Monday, January 16, 2012

FATCA Red Herring

For all the groaning about FATCA, there is one “red herring” which should be given the lie right away, and that is the silly notion that FATCA is an attempt to force the application of U.S. law on foreign financial institutions.  In fact it does nothing of the sort. The key to FATCA is the requirement of Internal Revenue Code section 1471(b)(1) which says that in order to avoid the 30% withholding tax, an FFI has to enter into a written agreement with the IRS to comply with certain best practices such as the Know Your Customer protocols, and agree to file an annual report with the IRS disclosing the names of the people who are enriching the foreign bank while at the same time enjoying their wonderful services.  What is more interesting is the requirement of section 1471(b)(1)(F)(i) which requires Americans with assets abroad to give the bank a waiver of the applicability of that country’s bank secrecy laws so that our government can correctly apply the Internal Revenue Code to the U.S. persons who are really subject to its jurisdiction. My question for those of you who are now engaged in the process of implementing FATCA, what if the waiver is forthcoming but the foreign bank refuses to disclose the names of its American customers for fear of violating the laws of their own countries?  Can anyone share their wisdom on how to handle that issue?


  1. In Canada there is a series of regulations called Access to Basic Banking Services which entitles anyone in Canada to basic banking services(Checking/Savings) with minimal forms of indentification. If the account is non interest bearing a Canadian Tax ID is not required either. People in Canada are real "pissed" about this to the point of calling their Canadian MP's and Canadian MP's coming calling for legislation to block the implementation of FATCA. The main issue in Canada is that their are many Canadian citizens who were born in the US but whose US status is unclear over the years as citizenship law has changed. Remember Canadian doesn't by nationality either, instead you taxed by your "resident" status.

    I would say there is a pretty big fight on the US' hand. In Canada you also have PIPEDA which is the main Canadian privacy law that would appear to outlaw this form of data transfer. You also already have an information sharing agreement in effect between the US and Canada(the only agreement the US has with any other country in the world to date) to share information on non resident accounts held by "residents" of the other country remember Canada taxes by "residency" but despite the existence of this agreement is unwilling to exempt Canada from FATCA making Canadian even more suspiscous of the US intention. The Canadian banks of course don't like FATCA but also don't won't World War Three between Canada and the US to breakout either. As your blog needs more traffic I'll try to send over some of these campaigners to "spice" things up a little.

    Here is the main position laid about by the main opposition party in Canada

    And this is what the current govt is saying about FBAR(as in they won't enforce it)

    1. Hi Tim:

      Excellent comment which I will forward on to my compadres who work for the IRS in DC. With any new program, there are bound to be kinks that need to be worked out. Even as we wait for the FATCA regulations, I am sure the worker bees at the IRS National Office are busy carving out exceptions to the general rules which may not have been anticipated by Washington at the time the legislation was conceived.

      A similar problem relates to foreign financial institutions who have no US clients and who would like to be non-participating financial institutions, but cannot do so because other foreign banks with US clients cannot deal with the NFFP banks if they do not register.I see the chances of FATCA being withdrawn as slim to none. There is a toxic atmoshpere in American politics today and any politician who comes forward perceived to be in favor of making it easier for US Fat Cats to hide their money offshore should be looking for another career.

  2. Steve,

    The other thing I'll mention is if you look at the current QI rules their are actually relatively few countries in the world whose financial insititution can even apply from just the standpoint of the US. Institutions from places like China, India, Russia, Brazil, much of Middle East and Africa are all ineligible under QI due to what they IRS calls incompatabilities with KYC/AML rules etc(Given the countries involved I don't expect these issues to change anytime soon). Thus I find it hard to see under FATCA how institutions from these countries could even be allowed to signup from the US perspective if they aren't allowed currently under QI. Now to be fair these are countries mainly with pretty strict currency controls(where essentially all dollars recieved by residents from exports remittances etc have to be sold to the central bank or government which is usually the only legal holder of foreign financial assets and thus exempt from QI or FATCA). The issue with FATCA though is banks are supposed to implement it on a global enterprise level where QI as I understood it was implemented more local subsidiary by local country. So it would seem difficult for me to see how Citibank for example could "signup" on an enterprise/global level for FATCA including its Chinese subsidiary when right now its Chinese subsidiary or any Chinese incorporated financial institutions are ineligible for QI. I thought FATCA was supposed to be "stricter" than QI. I can't see how letting a huge swath of currently ineligible entities from countries that have fairly limitied legal cooperation with the US as being stricter. My sense is by wanting "everyone" to singup for FATCA they are forgetting today their are many institutions that can't sign up for QI for very good policy reasons even if their local governments approved it.

  3. In regards to Canada again what I have heard now enough times recently to make it believable is that as recently as October there was a real possibility of big blowup between Canada and the US regarding FATCA. However, based on what I have heard now from several places there was some very high level discussions between Canadian Finance Minister Jim Flaherty and US Treasuyr Secretary TIm Geithner with a view to trying to put things back in a better situation(I would not discount the possibility that Prime Minister Harper and President Obama were not involved in fact I suspect given some of Flaherty's earlier statement back in September Harper was definately involved.) The view in both Ottawa and Washington as I can make out seems to be that their is plenty of room to work out some type of agreement using the existing automatic exchange of information arrangement and the Treasuries rulemaking power under the actual FATCA legislation. However, it seems like everything is happening relatively late in the game than many of the participants wanted so to speak.
    The other interesting thing is there is a lot of discussion in Ottawa over the whole FBAR reporting regime at least to the extent that Canada is considered "foreign." My impression is very few people in the Canadian government actually knew about FBAR and when they found out they took a very dim view of it as that earlier video I linked to showed. It would be interesting to know what the view of the US was when asked about FBAR by Canada. My sense is sometype of exemption on FBAR for Canadian accounts would be seen as olive branch in Canada towards either dual citizens living in Canada renouncing their US citizenship and cleanly getting out of the US tax system or as you put it coming back in through "voluntary compliance." For example if it actually in doubt whether you are still a US citizen(something that applies to many Canadians born in the US who obtained Canadian citizenship in that period) and reallistically don't owe any US tax through direct contact with the US, haven't filed a return or FBAR in decades why at all call your circumstances into question. My understanding though is FBAR is more a Treasury/FINCEN program vs IRS related to law enforcement more than tax collection so the key Canadian agencies involved would have to be the RCMP and FINTRAC(The Canadian AML monitoring/reporting agency). In the past the US has exempted Canada from other legal requirement in areas such immigration, export controls, defense production agreements etc. so sometype of arrangement between FINCEN and FINTRAC definately would seem conceivable or perhaps not.

