March 20 Roundup: News and Commentary on the Approaching FATCA ‘Train Wreck’

Treasury (Inadvertently) Admits FATCA is a ‘Fishing Expedition’!
Lack of ‘Reciprocity’ Fatally Undermines Both FATCA and OECD ‘Information Exchange’
Rob Portman: Big Pickup in Senate for Repealing FATCA.
Canadians Fight Back

This bulletin rounds up some important news and commentary from around the world on the looming July 1, 2014, “train wreck” of the “Foreign Account Tax Compliance Act” (FATCA). The headlines:

  1. Even Tax Compliance Experts Decry Looming “Train Wreck,” Impossibility of Meeting IRS’s Requirements.
  2. Treasury (Inadvertently) Admits FATCA is a “Fishing Expedition.”
  3. Lack of “Reciprocity” Fatally Undermines Both FATCA and OECD “Information Exchange.”
  4. Rob Portman (Ohio): Big Pickup in Senate for Repealing FATCA.
  5. Canadians Fight Back.

More information on each of the headlines above is provided below:

1. Even Tax Compliance Experts Decry Looming “Train Wreck,” Impossibility of Meeting IRS’s Requirements – But Treasury Remains Determined to Press Ahead. has criticized the fact that financial institutions worldwide have pumped hundreds of millions, if not billions, of dollars into complying with FATCA but have declined to direct a comparatively tiny fraction to help get rid of “the worst law most Americans have never heard of.” But now it seems that even compliance industry practitioners, who have every incentive to wish FATCA a long and healthy run, are beginning to rip their hair out over the sheer dysfunctionalism of a law called “sheer idiocy” by one of America’s top tax lawyers, Herman Bouma.

“FATCA: Get Ready for the ‘Train Wreck’,” by David M. Quinones. Excerpt:

With the first hard deadlines for the Foreign Account Tax Compliance Act coming this summer, one former prosecutor has a clear message: “It is going to be a train wreck.”

Mark E. Matthews, a member of Caplin & Drysdale’s Tax Controversies and Tax Litigation practices who was an IRS Deputy Commissioner from 2003 to 2006 and a Department of Justice prosecutor, lobbed criticism at the wide-ranging set of laws Tuesday morning during the 19th Annual International AML & Financial Crime Conference in Hollywood, FL.

“I don’t know how you enact a statute that will have billions of dollars in global weight without a single public hearing,” he said. This summer we’re going to see some bad results.” [ . . . ]

“Again, I point to the Congress’ pushing so fast, so aggressive, in a unilateral way. Treasury is going to lose money on this legislation,” Matthews said.

FATCA Fatigue Setting In, Expert Warns,” by Jessica Meek. Excerpt:

Banks getting tired of incomplete information and spiralling costs of Fatca

Financial institutions are tired of dealing with the Foreign Account Tax Compliance Act (Fatca) amid continued confusion over what needs to be done, one expert warns. Jon Watts, director and head of banking and securities, Fatca at Deloitte New York, told delegates at an Inside Reference Data conference in New York this week that even the largest financial institutions are fed up with Fatca.

"Some of the biggest major financial institutions have had major programmes structured around Fatca going on for three or four years now. Fatca as a programme-wide concern has been going on for quite some time and I deal with a lot of the bigger banks, brokerages, securities firms and asset-servicing firms and really there is almost a point of fatigue. Everybody's been working hard at this for a long time. There has been a lot of confusion, a lot of waiting around for guidance and forms and a lot of changing of dates; and all along this journey a lot of money has been spent."

He pointed out that many larger institutions have now spent upwards of $100 million on their Fatca compliance programmes getting ready for the July 1 deadline and are likely to spend more.

"There are still a lot of requirements to come. This has been expensive, it has been time consuming, and it has taken a lot of time, attention and resources from tax, operations, compliance and risk just to focus on getting to the point we're at today."

NOTE TO FINANCIAL INSTITUTIONS from Save yourselves a bundle! Invest in the repeal effort and hasten FATCA’s well-deserved demise before it costs you even more.

2. Treasury (Inadvertently) Admits FATCA is a “Fishing Expedition”

Sometimes the most interesting information slips out where least expected.

