historical requirement that naturalization be volitional, a norm now appropriately applied in some cases in the context of birthright citizenship.  

To the extent the ascription of U.S. citizenship compromises individual rights, there are tax fixes and there are citizenship fixes. Citizenship fixes include opt-in and opt-out mechanisms for birthright citizenship. The better solution may lie in frictionless exit for those with nominal ties to the national community. Though reform is more likely to be accomplished through the tax regime, the moment highlights the over-inclusiveness of U.S. citizenship and the growing salience of international law to citizenship practices.

I'm less confident than Peter that reform will ever be delivered through the tax regime, but I am very glad to see this important contribution to the growing literature focusing on the citizenship/taxation link.

Shu Yi Oei: The Offshore Tax Enforcement Dragnet

Shu Yi Oei (Tulane) has posted an important new paper on U.S. offshore tax enforcement, of interest. Here is the abstract:

Taxpayers who hide assets abroad to evade taxes present a serious enforcement challenge for the United States. In response, the U.S. has developed a family of initiatives that punish and rehabilitate non-compliant taxpayers, raise revenues, and require widespread reporting of offshore financial information. Yet, while these initiatives help catch willful tax cheats, they have also adversely affected immigrants, Americans living abroad, and “accidental Americans.”  

This Article critiques the United States’ offshore tax enforcement initiatives, arguing that the U.S. has prioritized two problematic policy commitments in designing enforcement at the expense of competing considerations: First, the U.S. has attempted to equalize enforcement against taxpayers with solely domestic holdings and those with harder-to-detect offshore holdings by imposing harsher reporting requirements and penalties on the latter. But in doing so, it has failed to appropriately distinguish among differently situated taxpayers with offshore holdings. Second, the U.S. has focused on revenue and enforcement, ignoring the significant compliance costs and social harms that its initiatives create.  

The confluence of these two policy commitments risks creating high costs for the wrong taxpayers. While offshore tax enforcement may have been designed to catch high¬-net-worth tax cheats, it may instead impose disproportionate burdens on those immigrants and expatriates who have less ability to complain, comply, or “substitute out” of the law’s grasp. This Article argues that the U.S. should redesign its enforcement approach to minimize these risks and suggests reforms to this end.

The paper provides a thorough review of the panoply of offshore enforcement programs and mechanisms and documents the harms of their dragnet approach, especially on the most vulnerable and least likely targets. A significant contribution to the literature.

Citizenship-based Taxation and FATCA

I am occasionally asked for a list of the things I've written or presented about FATCA and citizenship-based taxation, and decided I may as well post it here. I have a newer article on the adoption of the IGA in Canada, will post that soon and add to this list.

On the personal impact of CBT/FATCA:

• Uncle Sam Wants...Who?  A Global Perspective on Citizenship Taxation (explaining the expansive US tax jurisdiction and its consequences on citizens abroad)
• Understanding the Accidental American—Tina’s Story (describing the “gotcha” of CBT and FATCA)
• Paperwork and Punishment: It’s Time to Fix FBAR (explaining FBAR, its mission creep, and its effects on USPersons living abroad)
• Taxpayer Rights, On and Off-shore (exploring tax complexity and compliance for nonresident US Persons)
• Regulating Tax Preparers: A Global Problem for the IRS (exploring the problem of regulating the tax compliance industry outside the US territory)
• Could a Same Country Exception Help Fix FATCA and FBAR? (calling for exemption of local accounts held by nonresident US Persons from FATCA reporting; third item in a compilation; scroll to p. 7 of the document).
• Two expert reports in connection with the Hillis v. Attorney General of Canada litigation. 

Providing Legal Analysis of FATCA and the IGAs:

• Submission to Finance Department on Implementation of FATCA in Canada (discussing legal issues with proposed adoption of IGA)
• What You Give And What You Get: Reciprocity under a Model 1 IGA (explaining asymmetrical account disclosure and sharing requirements)
• Tax Cooperation: Past, Present and Future (explaining why FATCA is a tax treaty override & the IGAs do not “cure” it)
• The Dubious Legal Nature of IGAs and Why it Matters (arguing that the IGAs violate the US constitution regarding the treaty power, and thereby implicate public international law as to the treaties they ostensibly interpret)
• Interpretation or Override: Introducing the Hybrid Tax Agreement (further analysis on the public international law problems created by the IGAs)
• Putting the Reign Back in Sovereign: Advice to the Second Obama Administration (analyzing FATCA’s unilateral nature and its implications for international tax policy)

Videos and Podcasts:

• Interview with Tax Analysts (November 2015)
• Podcast with the McGill Law Journal (February 2014)
• Testimony to Finance Committee (March 2014)
• Interview with CBC News (January 2014)
• Interview with CBC Radio "All in a Day" (July 2014)
• Explaining the basic structure and issues surrounding FATCA (2012-prior to the IGA era)

Parada: Legal Questions Surrounding FATCA-based Agreements in Europe

Leopoldo Parada has recently posted on SSRN an article published last summer in the World Tax Journal, entitled Intergovernmental Agreements and the Implementation of FATCA in Europe, of interest. Here is the abstract:

FATCA is a US domestic tax policy that requires Foreign Financial Institutions around the world to provide the IRS information regarding their US clients. Recognizing this extraterritorial characteristic and the troubles associated with it, the US Treasury Department developed the Intergovernmental Agreements (IGAs), which have served the double purpose of coordinating FATCA at an international level and influencing the new international standards on automatic exchange of information. Nevertheless, the IGAs are instruments that still need to be improved, at least in order to guarantee their successful implementation in Europe. The first part of this article explores the legal nature and the characteristic of the IGAs, concluding that they possess an asymmetriclegal nature that can lead to conflicts of interpretation. Likewise, it concludes that their contribution toward international transparency is incompatible with the existence of other instruments in Europe that seek the opposite goal of protecting bank secrecy, although it recognizes the importance of the most recent achievements at the European level in order to ensure a coherent and consistent system of automatic exchange of information. The second part of this article analyses three grey areas in the IGAs implementation process in Europe (i.e., “quoted Eurobonds” in the United Kingdom; group requests under the Switzerland-United States IGA, and the “coordination timing” provision of the IGA Model 1A), concluding that there is still work to be done in order for the IGAs to grant an acceptable level of reciprocity in practice.

I was not aware of this article when I wrote on a column last fall on this very same topic, in which I called the IGAs "Hybrid Tax Agreements" and pointed out the mess created by their unprecedented legal form as treaties to the rest of the world but administrative guidance in the United States. Parada's article goes further in the analysis and lays out a number of enduring difficulties. It seems to me that governments are simply ignoring these difficult issues as inconvenient barriers to desired outcomes and courts will face the same temptation. But I don't think these issues go away with time and gradual acceptance of FATCA as an institution. Instead, I think the issue will cause systemic problems going forward, both in terms of raising endless conflicts of law, and in terms of the precedent set for international tax relations by the failure of states to challenge US exceptionalism even as it tramples on law and legal process throughout the world.

Uncle Sam Wants...Who? At UBC Law This Week

This week I will be in Vancouver to present a paper at the UBC Allard School of Law. The paper, "Uncle Sam Wants...Who? A Global Perspective on Citizenship Taxation," is now available in draft form on SSRN. Here is the abstract:

Across the globe, banks are flagging accounts with indicia indicating their owners may be “US Persons,” making it possible for the United States to enforce its taxation of nonresident citizens extraterritorially for the first time in history. The indicia method constitutes a mining expedition for US citizens carried out by foreign banks and governments. Establishing a tax jurisdiction in this manner is unprecedented and has significant practical and normative consequences. In the case of so-called “accidental Americans,” it violates one of the most fundamental and universally- acknowledged tenets of taxpayer rights, namely, the right to be informed about what the law requires. Third party indicia-searching should be universally rejected as a means of identifying a taxpayer population. Instead, the United States itself is responsible for cataloguing, informing, and educating its global population of taxpayers. Those who don’t belong in the system should be allowed to opt out without cost.

I welcome comments on this work in progress.

