Is FATCA Aimed At Resident Americans, Residents Of Other Countries, Or Both? (Part 3 – Notice 2023-11)

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Is FATCA Aimed At Resident Americans, Residents Of Other Countries, Or Both? (Part 3 - Notice 2023-11)

Summary – The Reader’s Digest Version …

Although FATCA was clearly motivated by the behaviour of US citizens resident in the United States, Treasury did NOT interpret the “purpose” as being limited to prevent abuses by “residents of the United States”. Rather Treasury appears to have interpreted the purpose of FATCA (very broadly) to target residents of other countries.

Had Treasury done what it was required by statute to do (consider the purpose of IRC 1471) it might have approached its responsibilities very differently. What began as an attempt to curb the behaviour of US residents became an attack on residents of other countries who happen to be US citizens. The evidence further suggest that the FFIs most heavily impacted by FATCA are located in the high tax jurisdictions where US citizens abroad are most likely to reside. Can it reasonably be concluded that the purpose of IRC 1471 – AKA FATCA – was to attack the residents of other countries and the banks in those countries? If not, then why did Treasury target the whole world, rather than the parts of the world with conditions that facilitated tax evasion for resident Americans? Can anybody seriously make the claim that banks in Canada, the UK, Australia New Zealand and other first world democracies were attractive locations for tax evaders? Yet, this is precisely what Treasury did.

Prologue: Citizenship, Taxation and US Citizenship Taxation

In the world, …

1. A minority of countries confer citizenship automatically based on birth inside the country.

2. There are only two countries that impose worldwide taxation based on and only on citizenship.

The United States is the ONLY country that does both.

The contextual meaning of US citizenship taxation is:

US citizenship taxation is a vehicle to impose US taxation on the non-US source income of people who do NOT live in the United States!

US “citizenship taxation” went largely unnoticed until the introduction of the Obama 2010 FATCA law. FATCA was a “revenue offset provision” to the HIRE Act. It was a series of amendments to the Internal Revenue Code which directly targeted both non-US financial institutions and individual Americans. FATCA became the enforcement tool for US “citizenship taxation” which has caused untold misery for many people living outside the United States, as tax residents of other countries, because and only because they were born in the United States.

FATCA – A vehicle to enhance and enforce the taxation of residents of other countries

US Treasury has adopted a broad interpretation of FATCA which has the effect of facilitating and enforcing – US citizenship taxation – the US taxation of non-US (foreign) source income earned by the residents of other countries.

What was the purpose of FATCA? Who decides what the purpose is/was?

But, it didn’t have to be this way. The purpose of this post is to explain how FATCA could have been interpreted more narrowly. Specifically, how FATCA could have been interpreted in a way that targeted ONLY US residents. The text of the FATCA statute implies that US citizens living outside the United States could have been excluded from the FATCA net. Instead the principal victims of FATCA have been the banks and residents of other countries. It didn’t have to be this way!

Introduction – The Internal Revenue Code – Chapter 4 – 1471* to 1474

It’s helpful to begin with a careful reading of the statute. A reading of the statutory language reveals that Treasury has the authority to exclude classes of financial institutions from active compliance with the burdens of FATCA. This authority is found in 1471(b)(2)(B) as follows:

(2)Financial institutions deemed to meet requirements in certain cases

A foreign financial institution may be treated by the Secretary as meeting the requirements of this subsection if—

(A)such institution—
(i)complies with such procedures as the Secretary may prescribe to ensure that such institution does not maintain United States accounts, and
(ii)meets such other requirements as the Secretary may prescribe with respect to accounts of other foreign financial institutions maintained by such institution, or

(B)such institution is a member of a class of institutions with respect to which the Secretary has determined that the application of this section is not necessary to carry out the purposes of this section.

Neither the meaning of “class of institution” nor “purpose of this section” (1471) is defined in the statute. Therefore, it is reasonable to conclude that the statute is/was intended to give Treasury broad discretion to effectively exclude a wide variety of financial institutions from the direct burdens of FATCA. The statutory predicate for excluding a “class of institution” is that Treasury has determined that including a “a class of institutions” is “not necessary to carry out the purposes of” IRC 1471 AKA FATCA. Absent a declaration of purpose in IRC 1471, it is reasonable to infer that Congress delegated to Treasury the job of determining the purpose of FATCA.