On February 26, 2014, the Senate Committee on Foreign Relations held a hearing on tax treaties with several countries. The hearing and the treaties dealt incidentally with FATCA, but among the documents distributed by the Treasury Department was a “technical explanation” of a double taxation Convention between the United States and Hungary. One provision of that Convention (Article 26), a standard in treaties of this sort, provides for the “obligation” of each party “to obtain and provide information to the other Contracting State,” according to the “technical explanation” (page 93). Moreover, according to Treasury, the language of Article 26 – “which incorporates the standard of the OECD model” – allows the IRS to examine information that “may be relevant” to the provisions of the Convention or U.S. domestic law. Treasury’s explanation of such requests includes this gem:

However, the language “may be” would not support a request in which a Contracting State simply asked for information regarding all bank accounts maintained by the residents of that Contracting State in the other Contracting State. Thus, the language of paragraph 1 is intended to provide for exchange of information in tax matters to the widest extent possible, while clarifying that Contracting States are not at liberty to engage in “fishing expeditions” or otherwise request information that is unlikely to be relevant to the tax affairs of a given taxpayer. [emphasis added]

Really, now? So, if asking for “for information regarding all bank accounts” from just one country would – as Treasury itself acknowledges – constitute a “fishing expedition,” what can we call FATCA’s demand (backed up with the threat of economic sanctions) for “information regarding all bank accounts” (and insurance equity, pension value, etc.) from every financial institution in every country in the world, whether or not it is “relevant to the tax affairs of a given taxpayer”?

3. Lack of ‘Reciprocity’ Fatally Undermines Both FATCA and OECD ‘Information Exchange’

As noted earlier, the linchpin of the U.S. Treasury Department’s efforts to rescue FATCA from its fatal flaws has been to sign statutorily unauthorized so-called “intergovernmental agreements” (IGAs) with foreign governments, promising “reciprocal” reporting from the United States. The same promise has been made with respect to multilateral “automatic exchange of information” under an incipient scheme of the Organisation for Economic Co-operation and Development (OECD).

The trouble is, Treasury’s promises of reciprocity simply will not be honored. FATCA is strictly a one-way street, socking America’s trade partners with a hefty cost to their consumers, diminution of their sovereignty, and a massive information funnel to the IRS (and to U.S. intelligence agencies). As Alex Newman writes in The New American (“Obama Bypasses Congress to Foist ‘Imperialist’ Tax Plot on World”; see also: “Obama Tax Scheme Could Destabilize Banks, Spark Economic Crisis”):

Of course, there is no mention of “inter-governmental agreements” (IGAs) or allowing so-called “reciprocity” in the actual statute that contains FATCA. There is also no authority to order domestic banks to collect and share information on all foreign account holders on behalf of foreign governments. The New American offered the Treasury Department multiple opportunities to explain what purported authority — statutory, constitutional, or regulatory — it believes it has to compel U.S. financial institutions to collect and share the information. TNA also asked about the supposed authority for IGAs.

No real answer was ever provided. Essentially, though, the Treasury pointed to existing tax treaties ratified by the Senate that the U.S. government has signed with other governments as its justification. However, those treaties generally deal with specific, individual requests made by authorities in other jurisdictions; not the wholesale NSA-style vacuuming up and transfer of all private financial data without so much as probable cause, a warrant, or even suspicion of wrongdoing, as envisioned in the IGAs and other FATCA-related schemes. None of the blanket domestic authority is contained in those treaties, either.

Lawmakers have been trying unsuccessfully to get answers about it all. “I further note that the IGAs that are being entered into are not authorized, or even mentioned, in FACTA,” explained Rep. Bill Posey (R-Fla.) in a 2013 letter to Treasury boss Jack Lew. “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.”

Separately, the congressman pointed out, other than in its Analytical Perspectives document, the administration had not even asked Congress for authority to implement the controversial agreements with foreign governments. “If such authority exists, please provide a citation to the specific relevant statute,” Posey said, adding that FATCA should be either repealed or drastically amended while calling for a moratorium on the scheme and the negotiation of IGAs.

According to a spokesperson for the congressman, the Treasury has not replied to the letter nor offered any hint about where its purported authority to proceed might come from. “We dispute whether the Treasury has the authority to implement these regulations and agreements; and they aren’t treaties because the Senate does not ratify them,” Posey spokesman George Cecala told The New American.