Update to Canada's FATCA litigation

The grassroots group responsible for launching the FATCA-based litigation in Canada has issued a public call for witnesses. They are looking for "a Canadian who has been somehow harmed by this FATCA legislation, are interested in helping out by becoming a Witness in our lawsuit, and are willing to have your affidavit statements and name go public." The group is up front about the risks involved in coming forward: being a witness is to expose oneself to public scrutiny, some of which is decidedly hostile, as well as of course the risk of ruinous consequences deriving from US tax rules as they apply to noncompliant nonresident persons' lives.

Understanding the Accidental American: Tina's Story

Tax Analysts has published my talk on taxpayer rights and citizenship-based taxation as enforced via FATCA, which I gave in November at the International Conference on Taxpayer Rights in Washington DC, organized by National Taxpayer Advocate Nina Olson. Tax Analysts' content is normally gated but they have made this column available on their free site.

FATCA, Citizenship-Based Tax, and Taxpayer Rights

I recently sat down with Bob Goulder of Tax Analysts to talk about FATCA, citizenship-based taxation, renunciation, and taxpayer rights.

Please Give: Passionate Plea for IRS Funding from Former IRS Commissioners

The IRS faces constant funding pressure from Congress, despite becoming a victim of constant mission creep thanks to Congressional mandates (ACA and FATCA in particular). Over the years many have pled with Congress to stop underfunding the agency. The latest comes from seven former commissioners, who note that not least among the reasons to fund the IRS is the need to spend money on cyber security as the IRS fends off one million hacking attempts each week.

That's a lot of hacking because of course the payload is enormous. FATCA has surely expanded the payload significantly by developing an enormous database of personal information attached to bank account numbers and detailed account activity on a global scale. Even a small breach of security with respect to that vault will be disastrous for the taxpayers involved.

The commissioners also suggest that the IRS workload is going to increase due to BEPS. BEPS is expected to result in more treaty-based conflicts among jurisdictions, so I expect more competent authority hours will be needed. But it's likely also the case that country-by-country reporting requirements will add another enormous treasure trove of information to the database, further increasing the payload.

At minimum, Congress has simply got to fund security for this massively expanding taxpayer information database.

November 9, 2015

The Honorable Thad Cochran

Chairman

Committee on Appropriations

United States Senate

113 Dirksen Senate Office Building

Washington, D.C. 20510

The Honorable Harold Rogers

Chairman

U.S. House Committee on Appropriations

U.S. House of Representatives

2406 Rayburn House Office Building

Washington D.C. 20515

The Honorable Barbara A. Mikulski

Vice Chairwoman

Committee on Appropriations

United States Senate

503 Hart Senate Office Building

Washington, D.C. 20510

The Honorable Nita M. Lowey

Ranking Member

U.S. House Committee on Appropriations

U.S. House of Representatives

2365 Rayburn House Office Building

Washington, D.C. 20515 

Subject: IRS Appropriations for Fiscal Year 2016

Dear Chairman Cochran, Vice Chairwoman Mikulski, Chairman Rogers and Ranking Member Lowey: 

We are all former Commissioners of the Internal Revenue Service. Over the last fifty years we served during the administrations of Presidents John F. Kennedy, Lyndon B. Johnson, Ronald Reagan, George H.W. Bush, William J. Clinton, and George W. Bush.

We are writing to express our great concern about the proposed reductions by the House and Senate in appropriations for the Internal Revenue Service for the current fiscal year that will end on September 30, 2016. We understand that the Appropriations Committees in the House and Senate have proposed to reduce the FY 2015 IRS appropriation of $10.9 billion by $838 million and $470 million, respectively, for the current fiscal year. If Congress were to reduce the IRS appropriation for the current year, it would represent yet another reduction in the IRS appropriation. The appropriations reductions for the IRS over the last five years total $1.2 billion, more than a 17% cut from the IRS appropriation for 2010. None of us ever experienced, nor are we aware of, any IRS appropriations reductions of this magnitude over such a prolonged period of time. The impact on the IRS of these reductions is that the IRS has lost approximately 15,000 full-time employees through attrition over the last five years, with more losses likely in the current fiscal year unless Congress reverses the funding trend. These staffing reductions come at a time when the IRS workforce is aging, with nearly 52% of IRS employees now over the age of 50 and 24% already eligible to retire. Three years from now, 38% of IRS employees will be eligible to retire. This loss of IRS knowledge and experience is alarming, particularly in light of the fact that, out of a present workforce of about 85,000 employees, the IRS has only about 3,400 employees under the age of 30 and only 384 employees under the age of 25 due to hiring freezes for budgetary reasons at the IRS since 2010 and periodically from 2005 to 2010. Over the last fifty years, none of us has ever witnessed anything like what has happened to the IRS appropriations over the last five years and the impact these appropriations reductions are having on our tax system.

These reductions in IRS appropriations are difficult to understand in light of the fact that, at the same time these reductions have occurred, the Congress repeatedly has passed major tax legislation to substantially increase the IRS workload. Most recently the Congress passed the Foreign Account Tax Compliance Act and the Patient Protection and Affordable Care Act, two major new programs, each of which significantly expands the IRS' tax administration burdens. The IRS personnel reductions come at a time when the IRS is stretched to the breaking point to cope with tax enforcement challenges attributable to global and domestic changes that are impacting our tax system. Increasingly, the United States is facing tax challenges as the result of efforts that are taking place in the international tax arena to deal with the tax non-compliance that is accompanying the continued globalization of business and investment activities. The most recent tax changes to address international tax non-compliance are proposed in the Organization for Economic Cooperation and Development's (OECD) Base Erosion and Profit Shifting Report. Regardless of one's view of these proposed changes, it is clear that the IRS will be substantially impacted by changes and challenges of other countries who adopt them.

Additionally, increasing incidents of identity theft and refund fraud are being perpetrated against our tax system by large, sophisticated organized crime syndicates around the world. These criminals seek to file false returns and claim fraudulent refunds using personal taxpayer data obtained from sources outside the IRS. At the same time, many unlicensed, unregulated return preparers are preparing and filing fraudulent tax refund returns. Every time there is an information technology hacking event in the public or private sectors in which Social Security numbers are stolen, the likelihood exists for additional identity theft and refund fraud. The growing refund fraud challenge to our tax system is especially alarming to us because of the need, which is fundamental to our tax system, for the IRS to be able to assure taxpayers who are paying their fair share of taxes that other taxpayers are doing the same thing. To emphasize the seriousness of refund fraud, the Government Accountability Office earlier this year placed identity theft and refund fraud on its list of "high risk areas" in the federal government, a sure sign to each of us that the IRS should have more, not fewer, enforcement resources to deal with this threat to the integrity of our tax system,

To place the impact on our tax system of the Congressional IRS appropriations reductions over the last five years in its proper context, Congress almost annually over the last 25 years has passed legislation that has imposed additional burdens on IRS tax collection and administration under our revenue laws. During this time, the Congress also repeatedly added more and more socio-economic incentives to the tax code and called upon the IRS to administer these new socio-economic programs, including healthcare, retirement, social welfare, education, energy, housing, and economic stimulus programs, none of which is related to the principal job of the IRS to collect revenue. At the same time, Congress passed even more legislation to pay for these tax spending programs. The result is that almost 30 years after the 1986 Tax Reform Act, our tax laws are a mess. Our tax laws have become so difficult for taxpayers to understand that 80% of all individual taxpayers now use paid consultants or software to prepare their income tax returns. Because of insufficient IRS resources in FY 2015, an average of more than 60 percent of the taxpayers who called the IRS for assistance in preparing their returns during the last filing season were unable to reach an IRS assistor, even after many taxpayers had remained on the telephone for more than 30 minutes before they were automatically cut off because of the volume of calls, which the reduced numbers of IRS assistors were unable to handle. Equally serious are the cybersecurity threats illustrated by the problem that occurred earlier this year involving unauthorized attempts to access taxpayer information using the IRS' Get Transcript online application. Separately, the IRS continues to experience about one million attempts each week to hack into its main information technology systems. Although the IRS has so far successfully thwarted these attacks and its main systems remain secure, all of this astonishes us and emphasizes to each of us that the IRS taxpayer assistance and IRS information technology resources are severely underfunded, especially when compared to the increasing cybersecurity budgets of private sector companies.

