On Tuesday February 12, 2013 Brian Mulroney spoke at Toronto’s Rotman school of business. It was interesting, engaging and a reminder of why he was so much fun to listen to, from 1984 – 1993 when he was Prime Minister of Canada.
The topic of the discussion was the Canada U.S. Free Trade Agreement. Fascinating history. This took place during the Reagan years. The audience was treated to stories about: Ronald Reagan, James Baker, George Bush, Peter Murphy, Derek Burney, Simon Reisman and others. (How many of these people do you remember?)
What I had not understood (or don’t remember) was why Canadian Tax Reform was a necessary incident of the Free Trade Agreement. To be specific: why the Free Trade Agreement required abolishing the 13.5% manufacturing tax and replace it with the 7% GST (Good and Services Tax).
Mr. Mulroney explained it with reference to the bottle of water in his hand as follows:
If this bottle of water is taxed at 13.5% in Canada, this is a cost of production that is added to the bottle of water before it leaves Canada. How, (since Free Trade allows us to export products to the United States) can that bottle of water compete in the U.S. market, if it is subject to that extra production cost? Obviously it can’t. The conclusion is that Free Trade can only benefit a country if its products are financially attractive.Free Trade provides strong incentives for countries to keep the cost of its exports low.
Mr. Mulroney’s Toronto presentation was delivered approximately three hours before the Obama state of the Union Address. Although, the President did not discuss citizenship-based taxation, there is a parallel between the bottle of water that Canada is trying to sell in a foreign market, and U.S. citizens that (one would hope) the U.S. is hoping will participate in foreign markets.
In the same way that Canada’s 13.5% excise tax increased the cost of Canadian products, the taxation of U.S. citizens abroad, increases the cost of buying the services of a “U.S. person abroad”. Last night President Obama addressed the issue of free trade. He said:
Even as we protect our people, we should remember that today’s world presents not only dangers, but opportunities. To boost American exports, support American jobs, and level the playing field in the growing markets of Asia, we intend to complete negotiations on a Trans-Pacific Partnership. And tonight, I am announcing that we will launch talks on a comprehensive Transatlantic Trade and Investment Partnership with the European Union – because trade that is free and fair across the Atlantic supports millions of good-paying American jobs.
As Roger Conklin and others have noted time after time, citizenship-based taxation hurts the competitiveness of U.S.citizens abroad. Hard to export a product if the cost of the product is too high. Hard to sell products in a country if you can’t go there to do it! Tax policy often does affect the cost of a product. Citizenship-based taxation, and the accompanying “reporting requirements” make U.S. citizens too expensive too deal with. Free Trade resulted in tax reform in Canada. Perhaps citizenship-based taxation should be tied to the issue of free trade. Citizenship-based taxation is certainly a major cause of the U.S. trade deficit. In general, citizenship-based taxation harmful to the U.S. economy.
Perhaps the U.S. should tie the desirability of Free Trade to a consideration of tax reform. It makes no sense to promote Free Trade on the one hand, and make it hard for your country to compete on the other hand.
The most interesting part of Mr. Mulroney’s “trip down memory lane” was his description of what happened during the final evening of the negotiations. It seems that the U.S. side was not willing to allow for an “independent dispute resolution mechanism”. In other words, the U.S. did not want to allow for any disputes to be resolved by third parties (an essential part of the agreement for Canada). Eventually, the U.S. under the influence of James Baker, conceded and the agreement is history. I was shocked to learn of the amount of trade that takes place between Canada and the U.S. If I remember correctly, Mr. Mulroney said that more trade passes between Detroit and Windsor each year, than takes place between the U.S.and Japan. Simply incredible. Also an important reason why the U.S. (if it had any sense) would consider what effect FATCA, and the taxation of Canadian citizens living in Canada, might have on the U.S. Canada trade relationship.
The Canada U.S. Free Trade Agreement eventually expanded to include Mexico and become NAFTA:
The North American Free Trade Agreement.
FATCA and NAFTA
Do the provisions of FATCA violate NAFTA? There are some who think so. This is an argument that needs to be developed.At a minimum FATCA imposes costs and obligations on Canadian banks that do not apply to U.S. banks. Does NAFTA affect tax policy? Do the PFICA provisions and the punitive treatment of Canadian mutual funds violate NAFTA? Those interested in these questions could start here.
Epilogue – When Politics and Policy Collide
The Canada U.S. Free Trade Agreement was not universally popular. Brian Mulroney was elected in 1984 with a massive majority government. By 1988, the Mulroney Conservatives were “fighting for their political lives”. The U.S. Canada Free Trade Agreement was THE defining issue in the 1988 election.
