Would A Move To Residency-Based Taxation Solve The FATCA Problem For Americans Abroad Created By The FATCA IGAs?

Would A Move To Residency-Based Taxation Solve The FATCA Problem For Americans Abroad Created By The FATCA IGAs?

Purpose Of This Post – The “Readers Digest” Version

FATCA is administered through the FATCA IGAs (international agreements) and not through the U.S. Internal Revenue Code (domestic law of the United States). the FATCA IGAs do NOT include a provision to change the meaning of “U.S. Person”. Rather the meaning of “U.S. Person” is permanently defined as a “U.S. citizen or resident”. There is no provision in the IGA to change this definition. Therefore, the IGAs are written so that they will ALWAYS apply to U.S. citizens regardless of whether the U.S. continues citizenship taxation.

In effect, implementing FATCA through the IGAs has had the practical impact that:

– the FATCA partner country has changed its domestic laws to adopt the provisions of the FATCA IGAs which are intended to impose specific rules on “U.S. Persons” who are defined as “U.S. citizens or residents”

– those domestic laws reference the FATCA IGAs which contain no provision to change or adapt the meaning of “U.S. Person” which means that discrimination against “U.S. citizens” is permanent.

– resulting in a situation where the FATCA partner country is obligated under its own domestic law to target “U.S. citizens” for special treatment!

Note that this is irrelevant to how the United States defines tax residency! A move to residence-based taxation will not change this basic fact.

Bottom line: The United States has forced other countries to permanently discriminate against U.S. citizens. Because the discrimination is enshrined in the FATCA IGAs, the United States has effectively created an extra-territorial jail for its own citizens, forced other countries to lock U.S. citizens up and effectively thrown away the key!!

#YouCantMakeThisUp!

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Introduction And Background On FATCA

FATCA has created many difficulties for Americans abroad. It has caused great anxiety, created an awareness of US citizenship taxation, expanded the US tax base into other countries and resulted in a growing number of Americans renouncing US citizenship. Because the US employs citizenship taxation, FATCA has created a situation where information flows from a country where Americans abroad live (for example Canada) to a country where they do not live (the United States). Any suggestion that FATCA and the CRS (“Common Reporting Standard”) are some how equivalent is wrong. Many of the differences between FATCA and the CRS are explained here. Finally, neither the FATCA IGAs nor FATCA as defined in the Internal Revenue Code (Chapter 4) impose any obligation of reciprocity on the United States. This has had the consequence of (1) the United States not providing information about accounts held by the tax residents of those countries in the United States while (2) demanding information about the accounts held by US citizens in those other countries. In other words: the combination of the US FATCA law coupled with the US refusal to adopt the CRS has supercharged the United States as a significant tax haven! All of this has had a considerable and life altering impact on US citizens who live, work and engage in retirement/financial planning outside the United States.

FATCA And Citizenship Taxation

There has been considerable discussion about how FATCA interacts with US citizenship taxation and what can be done to mitigate the effects of FATCA on the community of Americans abroad. There is an obvious correlation between the enactment of FATCA and renunciations of US citizenship. What is the solution? If the United States severed “citizenship” from its definition of tax residency (abolishing citizenship taxation) would that solve the FATCA problem for Americans abroad?

Severing citizenship from US tax residency – how would FATCA continue to apply to Americans abroad?

In Part 1 I considered the question of whether a move from citizenship taxation to residence based taxation would end the FATCA problems for Americans abroad under the Internal Revenue Code. I concluded that severing citizenship from tax residency would solve the FATCA problem for Americans abroad in the Internal Revenue Code. The problem is that FATCA is NOT administered through the Internal Revenue Code. FATCA is administered through the FATCA IGAs (“Inter-governmental Agreements”). It’s important to understand that implementing FATCA through the FATCA IGAs has meant that:

1. The FATCA IGAs (agreed to by both the United States and the partner country) have replaced the Internal Revenue Code (a US law made by and only by the United States) as the vehicle through which FATCA is implemented; and

2. The partner country has enacted the terms of the FATCA IGA as the domestic law of that country.

To put it simply, the use of the FATCA to implement FATCA has meant that other countries (at the request of the United States) have adopted laws for the express purpose of identifying US citizens, reporting their financial accounts to the IRS and ultimately discriminating against US citizens by not allowing them access to financial services! In 2008, Candidate Obama defined his vision as “Change You Can Believe In”. He neglected to say that the change included the United States forcing other countries to change their domestic laws to punish US citizens who live in their country!

In this post – Part 2 – I consider whether a move to residence taxation would end the FATCA problem for Americans abroad as it is defined in the FATCA IGAs. I conclude that it would NOT end the FATCA nightmare caused by the FATCA IGAs.

Therefore, a move to residence taxation would NOT end the FATCA nightmare for Americans abroad.