It is clear to each of us that the IRS appropriations reductions over the last five years materially and adversely affect the ability of the IRS to assist taxpayers who are trying to comply with their tax obligations, as well as the ability of the IRS to detect and deter taxpayers who have not complied with their tax obligations. Recently, we understand that the IRS estimated a direct annual revenue loss to the Federal government in tax enforcement at $6 billion last year and $8 billion this year, due to such appropriations reductions. Historically, for every dollar invested in IRS tax enforcement, the United States received $4 or more in return, and we understand that continues to be true today.

The Congressional Budget Office in its June 2015 Long-Term Budget Outlook projected future fiscal challenges to the United States because of the large and increasing size of our national debt and rising future operating deficits attributable to an aging U.S. population and rising healthcare costs. It, therefore, is imperative that our tax system in the future operate at an optimal level in order to maximize the revenues the IRS collects. For that to happen, the IRS must be able to assist taxpayers who are trying to comply with their tax obligations, and at the same time be able to enforce the tax laws against those taxpayers who have not complied with their tax obligations. In short, because of our country's fiscal and other challenges, our tax system must work and work well to collect the taxes that are owed.

Some have argued that the IRS can solve these problems by simply becoming more efficient. This argument ignores the reality that the IRS is already, by far, the most efficient tax collection agency among large countries in the world. The OECD recently released its bi-annual analysis of tax administration across the developed world and reported, based on 2013 statistics which don't reflect the most recent IRS budget cuts, that the amount the IRS spends to collect a dollar in taxes is approximately half the average amount spent by all OECD countries. Germany, France, England, Canada and Australia all spend as much as two to three times the amount the IRS does to collect a dollar of revenue.

In light of the foregoing, we fail to understand how it makes any logical sense to continue to reduce, rather than increase, the IRS budget for FY 2016 in order to optimize the IRS' ability to provide taxpayer service and to enforce the tax laws to increase revenue collections. To put it succinctly, we do not understand why anyone with present and projected debts and annual losses as large as those of the United States would refuse to pay for telephone assistance to people trying to fulfill their tax obligations, would turn their back on $8 billion annually in additional revenue, or would fail to make an investment that offers a return equal to at least four times the amount invested. For these reasons, we respectfully call upon each of you to support and work to accomplish the passage of an IRS appropriations request for FY 2016 that is substantially in excess of the appropriation for the IRS in FY 2015.

Mortimer M. Caplin (1961-64)

Sheldon S. Cohen (1965-69)

Lawrence B. Gibbs (1986-89)

Fred T. Goldberg, Jr. (1989-92)

Shirley D. Peterson (1992-93)

Margaret M. Richardson (1993-97)

Charles O. Rossotti (1997-2002)

Intergovernmental Agreements (IGAs) as Hybrid Tax Agreements

I recently published "Interpretation or Override? Introducing the Hybrid Tax Agreement." Here is the abstract:

In the effort to overcome foreign law impediments to the implementation of the Foreign Account Tax Compliance Act (FATCA), the U.S. Treasury introduced intergovernmental agreements (IGAs). IGAs are hybrid tax agreements: Treaties to most of the world, in the United States they instead constitute an executive interpretation of the underlying tax treaty. This introduces a great deal of interpretive uncertainty where the terms of IGAs and tax treaties conflict. Prompted by recent queries in the EU regarding the legal nature of the IGAs, this article explores a concrete example of the legal principles at stake by examining how the public policy rules for information sharing found in US tax treaties interact with the information exchange provisions found in the IGAs.

Further in, I explain that it is difficult to understand how as a matter of international law the IGA, as a document that purports to "interpret" the underlying tax treaty, in fact obviates some of the provisions of the treaty, but do so only for the party other than the United States. I conclude:

Process matters in law. It is what makes the rule of law function as a legitimate source of authority. It is ironic that even as the United States partners with its fellow OECD members to try to address the major challenges to international taxation posed by hybrid legal entities and hybrid financial instruments, Treasury has invented the hybrid tax agreement. Conflicts resulting from this invention are inevitable and I anticipate they will be costly. I believe that Treasury took a few shortcuts around established legal precedents on the road to implementing FATCA. I understand that this may be considered expedient in the effort to get FATCA to work. But in the long run the sacrifice renders a disservice to the rule of law. That sacrifice deserves careful reflection by all those affected.

I continue to be fascinated by the rapid developments in international taxation over the past several years, in terms of both substance and process/rule of law.

Latest Update in Canada FATCA IGA litigation

The Federal Court of Canada (Martineau J.) issued a decision in the Canadian FATCA IGA litigation on September 16, ruling against the plaintiffs by finding that the provisions of the IGA are duly enacted law, thus clearing the way for the Canadian tax authorities to furnish information to the United States. You can read the decision here.  Today, the Plaintiffs made a motion for an interlocutory injunction pending appeal of the decision.

Because of my role as an expert witness I will abstain from detailed comments other than to stand by my submissions, but I do note the overwhelming sense of judicial impotence expressed in the September 16 decision. The decision notes that the issues at stake involve injustice at the individual level as well as harsh dealings in terms of sovereign relations. As to the former, the legality of the regime is given as its justification, while the latter are deemed inappropriate matters for judicial intervention. Instead the plaintiffs are directed to seek redress for the personal effects of these circumstances though political and administrative channels.

In my view it was political malfunction in both the US and Canada that brought forth FATCA and then the FATCA IGA, and that FATCA as applied can be summed up in terms of administration as a case of continuous indifference to individuals who are wrongdoers in no real sense yet bear the brunt of severe punishments meant for others. If the judiciary is also not to blame and not to fix, then it seems there is no avenue to right the wrongs of FATCA anywhere. I hope that is not the case.

In any event, two days after the decision was released, the IRS announced another delay in FATCA, this time for Model 1 IGA countries. Model 1 IGA countries involve government-to-government sharing, as compared to Model 2, under which financial institutions directly report to the IRS pursuant to authority granted by their home governments. Canada has a Model 1 IGA so it could delay furnishing information to the United States if it notifies the IRS before September 30, 2015 "and provides assurance that the jurisdiction is making good faith efforts to exchange the information as soon as possible." There have been some efforts to compel the Canadian government to avail itself of this option (see, e.g., here and here), but I am not sure how to monitor the government's response.

More to come as events unfold.

Update on the Canadian FATCA Litigation

As readers may be aware, two Canadian citizens filed a lawsuit last year against the Attorney General and the Minister of National Revenue in the Federal Court of Canada (Federal Court File T-1736-14). Over the past two days in Vancouver, the parties have presented their arguments in a summary trial in front of the Hon. Luc Martineau. The summary trial involves arguments on the parties' affidavits and cross-examinations undertaken prior to the hearings--no live witnesses.

In broad strokes the suit seeks to prevent the Canadian Revenue Agency from furnishing to the US Internal Revenue Service the personal and financial account information of Canadian citizens pursuant to the FATCA IGA signed by Canada and enacted into law last year. This is not a charter-based (constitutional) challenge, rather it is a challenge that certain provisions of the IGA are unlawful based on the Canada-US Tax Treaty Act  (which in effect ratifies the US Canada Tax Treaty) and the Income Tax Act. Thus it is not about fundamental rights and freedoms at this stage, but about an interpretation of relevant laws, including the existing tax treaty.

The litigants are being funded by a grassroots group that organized itself for this purpose, called the Alliance for the Defence of Canadian Sovereignty/L'Alliance Pour la Défense de la Souveraineté Canadienne (ADCS). ADCS has many of the court filings available here and here and here, and one of the group's organizers has blogged about the proceedings here and here.  While the lawsuit made the news when it was filed, e.g. here and here among several others, I am seeing virtually no press coverage at this stage, except for one brief article here. That is a shame and I hope that journalists will renew their interest in this issue.

Long-time readers will be aware that I made a submission to the Department of Finance concerning many of the legal issues surrounding the adoption of the IGA, that I understand FATCA to be a tax treaty override that is not cured by the IGAs, and that I understand the IGAs to lack validity as legal instruments under US law. In connection with this litigation, I wrote two "expert reports" and was cross examined for purposes of the summary trial; the reports and transcript are part of the court record and mostly available at the links above, but I will also make the reports available on request. If and when additional information about the summary trial becomes available I will update this post.