The 1988 Canadian Federal Election: Brian Mulroney vs. John Turner
John Turner:
“When the economic levers go, the political independence is sure to follow!”
“It’s far more important to us, then it is to the United States.”
What about when control of your banks go, the political independence is sure to follow!
The following video captures the 1988 debate. You might find the comments to the this video interesting.
Great post! And I’ll echo a suggestion that Mark Twain made today on another post (location? )- that is that trade now goes far beyond actual physical goods, but includes people, services and intangibles like ideas, knowledge, etc.
I think that might add to this angle – that part of what is being sold or traded abroad resides in the minds and persons of US citizens – you can ship physical goods and have them bought and received abroad by non-US customers, but intangibles – skills, knowledge, ideas, etc. are partly inseparable from the actual person who has mastered and owns them.
@all, here is Mark Twain’s important comment re trade going beyond physical goods now; http://isaacbrocksociety.ca/2013/02/14/free-movement-for-u-s-goods-but-not-for-u-s-citizens/comment-page-1/#comment-186485
It made me stop and think again, because I am more used to thinking of trade in terms of ‘shingles and shakes’, or natural resources – tangibles.
There’s a great book on this negotiation — Decision at Midnight — by Michael Hart. And you are right that it almost fell apart over the US refusal to allow a dispute settlement mechanism (Chapter 11, I think).
But the irony on that is — although it took them 20 years to do it — the US ultimately destroyed Chapter 11. The Americans almost always lost those cases, because the US trade adjudication system is corrupt to the core. The Department of Commerce and its related tribunals were little more than kangaroo courts in which almost any claim (by an American industrial sector) of subsidy against a foreign import was upheld. Canada was sideswiped by this in so many areas — softwood lumber being the worst — that the dispute resolution system was seen as the country’s only salvation.
And it was — until the Americans got tired of perpetually losing the cases. They got totally hammered in the last round of the softwood lumber war, but found a way to win it by refusing to implement the rulings of the dispute resolution panels. Unfortunately, Harper (and his trusty sidekick David Emerson) decided to settle with the Americans “out of court” and left Chapter 11 in tatters. You’ll notice there have been very few cases since that one. Harper snatched defeat from the jaws of victory.
This should be instructive for all of us because I expect Harper and Flaherty to do the same on FATCA and sign an IGA — throwing us all under the bus. They do not operate on principle — only expediency.
And that’s exactly why no FATCA IGA is possible. It is already clear that the model agreement does not mandate full reciprocity. Canada must lead the world in saying NO to FATCA.
If they don’t (and a capitulation is possible) at the very least Canada must negotiate terms that would:
1. Either not allow FATCA to apply to Canadian citizens resident in Canada; and/or
2. Allow all U.S. citizens who are also Canadian citizens to renounce U.S. citizenship free of any tax implications (including the Exit Tax).
Re David Emerson: Remember that he was Liberal stalwart who immediately “crossed the floor” to the Harper Conservatives in 2006. What would you expect of a “floor crosser”?
@USCitizenAbroad
If Harper signs the IGA, I believe it will be because their hand will be forced, just like the way the US did it to Switzerland. If push really did come to shove, I’m feeling pretty sure that the US will not be afraid to use its military to get what it wants out of Ottawa, commanded no doubt, by a president with a Nobel Peace Prize!
What is also important to know is that if the Canadian government decides not to enter into a FATCA IGA with the US, then the banks are going to enter into it themselves. Whether it’s legal for them to do this will obviously have to be settled in court.
Perhaps these link will prove useful.
http://www.scotiabank.com/ca/en/0,,6098,00.html
@USCitizenAbroad and mjh49783 ;
Just posted here http://isaacbrocksociety.ca/2012/12/04/iga-about-to-be-signed-with-switzerland-parliament-and-swiss-sovereign-peoples-approval-still-needed/comment-page-2/#comment-187083 re Globe piece directing to http://www.lexpert.ca/Globe/ article by Bev Cline; ‘US Regs Spur Banking Tax Agreement’
“New regulations under the Foreign Account Tax Compliance Act (FATCA) in the United States have cast a cloud of uncertainty over Canadian financial institutions and their US clients. “….
….”He points out that Canada and the US are in negotiations, with an eye to creating a Model 1 Intergovernmental Agreement (IGA). Under this bilateral agreement, Canadian financial institutions would report the information required under FATCA to the Canadian government (rather than to the IRS), which would then exchange this information with the IRS for similar information that the IRS may be expected to collect about Canadian accounts held in the US.