“We think that these agreements are treaties and need to be submitted to the Senate for ratification,” he continued. “We do not believe FATCA gives them the authority to do this — FATCA does not state that. America’s elected representatives need to make these major changes. This is shifting decision making to unelected bureaucracies, and such important decisions should be made by the people’s elected representatives.”

It is all part of a broader trend, too. “The administration has established a track record of bypassing Congress and issuing regulations when they want to,” Cecala said, citing endless executive re-writes of ObamaCare and other examples of the president either defying or ignoring lawmakers. “The fact that they are now asking Congress for this authority suggests they don’t have it, and we don’t think they do.”

As to the wisdom of the dragnet-style approach to gathering and sharing sensitive information on everyone, Cecala explained that the U.S. government already has tools to locate criminals. “If the Treasury Department suspects criminal activity, they can send an enforcement order,” he said. “What they are asking for is blanket authority to collect all data, centralize it, and then share it with other governments.”

Sen. Rand Paul (R-Ky.), who introduced legislation aimed at reining in the scheme, has also spoken out about the administration’s abuses. “FATCA's harmful impacts cover the spectrum,” he said, blasting “hundreds of billions” in compliance costs to the U.S. economy alone. “It is a violation of Americans' constitutional protections, oversteps the limits of Executive power, disregards the mutual respect of sovereignty among nations and drains money from the federal treasury under the guise of replenishing it, and discourages overseas investment in the United States.”

Lawmakers on both sides of the aisle have also lashed out against the IRS “regulation” mandating the reporting of foreign-owned accounts, saying, among other major concerns, that it “flagrantly violates the intent of Congress.” In a letter to Obama asking him to “permanently withdraw” the scheme, signed by every member of the Florida delegation to the U.S. House of Representatives including Democratic National Committee Chair Debbie Wasserman-Schultz, the lawmakers said: “We feel the IRS is abusing its regulatory authority and doing so in a manner that is contrary to congressional intent.”

Tax law experts have also questioned the administration’s purported authority to proceed as it has — and warned of serious implications. Allison Christians, the H. Heward Stikeman Chair in Tax Law with McGill University’s Faculty of Law, noted in a 2013 paper that the FATCA statute “made no mention of any internationally-agreed alternative to its enforcement, and Congress has made no authorization since then for the president to override FATCA’s statutory provisions by international agreement.”

However, because of “difficulties” in foisting FATCA on the world, the Treasury began creating IGAs, which purport to promise domestic action that may not be possible. Professor Christians concluded that the “legal pedigree” of the agreements “is tenuous as a constitutional matter” and they “violate the rule of law by ignoring established procedural requirements for binding the U.S. internationally.” The consequences could be serious on multiple fronts.

“This undermines the legal system in the U.S. domestically as well as hurting U.S. credibility in the international community,” the tax-law expert said. “Instead of jeopardizing the important and complex project of global tax compliance with such a legally dubious procedure, the obvious and straightforward approach to making FATCA work internationally is to follow the normal treaty-making procedure, time-tested through 100 years of U.S. tax treaty-making history.”

Right now, the issue of IRS mandates forcing U.S. banks to report accounts is in federal appeals court, where industry associations from Florida and Texas are suing to stop the radical decree that has been lambasted by top Republicans and Democrats in Congress. Questions about the legality of the IGA pseudo-treaties and the ability of the Treasury to deliver on its “commitments” to foreign governments, meanwhile, are growing louder every day as awareness spreads.

The fate of requests to Congress from the administration for even broader authority to gather and share more sensitive information remains uncertain. “As [Deputy Assistant Secretary for International Tax Policy] Robert Stack of Treasury confirmed to me in person, regulations to impose domestic reciprocal reporting cannot be promulgated without new statutory authority,” former U.S. diplomat and Senate staffer James Jatras, an attorney who runs, told The New American. “Chances of getting that through the House are virtually nil — even more so if the Senate flips.”

The domestic information gathering and international sharing component of FATCA — referred to by some analysts as DATCA — represents the “Achilles heel” of the whole ploy, Jatras said. “FATCA and the OECD scheme could end up like the League of Nations: a dead letter because the United States, which got the ball rolling, opted out,” he added.

