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Thursday, July 4, 2013

The U.S. Congress and FATCA Reciprocity

Breaking story from James Jatras.

An unexpected development on the FATCA front.  Congressman Bill Posey, a representative from the state of Florida and member of the House of Representatives Financial Services Committee, has sent a letter to the U.S. Treasury about the promises of reciprocity that Treasury is making to foreign governments as they try to negotiate agreements to implement FATCA worldwide.

For those just joining the conversation, FATCA (Foreign Account Tax Compliance Act) is a law that was voted in 2010 by the U.S. Congress as part of the HIRE Act. It requires foreign banks to report the account information of all U.S. persons (U.S. citizens and Green Card holders) all over the world to the American IRS and imposes draconian fines on foreign entities for non-compliance. The legislation is "extra-territorial" which means that the U.S. is expecting foreign governments to impose American law on their own people and banks.

The unintended consequences of this law are many.  It is already turning U.S. citizens and Green Card holders into pariahs, literally "toxic assets" outside the U.S.  It is getting harder and harder for Americans living abroad to get banks accounts in the countries where they live and work.  It is even having an impact on the ability of Americans to do business or find work outside the U.S.  But those things are not obvious to Americans living in the homeland since they don't impact most of them directly.  However, there is one consequence to this law that does concern them and that is the issue of reciprocity.

FATCA as written is a one-way street.  It calls for information about the financial doings of U.S. Persons abroad to flow into the U.S., but does not provide for information to flow in the other direction - from the banks in the U.S. to foreign governments.   This is a serious problem.  Why, in heaven's name, would foreign governments agree to change their own laws, force their own banks to make major and expensive changes to their IT systems and procedures, and oblige their own citizens to bear the costs without getting something in return?  

And that is precisely what countries around the world want.  If the U.S. is asking us, they say, to report on U.S. customers in our countries then we want U.S. banks to report to us about account holders from our country. Sounds fair to me.  

So what happened is this:  As the U.S. Treasury toured the world negotiating FATCA implementation worldwide and signing IGA's (Intergovernmental Agreements), they made promises to these countries that the U.S. would indeed provide some sort of reciprocity at some point in the future.  I was personally present at two meetings here in Europe where I heard them say this. They were vague and used ambiguous language (a "je vous ai compris" style of discourse) but they gave assurances that reciprocity would happen and the Europeans listening left the meetings with that message.

Did Treasury have the authority to make these kinds of promises?  Remember that FATCA doesn't call for U.S. financial institutions to participate in this kind of automatic information exchange and the U.S. Congress has never ever explicitly approved reciprocity.  Instead of a public debate about this, what we've seen is under the radar attempts by Treasury to get reciprocity authorized without having to go through the very public democratic political process.  A good example is a short paragraph slipped into the Obama 2014 budget where it's likely that Congress won't even notice it's there or ask too many questions about it.  Sneaky.   

But some members of the U.S. Congress have noticed.  The domestic backlash over FATCA reciprocity started months ago and that brings us to Congressman Posey's July 1st letter to the Secretary of the U.S. Treasury, Jack Lew.  It's pretty direct and governments around the world should sit up and take notice.  He not only expresses his deep concern over proposed reciprocity because of the costs to U.S. banks, but he calls into question Treasury's authority to negotiate with and make promises to foreign governments without oversight and authorization from the U.S. Congress:
"My concerns are compounded by Treasury's actions to implement the Foreign Account Tax Compliance Act (FATCA) by negotiating "Intergovernmental Agreements" (IGAs) with foreign nations that would require these countries to enforce FATCA requirements on their own financial institutions." 
"I further note that the IGAs that are being entered into are not authorized, or even mentioned in FATCA.  Despite the absence of any specific legislative authorization, these IGAs are not being submitted to the Senate as treaties or treaty amendments for its advice and consent..." 
"I expect these broader questions to be more fully aired by the Financial Services Committee in its anticipated review of the administration's request for enhanced legislative authority.  In the meantime, I believe a moratorium on FATCA enforcement and negotiation of additional IGAs is in order."
Talk about cutting Treasury off at the knees.  They have already had a great deal of trouble getting foreign governments to sign IGA's.  There are 190+ countries in the world and right now only only a few nations like the UK, Germany, and Mexico have signed on.  Time is getting short - FATCA goes live in a few short months (January 1, 2014.)  How many more IGAs will Treasury be able to sign if there is uncertainty about reciprocity?  As for the ones already signed, how will these nations react to the possibility that those promises were empty?  And finally if FATCA goes live as planned in 2014 is the U.S. really going to start enforcing it and imposing penalties on foreign banks?  That would be a catastrophe.