This issue is explored in the following four parts:

Part A: A Move To Residence-based Taxation Under The Internal Revenue Code Would End The Application Of FATCA To Americans Abroad Under The Internal Revenue Code
Part B: A Move To Residence-based Taxation Under The Internal Revenue Code Would NOT End The Application Of FATCA To Americans Abroad Under The FATCA IGAs
Part C: The FATCA IGAs Have Been Legislated As Domestic Law In The FATCA Partner Countries
Part D: What Amendments To The IGAs Would Be Required If The U.S. Severed Citizenship From Tax Residency?

Part A: A Move To Residence-based Taxation Under The Internal Revenue Code Would End The Application Of FATCA To Americans Abroad Under The Internal Revenue Code

My conclusion was:

Yes, a move to residence based taxation would end the FATCA problem for Americans abroad under the Internal Revenue Code. This is because “US citizens” would no longer be “specified US persons” under the definitions found in the Internal Revenue Code.

In relevant part the post included:

1. The Existing Statute Which Under The Citizenship Tax Regime: IRC 1471 (the operative FATCA section) refers to IRC 1473 for the definition of “Specified United States Person” which is defined partly in terms of “United States Person”. The point is that by ceasing to be a “United States Person”, one ceases to be a “Specified United States Person” for FATCA purposes.

The sequence of reasoning under the existing Internal Revenue Code is:

1. If “United States Account” then FFI has FATCA reporting obligations (1471(b)).

2. If account held by “specified United States Person” then “United States Account” (1471(d)(1)

3. If individual “United States Person” then “specified United States Person” (1473(3)).

4. If US citizen or resident then “United States Person” (7701(a)(30)).

The key point is that if an individual is a “US Citizen” (or resident) the FFI must treat the account as a “United States Account”. A “United States Account” exists if and only if there is a US citizen or US resident which triggers the sequence of 1. Becoming a “US Person” and 2. Then becoming a “Specified United States Person” 3.Then becoming a “United States Account” and 4. As a “United States Account” subjecting the FFI to reporting obligations.

The statute is written so that “United States Accounts” that are reportable. By changing the definition of “US Person” one changes whether an account is a “United States Account”. If Congress were to amend the definition of “United States Person” to include “All Blue Eyed Individuals” then accounts held by “Blue Eyed Individuals” would become United States accounts and therefore subject to FATCA reporting.

Bottom line: The disclosure obligations of FFIs applies to “United States Accounts”. Accounts held by “United States Persons” are “United States Accounts”. But any change in the definition of “United States Person” will change the characteristics/definitions of “United States Accounts”. Congress controls the meaning of “United States Account” by controlling the definition of “United States Person”.

As described in Part B, the FATCA IGAs do NOT have a provision to change the meaning of “U.S. Person”. Rather the meaning of “U.S. Person” is defined as a “U.S. citizen or resident”. There is no provision in the IGA to change this definition. Therefore, the IGAs are written so that they will ALWAYS apply to U.S. citizens regardless of whether the U.S. continues citizenship taxation.

Part B: A Move To Residence-based Taxation Under The Internal Revenue Code Would NOT End The Application Of FATCA To Americans Abroad Under The FATCA IGAs

The United States has entered into FATCA IGAs with many countries. The purpose of the IGAs was two-fold:

1. To force the FATCA partner jurisdictions to change their domestic law to effectively enact the US FATCA law as the law in their own countries; and

2. By enacting the US FATCA law as the law of their own countries to allow the FFIs to override certain privacy rights and rights to non-discrimination that might have made it difficult for the FFIs to supply the required information under domestic law.

The FATCA IGAs retain the spirit and purpose of FATCA. They are NOT identical to FATCA.

The FATCA IGAs specifically require the FFIs to “hunt” for individuals based on their being US citizens (or residents) regardless of whether the United States employs citizenship taxation, residence taxation or even no taxation! The requirement to seek and identify individuals based on their status of being US citizens is an integral part of the IGAs and can be changed ONLY by amending the IGAs. This can be understand by parsing the “definition section of the IGAs as follows:

cc) The term “U.S. Reportable Account” means a Financial Account maintained by a Reporting Canadian Financial Institution and held by one or more Specified U.S. Persons or by a Non-U.S. Entity with one or more Controlling Persons that is a Specified U.S. Person. Notwithstanding the foregoing, an account shall not be treated as a U.S. Reportable Account if such account is not identified as a U.S. Reportable Account after application of the due diligence procedures in Annex I.

JR Commentary: The account is held by “Specified U.S. Persons”. The next question is: What is a “Specified U.S. Person”?

ff) The term “Specified U.S. Person” means a U.S. Person, other than: …

JR Commentary: The question is what is a “U.S. Person”?

ee) The term “U.S. Person” means
(1) a U.S. citizen or resident individual, …

This subparagraph 1(ee) shall be interpreted in accordance with the U.S. Internal Revenue Code.

