(This is a continuation of a previous post by John Richardson titled, “Introducing FATCA – What Does It Mean In Your Life?” It gives a great summary of FATCA and leads directly into this article.)
First, About the FATCA legislation …
2012 – The world according to FATCA – For the compliance industry: “The Gift That Just Keeps on Giving.”
Tax professionals, lawyers, commentators and the general public describe FATCA as though it is one law. This is incorrect. FATCA is the sum of a collection of amendments to the Internal Revenue Code that apply to (1) non-U.S. financial institutions and (2) individuals which the United States, in it’s sole discretion defines as U.S. Persons. It is important to note that the overwhelming majority of individuals affected by FATCA are the citizens and residents of other nations, which happen to have had a U.S. place of birth.
In other words, FATCA affects few individuals residing in the United States and few U.S. financial institutions. It mainly imposes U.S. law on non-U.S. financial institutions and the citizens and residents of other nations.
To make matters worse, FATCA (like many extraterritorial laws impacting Americans abroad) was added as a “revenue offset” to the HIRE Act (which is a broader legislative initiative).
For those of you who are technical, anal or tax geeks, you will be interested to know that FATCA is the revenue offset provision to the HIRE ACT. To be specific, FATCA is TITLE V –OFFSET PROVISIONS beginning with S. 501 of the HIRE ACT which you will find here.
The original FATCA legislation had two clear targets.
The first target was U.S. Persons with bank and financial accounts outside the United States (primarily Americans abroad and accidental Americans). The United States has a long history of controlling the foreign activities of U.S. Persons through Title 31 (think FBAR) , Title 26 (think PFIC, CFC, Foreign Trusts, etc.) and restrictions on the issuance of passports.
The second target was the non-U.S. financial institutions that were unfortunate enough to allow U.S. Persons as clients (bank account closures of Americans abroad are a reality). In a manner that is reminiscent of Juan Zarate’s “Treasury’s War”, FATCA has made it very dangerous and expensive for banks to have “U.S. Person” clients. Predictably a number of banks have been denying bank accounts to U.S. citizens. Interestingly the U.S. Ambassador to Switzerland has intervened and asked Swiss banks to accept the risk of having Americans as clients. (For an interesting comment on the Ambassador’s initiative see this comment which includes: “As for those most unfortunate US persons, the only advice I can give them is to do whatever it takes to stop being U.S. persons. Get rid of their US passports or green cards, quick time”.)
Americans abroad are very much affected by the original FATCA legislation. The original FATCA legislation, which is in full force, imposes substantial burdens on Americans abroad. In fact, FATCA was a major step in, “freedom eroding legislative creep”, that puts most aspects of the lives of Americans abroad, under the substantial and jurisdiction control of the Internal Revenue Code of the United States. (If politics is relevant, it might be worth remembering that FATCA is and continues to be an initiative of the Democratic Party. FATCA is opposed by the Republican Party. But, I digress…)
The acronym FATCA is well known. FATCA stands for “Foreign Account Tax Compliance Act”. Although there are many people who feel strongly about FATCA (love it or hate it), there are surprisingly few people who understand what FATCA is or it’s legislative origins. The purpose of this post is to identify the FATCA legislation, its component parts and to recognize that (at least in relation to non-U.S. banks) that the FATCA legislation has been replaced by the FATCA IGAs.
Second, About the FATCA IGAs Chapter 4 of the Internal Revenue (FATAC for non-U.S. banks) Has Been Eclipsed by FATCA IGAs.
The FATCA IGAs – Why pay attention to Congressional laws when you can legislate through executive agreements (of dubious legal validity)?
FATCA discussion is dominated by a discussion of the FATCA IGAs. It’s as though FATCA no longer exists in its original legislative form. For all practical purposes, Internal Revenue Code Sections 1471 – 1474 have been replaced the FATCA IGAs. The non-U.S. banks no longer deal with the FATCA legislation, per se. From their perspective, the FATCA legislation has been replaced by the FATCA IGAs. (Even if FATCA were repealed, the IGAs would remain.)
The world before the IGA? What was the motivation for the FATCA IGAs?
Let’s use Canadian banks as an example. (The principle applies to banks throughout the world.) Canadian banks are in Canada are subject to Canadian law. Makes sense right? Canada is a sovereign nation and has the right to make laws for Canada. But, the United States enacted FATCA and made the Canadian banks subject to U.S. laws. Does this make sense?
What did it mean for Canadian banks to be subject to both U.S. law and Canadian law? Let’s see.
—According to Canadian law:
banks were prohibited from discriminating against people based on place of birth. In fact this kind of discrimination also probably violates Canada’s Charter of Rights which is part of Canada’s constitution. In addition, Canada has privacy laws that may prohibit the sharing sensitive banking information.
—According to the “U.S. FATCA Law”:
(Internal Revenue Code Sections 1471 – 1474), Canadian banks were now REQUIRED to hunt for people with a U.S. place of birth and report them to the IRS. Failure to do so would subject the bank to enormous penalties.
Do you see the problem? Therefore, an ingenious solution to the FATCA dilemma (the problem of being subject to the laws of two countries) was proposed. If the problem was that, to obey the U.S. law, would require violating the Canadian law, then:
Why not just change Canadian law? Simple right?
In fact let’s change Canadian law so that:
- discrimination based on place of birth and violations of privacy were no longer violations of Canadian law; and
- at the same time (for clarity), simply enact the U.S. FATCA law as the law of Canada.
This is exactly what Canada agreed to do by signing the Canada U.S. FATCA IGA. By so doing, Canada agreed to:
- allow the United States to decide which Canadian citizens/residents were to be treated as U.S. citizens (no longer having the protections of pure Canadian citizens); and
- effectively assisting in turning them over to the IRS.
This is exactly why the “Alliance For The Defence Of Canadian Sovereignty” has brought a legal action against the Government of Canada.
The argument advanced by their legal counsel is that:
The Government of Canada violated the Canadian Constitution by entering into the FATCA IGA with the United States. The Canadian banks may like this. The Canadian people do not. A series of posts detailing the FATCA lawsuit against the Government of Canada is here.
A list of U.S. Treasury FATCA IGAs is here.
It is important to note that the creation of FATCA in NO WAY and at NO TIME contemplated the creation of the FATCA IGAs. (The Canada U.S. FATCA IGA is the subject of the Alliance For The Defence of Canadian Sovereignty FATCA lawsuit.)
Third, About the Meadows Bill
Congressman Mark Meadows has recently introduced H.R. 5935 – a bill to Repeal FATCA. The title is:
“H.R.5935 – To repeal the violation of sovereign nations’ laws and privacy matters.”
The title provides strong clues of the motivation for the bill. I received an email asking exactly how the Meadows Bill would “repeal FATCA”. This post is an attempt to answer that particular question. In order to understand how the Meadows Bill would repeal FATCA, one must understand exactly what is the FATCA law that would be repealed. (Note that a repeal of FATCA would leave the FATCA IGAs intact.)
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