Does this mean that FATCA is dead?  Not necessarily.  There is support, for example, from the EU and other regions for some kind of automatic information exchange and that isn't going to go away.  What I would hope for is that this will stop the heedless rush to implement a one-sided, very poorly written, American law with many unintended consequences.  Then everyone (all governments interested in automatic exchange) can sit down at a table and hash out together a system that is protective of people's rights, appropriately targets the few who are intentionally breaking the laws against tax evasion (and not those who are just collateral damage), and is agreed to by each country and its representatives through a legitimate political process.

"But that would be hard!"

Well, yes, it would be but if they think it is worth doing, then how about doing it right?  If I were one of the people who is adamant about implementing this kind of system, I would suck it up, press "rewind" and begin again. 

For more information, interpretations and comments, see the following sites:  The Maple Sandbox, The Isaac Brock Society and, of course, Repeal FATCA.


P. Moore said...

Gee Victoria,
I think the ink is barely dry on Posey's letter and you already put together this excellent post. I for one think FATCA cannot be implemented in 2014 or likely anytime in its present form. To me, the simple answer, if governments want some kind of information exchange that makes sense, is to base it on residency not citizenship. Strange how simple solutions are too complicated for the US government and congress. Didn't Churchill or someone say something like 'Trust the Americans to do the right thing after they tried everything else'?

I strongly encourage you to keep up your work on this and related issues. Not only have you developed a 'following' on this, but you have a very good grasp of the issues and articulate them very well. Keep up the outstanding work!

Blaze said...

Yes, you, I and most reasonable e people would push rewind and begin again.

However, as we have seen over the last two years, we are not dealing with logical, rational people on FATCA issue. Instead, we have been dealing with control freaks bullies run amok.

Congressman Posey's letter is a great first step. For some reason, I suspect Department of Treasury is not going to meekly roll over and go away.

We need to stay united and vigilant.

Happy Independence Day!

Anonymous said...

My fear is that even if FATCA is repealed, discrimination against Americans and Green Card holders is not going to stop, because of how things started. Banks are just not going to do a 180 on their discriminatory policies against US persons.

Anonymous said...

Your blog keeps me sane. In the EU country where I live almost 100% of the U.S. expats belong to Democrats Abroad. They shrug off FATCA as "just a form." No big deal.

This makes me pessimistic about the possibility of mass action or demonstration on the part of expats, dispersed as we are.

A small first step for me was to change my voter registration from (life-long) Dem.


Anonymous said...

Victoria, hope this is acceptable - I posted this on IBS, but hoping that perhaps some bilingual Quebecers or those with knowledge of Quebec sovereignty re international treaties and tax matters might notice it if I post here as well:

We have not explored whether Quebec's unique powers within Canada would provide a block or impediment to the Canadian government in signing a FATCA IGA. If Canada's federal government cannot sign a FATCA IGA that binds ALL of Canada - including Quebec, then there is a big hole in the agreement. If Quebec must acquiese, then we have not heard anything indicating that it has a position on FATCA, or that it is agreeable to the Harper government signing away the rights of all Quebecers who the US deems to be 'taxable persons'.

Would love to know how this would play out.

There also is an issue of First Nations and Aboriginal sovereignty in Canada - not sure how that interacts with any attempts by the US to bind Canada as a whole.