Responses to Questions on Canada's Adoption of FATCA IGA

Back in November I noted that MP Ted Hsu presented an order paper question (OPQ 816) on the topic of the unusual process surrounding Canada's adoption of an intergovernmental agreement on FATCA. He asked a series of detailed questions about the treaty tabling and ratification process, and today he got his answers, the substance of which I have reproduced below; you can find the full document here.

I note that there is a common answer to many of the questions: "Information pertaining to Memorandums to Cabinet which are less than 20 years old is considered a cabinet confidence and details of these are excluded from disclosure under the principles of the Access to Information Act." Therefore, most of the answers are: you will find out in 20 years.

Though the government continues to claim that it "followed the treaty tabling policy" and that it made procedural exceptions deliberately, according to stated procedures, and out of urgent need, the facts and the nonexistence of key documents declare otherwise.

Bottom line: if there is a treaty policy in Canada, it is that a sitting government can bind the nation to any agreement of any sort with no parliamentary oversight of any kind and with no transparency, and if that agreement violates existing laws and rights, then it will be up to those whose rights have been violated to mount legal action to assert those laws and get their rights restored. This is not just a matter of some arcane technical procedure. It is fundamentally a problem of access to justice. Law is not free. It is, in fact, quite expensive.

I note that all the answers below are from the Minister of Foreign Affairs except with respect to three answers from Finance, which are indicated in brackets.

ORDER/ADDRESS OF THE HOUSE OF COMMONS
No. Q-816
By Mr. Hsu (Kingston and the Islands) 
Date November 24, 2014 

With regard to the Agreement Between the Government of Canada and the Government of the United States of America to Improve International Tax Compliance through Enhanced Exchange of Information under the Convention Between the United States of America and Canada with Respect to Taxes on Income and on Capital (the Agreement), the government's Policy on Tabling of Treaties in Parliament (the Policy), and the statement of Peter Van Loan, Government House Leader, in the House on Monday, April 28, 2014, that "in this case, the fact is that the government, the cabinet, actually did grant such an exemption to the tabling policy. As such, the very words of the policy, the
requirements of the policy, have been followed. The processes for obtaining the exemption were obtained. As a result, the requirement that it be tabled in the House 21 days in advance of the legislation being introduced is not necessary and the policy is fully complied with" (the Statement):