Hence, it is reasonable to begin with the question:

What would Treasury reasonably have understood the purpose of FATCA to be?

The historical context

FATCA was enacted in the context of the revelations (UBS and other) that American residents were hiding money and other financial assets outside the United States. The evidence suggests this was facilitated through both direct account ownership and through nominee entities. One perspective comes from former Swiss Banker Bradley Birkenfeld.

“Some” Of The concerns expressed – a trip down “Memory Lane”

Context 1 – “Change You Can Believe In” – Barack Obama

Significantly in 2007 Senator Barack Obama along with Senators Coleman and Levin introduced the “Stop Haven Abuse Act“. It appears that the Bill was primarily focused on the targeting of specific jurisdictions that were recognized/deemed to be “Tax Havens” (whatever that means). The Bill did NOT target the residents of other countries.

A 2012 post at the Isaac Brock Society includes the following 2009 video of then President Obama explaining the rationale for what was to become FATCA. Precursors to FATCA were called the “Stop Tax Haven Abuse” Act which suggests the concern was motivated largely by Americans parking money in tax havens. (Ironically FATCA caused the rise of the US as tax haven.) FATCA was enacted in the context of the 2008 revelations that resident Americans were using Swiss accounts to hide money from the IRS. Although Americans abroad were “sucked into the vortex” of the problem. They do NOT appear to have been either the motivation for FATCA or the targets of FATCA. Yet, they suffered the consequences.

Context 2 – “The Ivory Tower” – Professor Rueven Avi-Yonah

In his 2019 book “Advanced Introduction To International Tax Law”, Professor Rueven Avi-Yonah describes FATCA as a response to curb the abuse of resident Americans of the tax residency rules. There is not the slightest suggestion that FATCA was for the purpose of enforcing US citizenship taxation on US citizens with tax residency in other countries.

Context 3 – US Treasury Implementing The FATCA IGAs – Manal Corwin

What Treasury has done: Treasury interpreted the purpose of FATCA to include the targeting of residents of other countries

In January of 2023, US tax lawyer Manal Corwin was appointed OECD tax chief. Interestingly this charges her with the responsibility of guiding the worldwide adoption of Pillar 1 and Pillar 2 (something the US has yet to agree to). Commentary about Ms. Corwin includes:

Corwin was the deputy assistant secretary for international affairs at the Treasury Department during the Obama administration, where she was a driving force behind FATCA, a program aimed at Americans skipping taxes by stashing money overseas.

Her work on FATCA during the Obama years suggests that she would/should understand the purpose of FATCA. She described her experience with FATCA and creating the FATCA IGAs during this 2014 lecture. The fact that the goal was to impose the IGAs on every country in the world is strong evidence that Ms. Corwin interpreted (I believe without justification) that the purpose of FATCA was to target the residents of other countries.

What Treasury has NOT done: Treasury has specifically NOT allowed for the exclusion of residents of other countries by allowing a “FATCA Same Country Exemption“

Those with an interest in this topic will find the following 2014 lecture by Manal Corwin interesting.

A not unreasonable inference …

Admittedly none of this is conclusive. But, I have not been able to find a single source that suggests that:

1. The “purpose” of IRC 1471 – AKA FATCA – was to enforce FATCA in a manner that targeted the residents and “tax residents” of other countries (who happened to be U.S. citizens); or

2. That the existence of US citizens living outside the United States was either acknowledged or considered in Treasury’s deliberations in creating the FATCA IGAs.

To put it another way:

Although FATCA was clearly motivated by the behaviour of US citizens resident in the United States, Treasury did NOT interpret the “purpose” as being limited to prevent abuses by “residents of the United States”. Rather Treasury appears to have interpreted the purpose of FATCA (very broadly) to target residents of other countries.