JR Commentary: The FATCA IGAs define the the term “U.S. Person” to include a “U.S. Citizen”. The FATCA IGAs clearly state that U.S. citizens are and will always be “U.S. Persons” for the purposes of the FATCA IGA. Therefore, changing the definition of “U.S. Person” under S. 7701(a)(30) of the Internal Revenue Code will NOT change the definition of “U.S. Person” under the FATCA IGAs!

Conclusion: The FATCA IGAs specifically require the FFIs To Hunt For “US Citizens” Whether The US Employs Citizenship Taxation Or Residence Taxation!

For the full text of the US Canada FATCA IGA see:

FATCA-eng

Part C: The FATCA IGAs Have Been Legislated As Domestic Law In The FATCA Partner Countries

The purpose of the IGAs was to force other countries to incorporate the provisions of the FATCA IGAs into the domestic law of the treaty partner country. Significantly, this means that the domestic law of the country specifically requires the banks to take steps to identify “U.S. citizens”. Notably, at least some countries have enacted legislation that simply references the text of the relevant IGA.

Canada

Canada enacted the provisions of the FATCA IGA into Canadian law by creating Part XVIII of the Income Tax Act of Canada which includes.

Identification obligation — financial accounts

265 (1) Every reporting Canadian financial institution shall establish, maintain and document the due diligence procedures set out in subsections (2) and (3).

Marginal note:Due diligence — general

(2) Every reporting Canadian financial institution shall have the following due diligence procedures:

(a) for preexisting individual accounts that are lower value accounts, other than accounts described in paragraph A of section II of Annex I to the agreement, the procedures described in paragraphs B and C of that section, subject to paragraph F of that section;

(b) for preexisting individual accounts that are high value accounts, other than accounts described in paragraph A of section II of Annex I to the agreement, the procedures described in paragraphs D and E of that section, subject to paragraph F of that section;

(c) for new individual accounts, other than accounts described in paragraph A of section III of Annex I to the agreement, the procedures described in paragraph B of section III of Annex I to the agreement;

(d) for preexisting entity accounts, other than accounts described in paragraph A of section IV of Annex I to the agreement, the procedures described in paragraphs D and E of that section; and

(e) for new entity accounts, other than accounts described in paragraph A of section V of Annex I to the agreement, the procedures described in paragraphs B to E of that section.

The UK

uksi_20141506_en

Part D: What Amendments To The IGAs Would Be Required If The U.S. Severed Citizenship From Tax Residency?

I suggest two possibilities:

First, The term “U.S. Person” would need to be redefined in the IGA to include only “resident”.

Second, the definition of “U.S. Person” would be redefined to reference S. 7701(a)(30) of the Internal Revenue Code. Although theoretically possible this option should NOT be encouraged. It would give the United States total control over which individuals in other countries would be subject to the FATCA inquisition.

Appendix – Why Changing The Definition of “US Person” In 7701(a)(3) Of The Internal Revenue Would Not Impact The FATCA IGAs

The definitions section of the Canada US FATCA IGA (see page 7) includes:

ee) The term “U.S. Person” means

(1) a U.S. citizen or resident individual,
(2) a partnership or corporation organized in the United States or under the laws of the United States or any State thereof,
(3) a trust if
(A) a court within the United States would have authority under applicable law to render orders or judgments concerning
substantially all issues regarding administration of the trust, and
(B) one or more U.S. persons have the authority to control all substantial decisions of the trust, or
(4) an estate of a decedent that is a citizen or resident of the United States.

This subparagraph 1(ee) shall be interpreted in accordance with the U.S. Internal Revenue Code.

For the full text of the US Canada FATCA IGA see:

FATCA-eng

Note that FATCA IGA specifies that a “U.S. Person” specifically includes a “U.S. Citizen or resident individual”.

Have a question? Contact John Richardson, Citizenship Taxation.

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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1 comment on “Would A Move To Residency-Based Taxation Solve The FATCA Problem For Americans Abroad Created By The FATCA IGAs?”

  • John is excellent. At first glance, the FATCA _ IGAs violate several several statutes, amendments and case law. First, the Civil Rights Act of 1866 prohibits govt actions that are deemed to have characteristics of ‘badge or incident of slavery.’ Second, CRA 1866 was meant to enforce the Thirteenth Amendment, ‘to pass all laws necessary and proper for abolishing all ‘badges or incidents of slavery’s. Third, the Fifth Amendment was meant to prohibit the govt from treating citizens unfairly. And fourth, the Jones v Mayer decision made clear de jure discrimination was unconstitutional. The victimization can be directly attributed to intentional govt action. The trick is to convince a series of judges the govt has every intention of sustaining slavery conditions for it’s citizens abroad.

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