(a) was an exemption to the government's Policy granted with respect to the Agreement;
• Yes.
(b) what is the difference between an "exemption" and an "exception" in terms of the Policy;
• Either term could be used in the context of the Policy.
(c) if the word "exception" is substituted for “exemption" is the Statement accurate;
• Either term could be used in the context of the Policy.
(d) on what basis was the Statement made;
• The Statement was made because the Agreement was granted an exemption to the normal treaty tabling process under the Policy.
(e) how was the Government House Leader informed of the exemption or exception being granted to the Policy;
• The Department of Foreign Affairs, Trade and Development (the "Department") has no information on how the Government House Leader was informed,
(f) what documents or memos were created regarding this exemption or exception and what are their access or control numbers;
• Information pertaining to Memorandums to Cabinet which are less than 20 years old are considered cabinet confidences and details of these are excluded from disclosure under the principles of the Access to Information Act
(g) who was involved in this decision to grant an exemption or exception and at what stage were they involved;
• Information pertaining to Memorandums to Cabinet which are less than 20 years old are considered cabinet confidences and details of these are excluded from disclosure under the principles of the Access to Information Act
(h) what was the process, step-by-step, by which this Agreement was granted an exemption or exception;
• Information pertaining to Memorandums to Cabinet which are less than 20 years old are considered cabinet confidences and details of these are excluded from disclosure under the principles of the Access to Information Act
(i) who reviewed the decision to grant an exemption or exception, (i) when, (ii) why, (iii) how;
• Information pertaining to Memorandums to Cabinet which are less than 20 years old are considered cabinet confidences and details of these are excluded from disclosure under the principles of the Access to Information Act.
 (j) does the Policy apply to the Agreement, and how;
• Yes. The Agreement was granted an exemption to the normal treaty tabling process under the Policy,
(k) between what departments does correspondence exist-regarding the tabling of the Agreement under the Policy and what are the file numbers for these documents;
• There is some correspondence between the Department, and the Department of Finance. There are no file numbers for the correspondence,
(l) on what date was the Agreement concluded;
• [Finance] The Agreement was signed and made public on February 5, 2014.
(m) on what date was the Agreement tabled in Parliament;
• In the context of the Policy, "If an exception is granted, the Minister of Foreign Affairs will inform the House of Commons that Canada has agreed to be bound by the instrument at the earliest opportunity following the ratification." (6.3b of the Policy), The Agreement was publicly tabled on September 15, 2014 by the Parliamentary Secretary to the Minister of Foreign Affairs as per Standing Order 32.2. That was the earliest opportunity for the Government to inform the House that Canada had agreed to be bound by the Agreement following its ratification - also the first sitting day of the House after the summer Parliamentary recess.
(n) on what date was the Agreement ratified;
• Canada ratified the Agreement on June 27, 2014.
(o) when was the House made aware of the text of the Agreement;
• In the context of the Policy, "If an exception is granted, the Minister of Foreign Affairs will inform the House of Commons that Canada has agreed to be bound by the instrument at the earliest opportunity following the ratification." (6.3b of the Policy)". The Agreement was publicly tabled on September 15, 2014 by the Parliamentary Secretary to the Minister of Foreign Affairs as per Standing Order 32.2. That was the earliest opportunity for the Government to inform the House that Canada had agreed to be bound by the Agreement following its ratification - also the first sitting day of the House after the summer Parliamentary recess. Additionally, the text of the Agreement was set out in Schedule 3 to Bill C-31, the Economic Action Plan 2014 Act, No. 1, which was introduced in the House of Commons on March 28, 2014.
(p) how was the House made aware of the text of the Agreement;
• [Finance] Legislative proposals to implement the Agreement with the U.S., including related amendments to the Income Tax Act, were set out in Part 5 of the Economic Action Plan 2014 Act, No. 1 (Bill C-31 ). The text of the Agreement was provided in Schedule 3 of Bill C-31. Bill C-31 was introduced in the House of Commons on March 28, 2014.
• In the context of the Policy, the text of the Agreement was publicly tabled in accordance with the Policy on September 15, 2014. Additionally, the text of the Agreement was set out in Schedule 3 to Bill C-31, the Economic Action Plan 2014 Act, No. 1, which was introduced in the House of Commons on March 28, 2014.
(q) when was the House made aware of the granting of an exemption or exception to the Policy in the case of the Agreement;
• The House was first informed of the exemption through the Statement by the Government House Leader on April 28, 2014. In the context of the Policy, the House was made aware of the granting of an exemption when the Agreement was publicly tabled in accordance with the Policy on September 15, 2014.
(r) how was the House made aware of the granting of an exemption or exception to the Policy in the case of the Agreement;
• The House was first informed of the exemption through the Statement by the Government House Leader on March 28, 2014. In the context of the Policy, the House was made aware of the granting of an exemption in the Explanatory Memorandum which accompanied the Agreement when it was publicly tabled on September 15, 2014.
(s) when and by what means is the House usually informed that an exception has been granted to the Policy;
• In the context of the Policy, the House is usually made aware of the granting of an exemption to the normal treaty tabling process under the Policy in the Explanatory Memorandum which accompanies the treaty when it is tabled publicly.
(t) in the absence of the point of order prompting the Government House Leader's response, how and when would the House have been informed of the exemption;
• In the context of the Policy, the House would have been made aware of the granting of an exemption to the normal treaty tabling process under the Policy in the Explanatory Memorandum which accompanies the treaty when it is tabled publicly.
(u) what steps and measures are in place to ensure that Parliament is informed of exceptions being granted to the Policy;
• The Policy states: "If an exception is granted, the Minister of Foreign Affairs will inform the House of Commons that Canada has agreed to be bound by the instrument at the earliest opportunity following the ratification."
(v) what steps are in place to ensure that Canadians are informed when exceptions have been granted;
• Informing Parliament publicly, as described under (u), is effective as a means of informing Canadians.
(w) what steps and measures are in place to ensure that Parliament is informed of exemptions being granted to the Policy;
• The Policy states: "If an exception is granted, the Minister of Foreign Affairs will inform the House of Commons that Canada has agreed to be bound by the instrument at the earliest opportunity following the ratification."
(x) what steps are in place to ensure that Canadians are informed when exemptions have been granted;
• Informing Parliament publicly, as described under (w), is effective as a means of informing Canadians.
(y) what does "urgent" mean in the context of the Policy;
• The term "urgent" is not defined in the Policy.
(z) how was the ratification of the Agreement determined to be urgent;
• The U.S. Foreign Account Tax Compliance Act ("FATCA") was enacted by the U.S. in March 2010. FATCA requires non-U.S. financial institutions to report to the IRS accounts held by U.S. persons. Absent the Agreement, obligations for Canadian financial institutions to comply with FATCA would have been unilaterally and automatically imposed on them by the U.S. as of July 1, 2014. These obligations would have forced Canadian financial institutions to choose between (a) entering into an agreement with the IRS that would require them to report directly to the IRS on accounts held by U.S. residents and U.S. citizens, which would raise concerns about consistency with Canadian privacy laws; or (b) being subject to the 30 percent FATCA withholding tax on certain U.S.-source payments for not complying with FATCA.
The Agreement takes into account the objectives and provisions of the FATCA, while supporting Canada's objectives for improving the integrity and fairness of the Canadian tax system. The Agreement addresses the Canadian concerns about FATCA described above, as well as others. It was realized that observing the Policy's requirement of waiting 21 sitting days would have made meeting the U.S. FATCA deadline of July 1, 2014, unachievable. As a result, the ratification of the Agreement was determined to be urgent, and a request for an exemption to the normal treaty tabling process under the Policy was granted.
(aa) who made the determination in (z), (i) how, (ii) on the basis of what information, (iii) with what authority, (iv) under what criteria;
• Information pertaining to Memorandums to Cabinet which are less than 20 years old are considered cabinet confidences and details of these are excluded from disclosure under the principles of the Access to Information Act.
(bb) how was the decision in (z) reviewed, (i) by whom, (ii) how, (iii) when, (iv) by what criteria;
• Information pertaining to Memorandums to Cabinet which are less than 20 years old are considered cabinet confidences and details of these are excluded from disclosure under the principles of the Access to Information Act.
(cc) who are or were the lead ministers with respect to the Agreement in terms of the Policy and how was this determined;
• The Minister of Finance is the lead Minister with respect to the Agreement. The Minister of Foreign Affairs is responsible for tabling treaties under the Policy.
(dd) when and how did the Minister of Foreign Affairs and the lead ministers seek approval from the Prime Minister for an exemption to the treaty tabling process;
• Approval from the Prime Minister was sought. Information pertaining to Memorandums to Cabinet which are less than 20 years old are considered cabinet confidences and details of these are excluded from disclosure under the principles of the Access to Information Act.
(ee) when was the approval in (dd) granted and how;
• Information pertaining to Memorandums to Cabinet which are less than 20 years old are considered cabinet confidences and details of these are excluded from disclosure under the principles of the Access to Information Act.
(ff) what correspondence is available -with file and control number- to corroborate the information provided in response to (dd) and (ee);
• Approval from the Prime Minister was sought. Information pertaining to Memorandums to Cabinet which are less than 20 years old are considered cabinet confidences and details of these are excluded from disclosure under the principles of the Access to Information Act.
(gg) was a “joint-letter that clearly articulates the rationale to proceed with the ratification, without tabling in the House of Commons" created;
• No.
 (hh) with respect to the letter in (gg), (i) who created this letter, (ii) when is it dated, (iii) how can it be obtained, (iv) who has access to it, (v) to whom is it addressed;
• No such letter was created.
(ii) was the letter drafted in consultation with the Treaty Section of the Department of Foreign Affairs and International Trade and the relevant Secretariat in the Privy Council Office;
• Information pertaining to Memorandums to Cabinet which are less than 20 years old are considered cabinet confidences and details of these are excluded from disclosure under the principles of the Access to Information Act.
(jj) what documentation exists - with file or control number for each document - to corroborate the information provided in response to (ii);
• No such document exists.
(kk) who is responsible for retention and access of such joint letters;
• There are no special provisions for retention and access of such joint letters. Joint letters would be subject to the normal retention and access legislation, regulations, and guidelines for the Government of Canada.
(ll) with respect to the Agreement, were the responsible ministers and the Minister of Foreign Affairs aware early on of the need to request an exemption to the treaty process prior to obtaining Cabinet authority to sign a treaty;
• Yes.
 (mm) how is "early on" defined for purposes of the Policy;
• The term "early on" is not defined in the Policy.
 (nn) how is "aware" defined for purposes of this provision in the Policy;
• The term "aware" is not defined in the Policy.
(oo) was a request made in a Memorandum to Cabinet, seeking policy approval for the Agreement;
• Information pertaining to Memorandums to Cabinet which are less than 20 years old are considered cabinet confidences and details of these are excluded from disclosure under the principles of the Access to Information Act.
(pp) what Memorandums to Cabinet exist relative to this agreement, (i) what are their dates, (ii) are they subject to privilege, (iii) who made them, (iv) what are their record or control numbers;
• The Department of Finance will respond to this question and sub-questions. Information pertaining to Memorandums to Cabinet which are less than 20 years old are considered cabinet confidences and details of these are excluded from disclosure under the principles of the Access to Information Act
• [Finance] Information pertaining to Memorandums to Cabinet which are less than 20 years old is considered a cabinet confidence and details of these are excluded from disclosure under the principles of the Access to Information Act.
(qq) which document in (pp) can be said to "clearly articulate the rationale for the exception to the treaty tabling process";
• Information pertaining to Memorandums to Cabinet which are less than 20 years old are considered cabinet confidences and details of these are excluded from disclosure under the principles of the Access to Information Act.
(rr) what is the rationale for the exception to the treaty tabling process with respect to the Agreement;
• The response in (z) outlines the rationale for requesting an exemption to the normal treaty tabling process under the Policy.
(ss) who determines the rationale per the Policy;
• The rationale was prepared through consultations by officials on behalf of the Minister of Finance, the Minister of Foreign Affairs, and the Minister of National Revenue.
(tt) what is an acceptable rationale per the Policy;
• There is no definition of “acceptable rationale” under the Policy.
(uu) how is rationale defined in terms of the Policy;
• The term "rationale" is not defined in the Policy.
(vv) is there a minimal level of sufficiency for a rationale per the Policy and if so what is it;
• There is no definition of a "minimal level of sufficiency" for a rationale under the Policy.
(ww) when was the exception granted;
• Information pertaining to Memorandums to Cabinet which are less than 20 years old are considered cabinet confidences and details of these are excluded from disclosure under the principles of the Access to Information Act.
(xx) did the Minister of Foreign Affairs "inform the House of Commons that Canada has agreed to be bound by the instrument at the earliest opportunity following the ratification" per the Policy;
• Yes. The Agreement was publicly tabled on September 15, 2014 by the Parliamentary Secretary to the Minister of Foreign Affairs as per Standing Order 32.2.
(yy) when did the actions in (xx) occur and how;
• The Agreement was publicly tabled on September 15, 2014, which was the first sitting day of Parliament after the Agreement was ratified.
(zz) in 2014, how many exemptions or exceptions were granted under the Policy before the Agreement;
• In 2014, there were two exemptions granted under the Policy. The first was concerning the Agreement. The second was concerning the Canada-Korea Free Trade Agreement.
(aaa) in 2014, was the Agreement's rationale for exception unique;
• Yes. The ratification of the Agreement was determined to be urgent, and a request for an exemption to the normal treaty tabling process under the Policy was granted.
(bbb) in 2014, was the Agreement the only item determined to be urgent in terms of the Policy;
• In 2014, the Agreement was one of two items determined to be urgent in the context of the Policy.
(ccc) is the Government House Leader always informed of exceptions and exemptions under the Policy and, if so, how;
• The Department has no information on how the Government House Leader would be informed of exemptions to the normal treaty tabling process under the Policy. There are no special provisions under the Policy to inform the Government House Leader of exemptions.
(ddd) is the House always informed of exceptions or exemptions under the Policy and, if so, how;
• In the context of the Policy, "If an exception is granted, the Minister of Foreign Affairs will inform the House of Commons that Canada has agreed to be bound by the instrument at the earliest opportunity following the ratification." (6.3b of the Policy).
 (eee) how early could the Agreement have been tabled in Parliament;
• It was realized early on that observing the Policy's requirement of waiting 21 sitting days would have made meeting the FATCA deadline of July 1, 2014, unachievable. As a result, the ratification of the Agreement was determined to be urgent, and a request for an exemption to the normal treaty tabling process under the Policy was sought, and subsequently granted. Since an exemption to the normal treaty tabling process under the Policy was granted, the Agreement was to be tabled at the earliest opportunity following ratification. This was done as early as it could have been when the Agreement was tabled, in accordance with the Policy on September 15, 2014. It should be noted that the text of the Agreement was also set out in Schedule 3 to Bill C-31, the Economic Action Plan 2014 Act, No. 1, which was introduced in the House of Commons on March 28, 2014.
(fff) how was the date in (eee) determined;
• Since an exemption to the normal treaty tabling process under the Policy was granted, the Agreement was to be tabled at the earliest opportunity following ratification. This was done as early as it could have been when the Agreement was tabled, in accordance with the Policy on September 15, 2014. It should be noted that the text of the Agreement was also set out in Schedule 3 to Bill C-31, the Economic Action Plan 2014 Act, No. 1, which was introduced in the House of Commons on March 28, 2014.
(ggg) if the Agreement could have been tabled earlier in Parliament than the date in (o), (i) why was it not, (ii) what decisions were made in this regard, (iii) who made these decisions, (iv) how, (v) on what basis; and
• Since an exemption to the normal treaty tabling process under the Policy was granted, the Agreement was to be tabled at the earliest opportunity following ratification. This was done as early as it could have been when the Agreement was tabled, in accordance with the Policy on September 15, 2014. It should be noted that the text of the Agreement was also set out in Schedule 3 to Bill C-31, the Economic Action Plan 2014 Act, No. 1, which was introduced in the House of Commons on March 28, 2014.
(hhh) if the Statement could have been made sooner in the House than Monday, April 28, 2014, (i) why was it not, (ii) what decisions were made in this regard, (iii) who made these decisions, (iv) how, (v) on what basis?
• The Department has no information on this question.