Had Treasury done what it was required by statute to do (consider the purpose of IRC 1471) it might have approached its responsibilities very differently. What began as an attempt to curb the behaviour of US residents became an attack on residents of other countries who happen to be US citizens. The evidence further suggest that the FFIs most heavily impacted by FATCA are located in the high tax jurisdictions where US citizens abroad are most likely to reside. Can it reasonably be concluded that the purpose of IRC 1471 – AKA FATCA – was to attack the residents of other countries and the banks in those countries? If not, then why did Treasury target the whole world, rather than the parts of the world with conditions that facilitated tax evasion for resident Americans? Can anybody seriously make the claim that banks in Canada, the UK, Australia New Zealand and other first world democracies were attractive locations for tax evaders? Yet, this is precisely what Treasury did.

Conclusion

Treasury’s has either failed to consider the purpose of IRC 1471 – AKA FATCA – or has chosen to interpret the purpose of FATCA in an overly broad way to attack the banks and residents of other countries. In 2011 Canadian Finance Minister Jim Flaherty published a September 16, 2011 letter in the Wall Street Journal that appeared to recognize that Treasury has a choice in how to interpret FATCA. The letter also recognized that FATCA was a clear attempt to target Canadian residents for US taxation.

To repeat:

IRC 1471 – AKA FATCA – allows Treasury to exempt members of a “class of institutions” because its inclusion is NOT necessary to meet the purposes of FATCA. It is clear that a purpose of FATCA was to prevent “resident Americans” from avoiding taxation by using offshore bank accounts. It is NOT clear that the purpose of FATCA was to apply FATCA in a way that targeted the residents of other countries. The decision to apply FATCA to the tax residents of other countries was made by Treasury and Treasury alone. The effect has been to extend the US tax base into those other countries.

The Effect of interpreting FATCA as a vehicle to target the tax residents of other countries

The effect of interpreting FATCA as a vehicle to target the tax residents of other countries (people who live outside the United States) was to allow the United States to claim the tax residents of other countries as US tax residents. For example, US Treasury is seriously making the claim that individuals with no connection to the United States (other than a US place of birth) are subject to US worldwide taxation. To put it simply: Treasury’s broad interpretation of the interpretation of FATCA has led to the expansion of the US tax base into other countries. As described in previous posts FATCA has also threatened the banking access of many non-US residents because and only because they were “Born In The USA”.

As the letter of Canadian Finance Minister Flaherty suggests: It didn’t have to be this way!

 

*Appendix – Internal Revenue Code 1471

https://www.law.cornell.edu/uscode/text/26/1471

26 U.S. Code § 1471 – Withholdable payments to foreign financial institutions
U.S. Code

(a)In general
In the case of any withholdable payment to a foreign financial institution which does not meet the requirements of subsection (b), the withholding agent with respect to such payment shall deduct and withhold from such payment a tax equal to 30 percent of the amount of such payment.