Anonymous said...

Further to my previous comment, here is what may prove complex if the Canadian government is signing a FATCA IGA and abridging our Charter and Constitutional rights - as well as potentially infringing on the sovereignty powers and rights of Quebec.

"In a preliminary search, I found;
” The PQ definition of sovereignty was first set out in a white paper before the 1980 referendum. It was subsequently accepted by the Bélanger-Campeau commission and the National Assembly used it in the 1991 referendum legislation. According to this definition, Quebec sovereignty means:

all taxes in Quebec are collected by the Quebec government;
all laws in Quebec are drafted by the National Assembly; and
all international treaties and agreements involving Quebec are negotiated by the Quebec government and ratified by the National Assembly.”

"I found also this: from ALI-ABA Institute on International
Trust and Estate Planning by David H. Sohmer
August 24th, 2012 “Offshore Tax Enforcement: Voluntary Disclosure, FBARs and FATCA”
which notes re Quebec: “….Note no tax collection
agreements with Canada, other provinces, or foreign
countries. ….”

Victoria FERAUGE said...

@P.Moore, Thank you so much for your note. I read all about the letter over my morning coffee and then sat down to write. My fingertips flew for over an hour. It was such an interesting development.

When I write about this sort of thing I try to put myself in the place of someone who has just stumbled on the topic. What would they need to know to get up to speed fast? How much information would they need to understand the context? That exercise really helps. Keeps it green for me and I hope makes it comprehensible to someone who is genuinely interested but hasn't followed the story from the beginning.

@Blaze, I don't get it either. Some of the stuff I hear from the US gov and FATCA supporters makes me wonder what planet these people are on?

Solidarity! And thank goodness we have it. I am so proud to know you, Blaze.

@anonymous, Yep, the fallout could continue for months or years regardless of what happens to FATCA. Americans have already lost a lot because of this.

@anonymous, I was so glad to hear that. I was wondering if I was the only one who had a problem with Dems abroad. I got so mad at them I asked them to take my name off their mailing list.

Tim said...

You need to check this out:

“In Europe, we have seen the instability these financial transaction taxes have on markets,” Roberts said in a statement. “A foreign tax is the last thing the U.S. economy needs. We have too many of our own taxes to have to then collect them for the French.”

Roberts’s bill would prohibit the Treasury Secretary from assisting any foreign government with respect to the collection of a tax on securities transactions occurring on a U.S. exchange. It also protects securities transactions in the U.S. from enforcement of any excise taxes imposed by the government of France.

Rep. Price, a Georgia Republican, introduced companion legislation in the House last week, the Protect American Investments Act of 2013, H.R. 2546, prohibiting a U.S.-based company from paying a financial transaction tax imposed by any foreign government. Price introduced similar legislation in the 112th Congress as H.R. 6616.

"Americans should not be forced to pay taxes imposed by foreign nations. Financial transaction taxes deter entrepreneurism, hurt investors and they will hinder America's global competitiveness," Price said in a statement. "I urge my colleagues on both sides of the aisle to stand with the American people and against any efforts that would deter economic growth and vitality."

Fighting words indeed. When are Hollande and Moscovici going to pull off the kick me signs they currently have stuck to their backs.

Anonymous said...

It's already been said here and is being said again. RECIPROCITY IS A DOUBLE-EDGED SWORD. If people have savings on both sides of the ocean then these savings are safe nowhere is not declared to be subject only to the taxation of the country which harbors them. People in the US <who have inherited or earned some money in the past and left it in the US - well, why should they have to have it declared in their coutry of residence - which would probably take much more out of it than the US would ? If reciprocity doesn't go through, the other countries who have (stupidly) signed onto FATCAT won't implement it. So let's not see fairness where "fairness" is only to the detriment of U.S. residents abroad, obliged to declare everything on both sides, with the unfortunate and probable double taxation and/or fines implied.

Anonymous said...