Reply by the Offices of the Prime Minister and the Privy Council
With regard to the Agreement, the Privy Council Office has no information in relation to part (ii) regarding a letter drafted in consultation with the Treaty Section of the Department of Foreign Affairs and International Trade.

Questions on the Canada-US FATCA Agreement

MP Ted Hsu has presented an order paper question (OPQ 816) on the topic of the unusual process surrounding Canada's adoption of an intergovernmental agreement on FATCA. I have noted many times the anomalies surrounding the US approach to these agreements, and in Canada's case these anomalies appear to have been compounded by odd and unexplained internal procedural decisions. I am working on a paper on this topic but it is slow going, not least because it is tremendously difficult to study Canadian treaty policy--it is vague, features unwritten rules that are apparently made to be broken, and written policies that lack any semblance of meaningful procedural limitations or parameters. If there is a rule of law here, I have yet to find it.

Mr. Hsu's inquiry follows on a statement made by Peter Van Loan, Government House Leader, in the House on Monday, April 28, 2014, that the government, "actually did" comply with its own treaty tabling policy, in response to a point of order raised by MP Marc Garneau back in April regarding the failure of the Government to table the IGA prior to ratification. Mr. Hsu seeks a number of details from the Government; I take it that answers are due on January 26, 2015. Some of the questions clearly illustrate that treaty-making in Canada is really quite a mysterious process. Here are a few of the OPQ highlights--just a small selection of the many detailed aspects of the question:

• was an exemption to the government’s Policy granted with respect to the Agreement;
• on what date was the Agreement ratified; 
• what steps and measures are in place to ensure that Parliament is informed of exceptions being granted to the Policy; 
• what does “urgent” mean in the context of the Policy; 
• did the Minister of Foreign Affairs “inform the House of Commons that Canada has agreed to be bound by the instrument at the earliest opportunity following the ratification” per the Policy; 
• is the Government House Leader always informed of exceptions and exemptions under the Policy and, if so, how; 
• is the House always informed of exceptions or exemptions under the Policy and, if so, how;
• if the Agreement could have been tabled earlier in Parliament [than it was], (i) why was it not, (ii) what decisions were made in this regard, (iii) who made these decisions, (iv) how, (v) on what basis?

All good questions and I, for one, would like to know the answers, not just for better understanding the meaning and implications of the IGA in terms of both its legal status and its substance, but also for understanding the treaty process in Canada more generally. It is a maddeningly opaque regime.

Peers complain banks treat them 'like pariahs'

From the BBC: "Members of the House of Lords have complained they are treated like "deposed dictators or political pariahs" when they try to open bank accounts."

More:

Peers said they were falling foul of money-laundering regulations because banks classed them as high-risk "politically exposed persons". 

This makes them, and their relatives, subject to extra due diligence checks. 

Treasury Minister Lord Deighton said banks were acting "disproportionately". 

He said UK parliamentarians were not currently classed as politically dependent persons, which are restricted to members of foreign governments, but added that new global standards "will require that they are treated as such".

 I know a few people who can relate to this feeling.

The power to tax

The start of a new semester means the return to fundamentals in taxation for me, which always begins with a discussion of the power to tax. Yesterday I asked my students: could Queen Elizabeth say hey Canadians, I notice you still have my face on your dollar and you've got a nice surplus shaping up; over here in England it's all austerity and program cuts. Mind helping out a bit? General consensus: she might as a legal matter be able to tax Canadians to help the Brits out, but she won't. Hmmm. During the discussion a student informed me that Canadians pay more for monarchical services than the Brits do. Well, sharing is caring.

Relatedly and on a more scholarly note, a recent twitter conversation brought me to a chapter in a book on socio-legal tax research (thanks to Martin Hearson for starting that conversation and Judith Freedman for making this recommendation). The book is called Taxation: a Fieldwork Research Handbook, edited by Lynne Oats, and the chapter I had my eye on today is entitled Tea Parties, Tax, and Power, by Rebecca Boden. Boden writes:

History...points to a longstanding power relationship between rulers and those they rule that is articulated through tax regimes. States, whether feudal or modern, need money to operate, to pursue their various programmes, from war to welfare, As citizens may be unwilling to relinquish their money voluntarily, the state must have powers to require payment, with sanctions for non-compliance. By the same token, this power is held in balance in democracies by the principle of consent, exercised through representation. Ultimately, taxpayers give their consent to be dominated and have their money taken away from them.

This contingent nature of the state's powers in taxation - taxation by "consent"- chimes with Foucault's notion that power can never be absolute (Foucault 1977). No, Foucault argues, is power only hierarchical or structural, rather it works in a capillary fashion. As such, the analysis of such power relationships is central to the critical tax project - only by viewing tax structures, policies, and practice through the prism of power relationships that change them can we understand how and why they are constituted and what their effects are likely to be.

There is much more in the chapter to reflect upon, but I found this intro intriguing. In my view a lot of mischief takes place in the subtle--maybe you missed it--transition from the use of the word "citizen" to the use of the word "taxpayer." This is a transition all too many scholars make without even noticing it, yet it masks a world of ideology and assumption that frame and define how we think about tax today.

The power to define the taxpayer permeates contemporary tax policy discussion. The question of who can tax whom is one that could or should involve theory but while the scholars talk it over, reality plays out in economic might. In an intro to tax policy principles that I recently prepared for my tax policy course, I wrote:

Perhaps because taxation has been so connected to state-building, most scholars closely associate the act of taxation with the state. Some even go so far as to argue that taxation is a fundamental right belonging to the state as sovereign, often citing Thomas Hobbes for the proposition that “[t]hese are the rights which make the essence of sovereignty … the power of raising money”. None have offered theoretical grounds for the claim that states are in fact holders of rights, however.

We observe throughout history that states exercise powers (mostly through military and economic might), and only declare rights for themselves upon successful domination (such as in constitutions and charters). This observation leads to the likelihood that taxation is not anyone’s right but rather it is a constructed reality, coming about solely by and through human experience. This would explain why so much has to be done to both justify as a matter of theory - and entrench as a matter of custom - the state’s authority to tax.