(b)Reporting requirements, etc.
(1)In general
The requirements of this subsection are met with respect to any foreign financial institution if an agreement is in effect between such institution and the Secretary under which such institution agrees—
(A)to obtain such information regarding each holder of each account maintained by such institution as is necessary to determine which (if any) of such accounts are United States accounts,
(B)to comply with such verification and due diligence procedures as the Secretary may require with respect to the identification of United States accounts,
(C)in the case of any United States account maintained by such institution, to report on an annual basis the information described in subsection (c) with respect to such account,
(D)to deduct and withhold a tax equal to 30 percent of—
(i)any passthru payment which is made by such institution to a recalcitrant account holder or another foreign financial institution which does not meet the requirements of this subsection, and
(ii)in the case of any passthru payment which is made by such institution to a foreign financial institution which has in effect an election under paragraph (3) with respect to such payment, so much of such payment as is allocable to accounts held by recalcitrant account holders or foreign financial institutions which do not meet the requirements of this subsection,
(E)to comply with requests by the Secretary for additional information with respect to any United States account maintained by such institution, and
(F)in any case in which any foreign law would (but for a waiver described in clause (i)) prevent the reporting of any information referred to in this subsection or subsection (c) with respect to any United States account maintained by such institution—
(i)to attempt to obtain a valid and effective waiver of such law from each holder of such account, and
(ii)if a waiver described in clause (i) is not obtained from each such holder within a reasonable period of time, to close such account.
Any agreement entered into under this subsection may be terminated by the Secretary upon a determination by the Secretary that the foreign financial institution is out of compliance with such agreement.
(2)Financial institutions deemed to meet requirements in certain cases
A foreign financial institution may be treated by the Secretary as meeting the requirements of this subsection if—
(A)such institution—
(i)complies with such procedures as the Secretary may prescribe to ensure that such institution does not maintain United States accounts, and
(ii)meets such other requirements as the Secretary may prescribe with respect to accounts of other foreign financial institutions maintained by such institution, or
(B)such institution is a member of a class of institutions with respect to which the Secretary has determined that the application of this section is not necessary to carry out the purposes of this section.
(3)Election to be withheld upon rather than withhold on payments to recalcitrant account holders and nonparticipating foreign financial institutions
In the case of a foreign financial institution which meets the requirements of this subsection and such other requirements as the Secretary may provide and which elects the application of this paragraph—
(A)the requirements of paragraph (1)(D) shall not apply,
(B)the withholding tax imposed under subsection (a) shall apply with respect to any withholdable payment to such institution to the extent such payment is allocable to accounts held by recalcitrant account holders or foreign financial institutions which do not meet the requirements of this subsection, and
(C)the agreement described in paragraph (1) shall—
(i)require such institution to notify the withholding agent with respect to each such payment of the institution’s election under this paragraph and such other information as may be necessary for the withholding agent to determine the appropriate amount to deduct and withhold from such payment, and
(ii)include a waiver of any right under any treaty of the United States with respect to any amount deducted and withheld pursuant to an election under this paragraph.
To the extent provided by the Secretary, the election under this paragraph may be made with respect to certain classes or types of accounts of the foreign financial institution.

(c)Information required to be reported on United States accounts
(1)In general
The agreement described in subsection (b) shall require the foreign financial institution to report the following with respect to each United States account maintained by such institution:
(A)The name, address, and TIN of each account holder which is a specified United States person and, in the case of any account holder which is a United States owned foreign entity, the name, address, and TIN of each substantial United States owner of such entity.
(B)The account number.
(C)The account balance or value (determined at such time and in such manner as the Secretary may provide).
(D)Except to the extent provided by the Secretary, the gross receipts and gross withdrawals or payments from the account (determined for such period and in such manner as the Secretary may provide).
(2)Election to be subject to same reporting as United States financial institutions
In the case of a foreign financial institution which elects the application of this paragraph—
(A)subparagraphs (C) and (D) of paragraph (1) shall not apply, and
(B)the agreement described in subsection (b) shall require such foreign financial institution to report such information with respect to each United States account maintained by such institution as such institution would be required to report under sections 6041, 6042, 6045, and 6049 if—
(i)such institution were a United States person, and
(ii)each holder of such account which is a specified United States person or United States owned foreign entity were a natural person and citizen of the United States.
An election under this paragraph shall be made at such time, in such manner, and subject to such conditions as the Secretary may provide.
(3)Separate requirements for qualified intermediaries
In the case of a foreign financial institution which is treated as a qualified intermediary by the Secretary for purposes of section 1441 and the regulations issued thereunder, the requirements of this section shall be in addition to any reporting or other requirements imposed by the Secretary for purposes of such treatment.

(d)Definitions
For purposes of this section—
(1)United States account
(A)In general
The term “United States account” means any financial account which is held by one or more specified United States persons or United States owned foreign entities.

(B)Exception for certain accounts held by individuals
Unless the foreign financial institution elects to not have this subparagraph apply, such term shall not include any depository account maintained by such financial institution if—
(i)each holder of such account is a natural person, and
(ii)with respect to each holder of such account, the aggregate value of all depository accounts held (in whole or in part) by such holder and maintained by the same financial institution which maintains such account does not exceed $50,000.
To the extent provided by the Secretary, financial institutions which are members of the same expanded affiliated group shall be treated for purposes of clause (ii) as a single financial institution.