I never thought I'd see the day when Republicans would seem more favorable to us than Democrats. When you realize that U.S. residents in France are well represented in Dems Abroad, France being 10% over the OCDE average for personal taxation and having some of the unfairest tax rates on the face of the earth, you can really wonder whose interests Dems Abroad are defending. Or are they leary about criticizing a measure slipped into the HIRE Act by Obama ?

Victoria FERAUGE said...

@Tim, Great link. Thank you!

@Anonymous, Thanks for pointing our that reciprocity is not necessarily a good thing.

@Anonymous, I have some serious issues with Dems abroad. I joined when the FATCA fight first started and was so disappointed that I unjoined. :-)

Anonymous said...

I cancelled my membership in Democrats Abroad after seeing how they blindly stand by their man, dismissing the concerns of their fellow expats who feel we are being targeted.

Ironically, several D. A. members who threatened renunciation if Pres. Bush was reelected--but didn't--are renouncing now.

Suddenly they have discovered they don't want to be Americans anymore.
But still they refuse to admit--even to themsleves--that it is because of this administration's discrimination against expats.

Victoria FERAUGE said...

@anonymous, I just had this revealing conversation with the younger Frenchling about U.S. political parties. She says:

"The Republicans are nuts and the Democrats are weak."


Sally said...

Comment a little late thanks to a holiday...

I might point out that the IGA that Germany signed explicitly addressed reciprocity: i.e. if the IRS does not have legislation and regulations in place to collect the information that Germany wants, then Germany doesn't have to do start collecting info. If the US does not provide information, then Germany does not need to either. (And vice versa of course.)

So maybe it's not really right that Germany "signed on". Instead Germany realized that Treasury probably didn't really have the authority it said it did and made sure the treaty language (it is a treaty) required real reciprocity. All very diplomatically of course, not ever openly saying they doubt the "Amis" intend to reciprocate.

Rep. Posey certainly does not intend to reciprocate. That would not be in the interest of Florida banks,

Victoria FERAUGE said...

@Sally, Oh yeah and I thought that was a very smart move on the part of the Germans. I predict that the French will do the same.

As for the US political arena, I agree that Posey isn't going for this. I think Rubio is also dead set against it. I bet more will oppose - can you imagine the costs to the US banks?

bubblebustin said...

And back to Quebec, Sally said "Rep. Posey certainly does not intend to reciprocate. That would not be in the interest of Florida banks,"...or I would think in the best interest of many Quebecers who hold revenue generating real estate assets in Florida.

Florida and Quebec's symbiotic relationship has flourished to the point that they have their own Chamber of Commerce:

"The keen interest of Quebecers for Florida is not a recent phenomenon. Since the early ‘60s, many Quebecers were leaving the cold weather for Florida’s sun for several months.

The presence of many “snowbirds” from Quebec in the Sunshine State is a well known reality, but the relationship between Quebec and Florida is far more important than the tourism market. Indeed, several Quebec entrepreneurs consider Florida as a promising business market and a gateway to South America."

Anonymous said...

Will Canada - i.e. the Harper Conservative government ape the US Treasury and IRS and bypass the democratic process in order to enact and implement FATCA IGAs?

See this significant article that just came out:
'What’s FATCA? The IRS peeking into Canadians’ bank accounts'
by Erica Alini on Thursday, October 31, 2013

..."How will the government implement FATCA?

FATCA is so intrusive it often needs to be somehow incorporated into foreign countries’ legislation in order for the banks to be able to comply with it without breaking domestic laws (such as the ones that govern the release of confidential information). It isn’t clear yet how Canada plans to do this.

The “how” here matters, because it might determine whether Parliament gets a say in all this or not. Ottawa might, for example, decide to re-interpret the existing U.S.-Canada tax treaty to allow financial institutions to abide by FATCA provisions. This would shut out lawmakers.

Another way to by-pass the Hill could be to draft a document that looks like an intergovernmental agreement and then call it by another name–say, “memorandum of understanding,” which does not require parliamentary action...."....