The same problem dooms the OECD scheme, as observed by Andrew Quinlan in Forbes (“The Foreign Account Tax Compliance Act Will Fail To Curb Tax Evasion”):

Domestic financial institutions are a much stronger constituency than FATCA’s original targets, and lawmakers are unlikely to jump at the idea of adding yet more costly burdens to the American economy. It is unclear how long foreign governments will tolerate a lack of reciprocity from the US as they work on behalf of the IRS.

The new OECD standard for automatic transmission of taxpayer information will face similar obstacles. Treaties and other agreements ought in theory to be mutually beneficial, but the OECD rules provide little advantage for low-tax nations that attract capital to their economies by choosing not to double tax savings and investment.

4. Rob Portman (Ohio): Big Pickup in Senate for Repealing FATCA.

As announced by Republicans Overseas:

Sen. Rob Portman (OH) on behalf of the National Republican Senatorial Committee (NRSC) made it clear to Mr. Michael G. DeSembre, President of Republicans Overseas that NRSC wants to repeal FATCA and is happy that repealing FATCA is part of the Republican National Committee's platform. Thank you Senator!

The Portman letter – which builds upon the Republican National Committee’s adoption of a resolution last month favoring FATCA repeal – was immediately hailed by the Credit Union National Association (CUNA).

5. Canadians Fight Back.

Canada is a “must have” country for FATCA’s survival. As our biggest trading partner, tightly integrated into the U.S. financial system, there is no way that Treasury could undertake a sanctions war against Canadian institutions without tanking those of the United States as well. Thus, the threat of 30% withholding for “recalcitrant” Canadian firms lacks credibility.

Still, the government of Prime Minister Stephen Harper (and recently departed Finance Minister Jim Flaherty), in collusion with some elements of the Canadian finance industry (led by the Canadian Bankers Association) blinked first, selling out Canadian citizens and consumers, along with their country’s sovereignty, by signing an IGA last month. (See Jatras, “Enforce Canadian Law, Not FATCA,” Toronto Star, March 3-4.) All indications are now that the “Conservative” (sic) Harper government will bury the enabling legislation in a massive bill, will not let it be debated or voted on separately in Parliament, or allow dissenting Tories to vote their consciences. This does not sound like the behavior of a government that is comfortable defending its policy in public – of which the Opposition New Democrats, Liberals, and Greens should take full advantage.

Canadians are not taking this lying down, however. Spearheaded by the heroic Isaac Brock Society and Maple Sandbox, a legal challenge to Ottawa’s FATCA sellout is underway, centering on abrogation of Canadians’ rights under the Charter of Rights and Freedoms. The British Columbia Freedom of Information and Privacy Association has also weighed in.

In addition, Professors Allison Christians of McGill University and Arthur Cockfield of Queen’s University have written the definitive, scholarly demolition of FATCA and the IGA to enforce it in their submission the Finance Department. Among their conclusions:

The proposed Implementation Act and the IGA do not enhance the reciprocal tax information exchange between the United States and Canada, nor do they create a workable regime for Canada to enhance its international tax enforcement efforts going forward. Instead, the Implementation Act and the IGA raise a number of serious issues ranging from likely Charter violations to violations of international law.

We conclude that the IGA and the Implementation Act will:

• unduly harm the privacy rights and interests of all Canadians;
• unduly raise compliance costs for all Canadian financial institutions and Canadian taxpayers;
• unduly raise legal exposure for Canadian financial institutions, due to ongoing potential liability for mistakenly-transferred personal financial information;
• provide potentially sensitive commercial information held by Canadian firms to the United States that, if improperly revealed, could harm firm competitiveness;
• interfere with cross-border mobility of Canadian workers to the United States as these ‘green card holders’ will be subject to costly tax compliance measures after they return to Canada;
• impede Canada’s efforts to enforce its own tax laws and to cooperate on a global scale to promote the integrity of the income taxation system; and
• violate the spirit and potentially the letter of a number of Canadian laws including the Personal Information Protection and Electronic Document Act, the Privacy Act, the Access to Banking Services Regulations, NAFTA, and others.

While the laws cited are specific to Canada, the impacts are common, to one degree or another, to any country that signs an IGA to enforce FATCA.


James George Jatras


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