(C)Elimination of duplicative reporting requirements
Such term shall not include any financial account in a foreign financial institution if—
(i)such account is held by another financial institution which meets the requirements of subsection (b), or
(ii)the holder of such account is otherwise subject to information reporting requirements which the Secretary determines would make the reporting required by this section with respect to United States accounts duplicative.
(2)Financial account
Except as otherwise provided by the Secretary, the term “financial account” means, with respect to any financial institution—
(A)any depository account maintained by such financial institution,
(B)any custodial account maintained by such financial institution, and
(C)any equity or debt interest in such financial institution (other than interests which are regularly traded on an established securities market).
Any equity or debt interest which constitutes a financial account under subparagraph (C) with respect to any financial institution shall be treated for purposes of this section as maintained by such financial institution.
(3)United States owned foreign entity
The term “United States owned foreign entity” means any foreign entity which has one or more substantial United States owners.

(4)Foreign financial institution
The term “foreign financial institution” means any financial institution which is a foreign entity. Except as otherwise provided by the Secretary, such term shall not include a financial institution which is organized under the laws of any possession of the United States.

(5)Financial institution
Except as otherwise provided by the Secretary, the term “financial institution” means any entity that—
(A)accepts deposits in the ordinary course of a banking or similar business,
(B)as a substantial portion of its business, holds financial assets for the account of others, or
(C)is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities (as defined in section 475(c)(2) without regard to the last sentence thereof), partnership interests, commodities (as defined in section 475(e)(2)), or any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities.
(6)Recalcitrant account holder
The term “recalcitrant account holder” means any account holder which—
(A)fails to comply with reasonable requests for the information referred to in subsection (b)(1)(A) or (c)(1)(A), or
(B)fails to provide a waiver described in subsection (b)(1)(F) upon request.
(7)Passthru payment
The term “passthru payment” means any withholdable payment or other payment to the extent attributable to a withholdable payment.

(e)Affiliated groups
(1)In general
The requirements of subsections (b) and (c)(1) shall apply—
(A)with respect to United States accounts maintained by the foreign financial institution, and
(B)except as otherwise provided by the Secretary, with respect to United States accounts maintained by each other foreign financial institution (other than any foreign financial institution which meets the requirements of subsection (b)) which is a member of the same expanded affiliated group as such foreign financial institution.
(2)Expanded affiliated group
For purposes of this section, the term “expanded affiliated group” means an affiliated group as defined in section 1504(a), determined—
(A)by substituting “more than 50 percent” for “at least 80 percent” each place it appears, and
(B)without regard to paragraphs (2) and (3) of section 1504(b).
A partnership or any other entity (other than a corporation) shall be treated as a member of an expanded affiliated group if such entity is controlled (within the meaning of section 954(d)(3)) by members of such group (including any entity treated as a member of such group by reason of this sentence).
(f)Exception for certain payments
Subsection (a) shall not apply to any payment to the extent that the beneficial owner of such payment is—
(1)any foreign government, any political subdivision of a foreign government, or any wholly owned agency or instrumentality of any one or more of the foregoing,
(2)any international organization or any wholly owned agency or instrumentality thereof,
(3)any foreign central bank of issue, or
(4)any other class of persons identified by the Secretary for purposes of this subsection as posing a low risk of tax evasion.

Have a question? Contact John Richardson, Citizenship Solutions.

The Reality of U.S. Citizenship Abroad

My name is John Richardson. I am a Toronto based lawyer – member of the Bar of Ontario. This means that, any counselling session you have with me will be governed by the rules of “lawyer client” privilege. This means that:

“What’s said in my office, stays in my office.”

The U.S. imposes complex rules and life restrictions on its citizens wherever they live. These restrictions are becoming more and more difficult for those U.S. citizens who choose to live outside the United States.

FATCA is the mechanism to enforce those “complex rules and life restrictions” on Americans abroad. As a result, many U.S. citizens abroad are renouncing their U.S. citizenship. Although this is very sad. It is also the reality.

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