We don't have to work too hard to think of a few examples where defining the taxpayer is an exercise in claiming authority, which fundamentally depends on power. FATCA is an obvious one; anti-inversions, BEPS, and the OECD common reporting standard are less obviously but equally so.

With FATCA, the US is using its sheer economic clout to get the whole world involved in chasing what it deems to be "US persons" for their tax tribute, without any discussion about whether the state's unilateral conferring of citizenship constitutes consent to (permanent and worldwide) taxation. Indeed, it continues to erect ever-higher barriers to shedding that status, without a single policy discussion at any level of government about the merits of this action. Those who think not can be expected to resist per Foucault, or, if it suits your taste better, Locke:

[People] therefore in society having property, they have such a right to the goods, which by the law of the community are their's, that no body hath a right to take their substance or any part of it from them, without their own consent: without this they have no property at all; for I have truly no property in that, which another can by right take from me, when he pleases, against my consent.

At the OECD, the common reporting standard, ostensibly modeled on FATCA but in fundamental principles not at all like FATCA, is all about making sure the "right" government gets the info it needs to exert its power over "its" taxpayers. Same idea: a state claims the authority to tax people that live within its territory, but other states have the power to thwart that exercise. (Different in fundamentals than FATCA for two reasons: (1) finding implied consent to tax is a given for residents of a state and (2) the OECD is not currently suggesting countries use economic sanctions to force others to cooperate).

The anti-inversion and BEPs issues are similarly about exerting power over a "taxpayer." Despite bemoaning their apparent helplessness in preventing corporate US persons becoming corporate non-US persons, US lawmakers clearly claim the authority to intervene and they likely have the power, too. But, this involves erecting higher and higher walls to keep the "taxpayers" inside. Internationally, discussions about the global problem of multinational tax dodging focus on the failure of the state to tax corporate persons that come in to the jurisdiction to do business. At the OECD, the BEPS project is very much about who belongs to who, so we can decide what belongs to who. Source and residence as tax concepts have always been about power and they have always been explained with ideas about authority and consent.

Globally, discussions about both corporate and personal income taxation are being forced to focus more and more on unanswered questions about the power to tax, and the issues of authority and consent that are raised when power is exerted and when it is resisted. The full Boden chapter is thus definitely recommended reading and I'm working my way through the rest of the book, which looks promising in several respects. More to come on this subject.

Filed Today: Lawsuit challenging constitutionality of FATCA in Canada

Noted Canadian constitutional lawyer Joseph Arvay filed suit today to challenge the constitutionality of Canada's implementation of FATCA. The statement of the claim is laid against the Attorney General of Canada in the Federal Court of Canada. It seeks a declaration by the Court that the relevant parts of recently enacted Bill C-31, referred to as the "Impugned Provisions," are beyond Parliament's authority and of no force and effect under the Constitution. The claim makes four claims about Canada's attempt to implement FATCA:

(1) it violates the Constitution by creating federal power over a provincial domain;
(2) it violates s. 7 of the Charter, guaranteeing individual rights to life, liberty & property;
(3) it violates s. 8 of the Charter, preventing unreasonable search & seizure; and
(4) it violates s. 15 of the Charter, prohibiting discrimination based on national origin etc.

The complaint concludes that none of these infringements can be justified by section 1 of the Charter, which provides for only "such reasonable limits prescribed by law as can be demonstrably justified in a free and democratic society."

The lawsuit is the product of efforts by a small, grassroots group formed for this purpose, calling themselves the Alliance for the Defence of Canadian Sovereignty. They have issued a press release, here. The two named plaintiffs are taking a major risk in being exposed as "non-compliant US Persons" in this lawsuit. On the other hand the IRS may not wish to get in the middle of this fight and prove the plaintiff's case, which is succinctly stated here.

I look forward to following the case, which I expect to wind its way toward the Supreme Court. As I've said many times, there are massive problems with FATCA that have nothing to do with tax evasion and everything to do with the basic injustice that is citizenship taxation and all global efforts to enforce it for the US. The US Congress is reluctant to act on this antiquated and unjust regime and the IRS must plow ahead, as I explained recently. But that certainly does not mean that other countries must do the job of the IRS, most especially when doing so is inconsistent with their own laws.

Christians on Regulating Tax Preparers: A Global Problem for the IRS

I have a new column this week in Tax Analysts: Regulating Tax Preparers: A Global Problem for the IRS, in which I discuss the challenges of protecting a global taxpayer population from fraud and abuse and make (yet another) plea for sanity in the form of abandoning citizenship taxation and turning to residence-base taxation. Here is the gated published version; here is the SSRN version (ungated). And here is a brief abstract:

The IRS recently announced that its mandatory registration regime for paid tax return preparers, struck down in the Loving decision, would henceforth be offered as a voluntary program. But the authors of this program appear to have forgotten that the US system is perfectly global in reach, thanks to its permanent inclusion of citizens and others with legal residence status no matter where in the world they live. Protecting a global taxpayer population from fraud and abuse is an enormous task, with massive legal, administrative, and even diplomatic factors to consider. Citizenship taxation plagues the project of tax return preparer regulation, just as it does all aspects of US tax law. Accepting the universally practiced norm of residency-based taxation is the only viable solution. If Congress cannot do so, it will always be the case that for the IRS, thinking locally truly means acting globally.

Just as this was published, a friend sent me an email about a growing problem of FBAR fraud, in which criminals attempt to get personal & financial information from people by sending them serious looking notices. Here's an example, from Tax-Expatriation blog:

I'm sorry I didn't see this before I published my column, as I would have mentioned it as a significant issue. Capitalizing on the ignorance and fear of regular (non-rich) US persons outside the United States will be all too easy for criminals, I am afraid. I hope that the IRS and FinCEN can figure out a way to warn people--but I don't see how they can really do that on a global scale, especially since FATCA's job is to funnel information about millions of people to the IRS, and not the other way around. At minimum, every government that signs an agreement to implement FATCA should be sending out the warnings, since each is undertaking a huge responsibility in implementing US citizenship taxation on their own residents.

IRS claims statutory authority for FATCA agreements where no such authority exists

Over at federal tax crimes blog Jack Townsend has posted a letter from the IRS to Congressman Bill Posey, in response to an inquiry the Congressman apparently made about the intergovernmental agreements ("IGAs") to implement FATCA by other governments (instead of directly by foreign financial institutions, per the law Congress enacted in 2010). Treasury says:

“Your letter also asks about statutory authority to enter into and implement the IGAs. The United States relies, among other things, on the following authorities to enter into and implement the IGAs: 22 USC Section 2656; Internal Revenue Code Sections 1471, 1474(f), 6011, and 6103(k)(4) and Subtitle F, Chapter 61, Subchapter A, Part III, Subpart B (Information Concerning Transactions with Other Persons)."

None of these sources of law contain any authorization to enter into or implement the IGAs.  It is patently clear that no such authorization has been made by Congress, and that the IGAs are sole executive agreements entered into by the executive branch on its own under its "plenary executive authority”. As such the agreements are constitutionally suspect because they do not accord with the delineated treaty power set forth in Article II. As Michael Ramsey wrote in a 1998 article, the danger is that if the president seeks to reach agreements outside of his plenary constitutional powers, the agreement lacks domestic legal effect.

Just to be clear, the fact that a document signed by an individual might or might not bind the United States as a matter of constitutional law does not mean that the United States will not honor whatever commitments the individual makes under such an agreement. The contrary is likely the case especially given the predicament Treasury found itself in, coupled with the pitiable small promises undertaken by the US in these "agreements."

But we should be clear that the analytical terrain we should be traversing is whether the scope of the plenary executive authority can suffice to support as a matter of law the promises made in some 80 or so IGAs (many of which are currently agreements in principle only). We should not be wasting anyone's time pretending that Congress has authorized Treasury or the Secretary of State to enter into the IGAs. It has not.

So let’s take a look at what these sources actually say.

