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.

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.