  4. My sense though is that if the last July 2011 regulatory release were to stand their would be pretty significant legal conflicts at least in Canada. I know under the QI program each agreement is specifically tailored to a specific legal requirments in a particular country something that as of yet has not been announced with FATCA. In this regard one thing I didn't know when I previously posted is under the Canadian specific provisions of QI acceptable forms ID for Canadian customer are basically the same as under Canadian Access to Basic Banking regulations i.e. Drivers License, Provincial Health Card etc none of which indicates nationality(Note: these are effectively the same types of ID most Americans open US domestic bank accounts with so I not sure how much the US can really complain on this issue). My sense is PIPEDA(Canadian privacy law) is a big obstacle to direct data exchange between Canadian insitutions and the US. QI as implemented probably streteches this law as much as possible thus any additional data exchange will have be between CRA and IRS on a government to government basis and I suspect will be on non resident accounts only I don't see Canada sharing info on dual citizens living in Canada nor do I think the US truely wants to pick that fight. Interestingly if you look at the Canadian T1 personal tax return(I put a link below) which gives the CRA a lot of information about someones financial status they don't really even ask whether your a Canadian Citizen or any other nationality questions the only question on citizenship is related to voter registration which you don't have to answer.(I don't think the US 1040 is any different in this regard).

  5. "For all the groaning about FATCA, there is one “red herring” which should be given the lie right away, and that is the silly notion that FATCA is an attempt to force the application of U.S. law on foreign financial institutions."

    I'm not sure whether you are creating straw man here or not. What is clear, is that the FFIs must disclose information to the IRS in exchange for access to US markets or have confiscatory withholdings on US source investments. As a DIY investor, I know something about trading and investing, and my opinion is that foreign investors, like myself, will simply find other markets to invest in rather than submit to a 30% withholding. Thus, if enough FFIs find that they cannot comply with FATCA, the result will be a massive flight of foreign capital out of the United States before its implementation. Already, I do know many Canadian resident investors (whether they are American or not is besides the point) who have already pulled their money out of the United States. I have made large bets (well for me) against the US dollar, by shorting it in favor of Canadian investments.

    FATCA has this going for it: the cost of implementation is born wholly by the FFI and the benefit is all for IRS. My question to you, if this idea that what you call is a silly notion, just remember, these are regulations imposed on FFIs as a condition of continued access to US markets. This changes the rules of the game, and it was done without negotiation with and imposed unilaterally upon the FFIs.

    Furthermore, as Tim has pointed out, the many of the people affected by FATCA are actually resident in the foreign country and are therefore questionably under the jurisdiction of the United States. In particular, dual citizens, according to the doctrines of international law which determine disputes of this sort, are actually under the jurisdiction of their country of residence--their dominant nationality. See the following post: Thus, FATCA, as all US extra-territorial taxation of it citizens aborad, is done without regard to international law and is just one more another sign of how the United States tries to bully the rest of the world.

  6. I posted a link below to an article on the CBC's website from a year or two ago that I think gives a good impression of a key difference between Canada's and US' policy on witholdings. An important quote:

    But getting at the funds is not easy. In this case, well before preparing the applications for a judge, the CRA first searched their non-resident tax-withholding form (NR4) database to find the offshore connections.

    The revenue agency searched under UBS, FBN and BMONB for Liechtenstein mailing addresses and country codes. The agency said the ad hoc searches turned up 25 Liechtenstein entities at UBS, 13 at FBN and eight at BMONB.

    It may be the case, as it was with RBCDS, that there is a mix of Canadians and non-residents behind the accounts.

    It's the first time the NR4 search method has been used in relation to Liechtenstein, according to CRA spokesperson Caitlin Workman, and it may not be the last.

    "The CRA could use the [NR4 searches] to obtain information about income or assets in any jurisdiction linked to non-compliance with Canadian tax laws," Workman said.

    The Non Resident N4 form is a key tool for CRA because it is collected on ALL non resident payees of Canadian source income thus the CRA can actually examine the details of particular shell entity and and request for futher information of financial intermediaries that they are supposed to obtain through KYC as they did in this case to see who is actually behind a particular entity and whether or not they are breaking the tax laws in Canada or in another country. Under QI and FATCA as long as the FFI certifies a foreign entity/corporation has no US Person involvement they don't have to turn over any information on the foreign payee. A foreign shell entity as such could very well be used to hide income from some other countries tax authorty but the US and its treaty partners have no idea because all information can be keeped at a foreign FFI in a secrecy jurisdiction. Additionally the US under FATCA is still relying on Foreign FI's to certify customers not taking it upon as US based custodian/FI US tax status something which hasn't worked to well under QI.

    I suspect in this case as there has been no further news out of the CRA(which there problem would be if they went after someone) it was probably in fact someone in some other country trying to hide investments in Canada via Liechtenstein from their own local tax collector


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