22 USC 2656 is about the power of the secretary of state. It says:

The Secretary of State shall perform such duties as shall from time to time be enjoined on or intrusted to him by the President relative to correspondences, commissions, or instructions to or with public ministers or consuls from the United States, or to negotiations with public ministers from foreign states or princes, or to memorials or other applications from foreign public ministers or other foreigners, or to such other matters respecting foreign affairs as the President of the United States shall assign to the Department, and he shall conduct the business of the Department in such manner as the President shall direct.

If that is an authorization for the IGAs, it is a vague one at best. Does an IGA constitute “correspondences, commissions, or instructions,” “negotiations”, “memorials or other applications,” or “such other matters respecting foreign affairs”? Under what interpretation of such relevant provisions? Also there is nothing here about the content or scope of the treaty power hereby implicitly authorized. Is IRS saying that with this power the Secretary of State can bind the nation at will on any matter, without the need for the President to seek advice and consent from the Senate prior to ratification? If so this is an extraordinary claim that does not scan with either historical practice or constitutional theory. 

26 U.S. Code § 1471 is, of course, part of FATCA. It is entitled “Withholdable payments to foreign financial institutions”.  It sets out the reporting obligations imposed on foreign financial institutions and states that the Secretary is authorized to treat a foreign financial institution as “meeting the requirements” of 1471 if the institutions complies with procedures or requirements set forth by the Secretary or is “a member of a class of institutions” identified by the Secretary. 

There is explicit authorization in 1471 for the Secretary to engage in agreements with FFIs to implement FATCA. However where is the authorization in 1471 for the Secretary to engage in agreements with other countries to implement FATCA? It is not in the text, certainly.

Therefore to what specific provision of 1471 could IRS possibly refer when it suggests this statute authorizes individuals to sign agreements altering the reach of FATCA on behalf of the United States? There is clearly no explicit authority. Is it implied? If so, by what?

Moreover, many or most of the IGAs have been signed by officers of the Secretary of State, ambassadors, consulates general and others, and not by Treasury. Does s1471 also impliedly delegate its implied treaty power authority to those outside of Treasury who have signed on behalf of the United States? Certainly there is no explicit delegation here.

26 U.S. Code §1474(f), also part of FATCA, is the statutory authorization for the Secretary of the Treasury to 

“prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of, and prevent the avoidance of, this chapter.” 

There is no authority expressed in this provision for the Secretary to enter into agreements with other governments. Does IRS suggest that an IGA constitutes “regulations” or “other guidance”? Under what interpretation of that characterization does the Treasury interpret the promulgation of either regulations or other guidance as an authorization to negotiate an agreement with a foreign government?

26 U.S. Code § 6011 is entitled “General requirement of return, statement, or list,” and it states the parameters under which a person must make a return “[w]hen required by regulations prescribed by the Secretary.” There is authorization in 6011 for the Secretary to require taxpayers to fulfill various reporting requirements, including electronic reporting. There is no authorization in 6011 for the Secretary to engage in agreements with other countries to implement 6011. 

What provision of 6011 is IRS suggesting confers the authority to negotiate agreements with other governments without Senate advice and consent?  Does IRS mean to imply that each and every authorization that Congress gives Treasury for the prescription of regulations is an implicit authorization for Treasury (or its implied designees in other departments) to conclude agreements with other governments? If so, this is a surprising claim of executive power that is inconsistent with the treaty power described in Article II of the constitution. I would think Congress would like to know under what interpretation of Congressional direction to the Secretary to issue guidance, IRS or Treasury would conclude that it now holds the power to make treaties on behalf of the United States.  

In other words, if IRS stands by this authorization it is suggesting that any tax code section that authorizes Treasury to regulate implicitly contains both a treaty making power as well as the power to delegate authority to departments other than that specifically charged with implementing the statute. That is not a plausible claim.

26 U.S. Code § 6103 is entitled “Confidentiality and disclosure of returns and return information” and it provides that “returns and return information shall be confidential,” with exceptions provided by statute. There is authorization in 6103 for the Secretary to engage in agreements with taxpayers to implement 6103 (for example in the case of advance pricing agreements). There is no authorization in 6103 for the Secretary to engage in agreements with other countries to implement 6103. Therefore, as with 1471 and 6011, to what specific provision of 6103 does IRS refer, and under what interpretation of the authority given by Congress in 6103 to enter into agreements with taxpayers does IRS find the authority for anyone to enter into agreements with other countries?

26 U.S. Code Part III, Subpart B is entitled “Information Concerning Transactions With Other Persons” and it contains 26 US Code §§ 6041 through 6050W—a very broad set of statutes involving information reporting, none of which explicitly grant anyone the power to bind the nation to anything. Certainly nowhere in the subpart appears any express authorization for Treasury to enter into agreements with other governments in respect of s1471 or otherwise. Therefore the same questions I have raised with respect to 1471, 1474, 6011, and 6103 would seem to arise here.

In short I see no express authorization anywhere in any of these authorities for the Treasury to enter into the intergovernmental agreements. Moreover there is no precedent for such agreements, and they are being signed by US officials who are not members of the Treasury. Does it not seem at least noteworthy that an enormous network of bilateral tax agreements has been established, a network that dwarfs the existing tax treaty network in size and scope, all without any explicit Congressional authorization, and without any regard to the Treaty power clearly laid out in Article II of the Constitution? 

And why not cite the TIEA power?

I would add that is not at all clear why any list of authorizations for an individual to enter into agreements with other governments on behalf of the United States would not include 26 US Code § 274(h)(6)(C)(f), which has long been relied upon to by Treasury to find the authority to enter into tax information exchange agreements ("TIEAs") that were not expressly authorized by the statute (because they are not listed in Section 274 as beneficiary Caribbean Basin countries).  This statute has clearly been abused by Treasury in extending it way beyond what Congress intended. However, the fact that Congress has not complained suggests that it has acquiesced to the overreach. 

That makes the TIEAs good precedent for those who want to defend the IGAs as a matter of law. In omitting this, the only plausible source of support for the authority to bind the nation without the advice and consent of Senate, does IRS suggest that Treasury now backs away from this authority? If so, why would they do that? The answer is of course that IRS believes that if necessary the TIEAs can also be considered sole executive agreements, and as such a TIEA "does not need Senate or other congressional approval." This is an official claim that the IRS doesn't think Treasury or anyone needs even s.274 as a cover: the executive can simply act alone to achieve its tax goals through international agreements.

At the end of the day, it is clear that Treasury saw a real and serious need to work with other governments to make FATCA work. There is no disputing that fact, and indeed it is a step toward multilateral cooperation which should be celebrated if only it weren’t so lopsided, and if only it weren't being accomplished via the threat of economic sanctions for all the world’s tax havens except the United States itself. But no amount of need or want can sidestep the constitutional delegation of powers among the branches, and the treaty power is no exception: nor should it be. At least one Treasury official has already conceded that the explanation for the IGAs is that they are "executive agreements”, not Article II treaties. 

IRS and Treasury should therefore just admit that the IGAs are simply “sole” executive agreements—not authorized by Congress but entered into by the executive branch under its sole discretion. 

This is a tenuous position and it ought to fail constitutional scrutiny but for the fact that in the past, Congress has acquiesced to this exercise of power by the executive and it is likely to do so again, especially given how little has been undertaken by the United States in these IGAs. As Lee Sheppard pointed out in a Tax Notes article two years ago, "An executive agreement depends on the good will of the parties to enforce it.” And as Susie Morse also pointed out in Tax Notes last year, Treasury is very likely to try to enforce their part of the IGAs. 

Since the US side of the IGAs is to deliver very modest undertakings that Treasury also believes can be done without congressional approval (namely, extending the longstanding s. 6049-based information exchange with Canada to other countries), this is probably true; all IGA promises to alter the law in the future should be seen as what they are, unenforceable promises that are beyond Treasury’s control and so won’t be delivered. 

Therefore honesty is still the best policy for Treasury. Instead of citing non-existent statutory authority that is easily refuted by simple reading, Treasury should own what it is doing outright. These are sole executive agreements, they lack statutory approval, they undertake very little on the part of the United States, but they are an effective way of pretending to be cooperative so that other countries can save face as they submit to the threat of economic sanctions that is FATCA. There isn’t really any reason why Treasury shouldn’t acknowledge this reality, since it is, strictly speaking, of Congress’ own making.