“….
@ mjh49783 at
February 14, 2013 at 9:14 pm
I followed the Scotiabank link and if you input FATCA into the search box, there are 19 pages that come up, and the FATCA notice “Tax notice for U.S. citizens or permanent residents.
For more information on Foreign Account Tax Compliance Act (FATCA)” has been put at the bottom right corner of those pages.
See: http://www.scotiabank.com/cgi-bin/search/texis.cgi/webinator/search_ca_en?pr=db_can_en
Personally, I intend to avoid doing business with proactive and unapologetic or eager FATCA collaborators. Even if all of the CBA members give in to FATCA, we would still have the choice of WHICH collaborator to do business with.
The credit unions are a far better choice than banks anyway – even if they too eventually are forced to give in, they don’t appear to be the ones lobbying Harper and Flaherty behind the scenes to implement an IGA like the CBA banks are.
Interesting to compare the positions each Canadian bank is taking on their websites.
For example:
See Scotiabank: http://www.scotiabank.com/ca/en/0,,6098,00.html
“What does this mean to Scotiabank and our customers?”
“It is the Bank’s intention to meet our FATCA obligations across our entire global network, where applicable and permitted”
See RBC site: http://www.rbc.com/aboutus/fatca.html
from RBC FATCA FAQs: ‘Does RBC agree with FATCA?’
“We understand the objectives of the legislation and the U.S. government’s concerns about tax evasion. We are moving towards compliance with FATCA and monitoring the overall impact of this legislation and IGAs, particularly with respect to minimizing its impact on client service, privacy and costs. We are committed to earning the right to be our clients’ first choice.”
“I am a U.S. person. What does FATCA mean for me?”
“If you are a U.S. person, you may be asked to complete IRS Form W-9 (Request for Taxpayer Identification Number and Certification) which will be kept on file at RBC. Information about you and your account will be reported to the IRS or your local tax authority on an annual basis. If you have complied with all of your U.S. reporting obligations, reporting by RBC should not result in any increased U.S. tax liability, but you should discuss your personal tax situation with your tax advisor.
If you do not complete IRS Form W-9, depending on which country your account is in, a tax of 30% may be withheld on U.S.-source payments (and potentially non-U.S. source payments in future) that you receive – or details about you and your account may be reported to the local tax authority. Also, RBC may refuse to open an account or may be required to close existing accounts….”
TD Bank:
http://www.tdcanadatrust.com/search/index.jsp?query=fatca&language=en&site=td_canadatrust_en
http://www.tdcanadatrust.com/customer-service/overview/fatca.jsp
CIBC – site references to FATCA – results not readily found
BMO – site references to FATCA – results not readily found
@Us Citizen,
Thanks for this interesting eye-opener on the past. Did not at all realize that GST was necessary to implement the Free Trade Agreement. Though I do remember it didn’t exist when I first came in ’82. Never liked Mulroney.
@mjh49783
I recently wondered what would happen to the banks who have already signed on, if the IGA goes thru. But clearly, they will be breaking the privacy laws and would likely be sued. I have been re-watching the video from the Fact Finding Forum in Toronto on Dec 15th and I still wish Canada would follow Allison Christians’ advice (located in Part 3-Abby Deshman’s section-during a discussion)
“Reject the IGA. Do not sign an IGA. Do not sign, if you’re a financial institution, do not sign a PFFI. And, wait for the US to actually withhold and then start suing.”
I am still amazed that the main tellers at my branch of BNS do not know what FATCA is. And I discussed it with a higher-level bank officer there well over a year ago.
@badger
Grrr how dare they call it a “bilateral” agreement. What garbage. I was irritated by this earlier today when reading on the Treas page about the agreement just signed with Switzerland.
And from the RBC notes, am fascinated by this little gem:
“If you do not complete IRS Form W-9, depending on which country your account is in, a tax of 30% may be withheld on U.S.-source payments (and POTENTIALLY, non-U.S. source payments IN FUTURE). What is this, the US will withhold on NON US source pmts???????
@Badger
That notice from the TD Bank is very recent – they had nothing online about FATCA even a couple of weeks ago.
This is a telling quote:
“While much uncertainty still exists regarding the obligations that Canadian Banks will face under FATCA, TD is committed to complying with all applicable laws and regulations in the jurisdictions where TD operates.”
No doubt this refers as much to TD’s 1300 U.S. branches as it does its 1100 Canadian branches. What a delicious irony if FATCA reciprocity does come to pass and all those American branches have to become compliant as well.
@nobledreamer
Well, if the banks end up doing the IGA, and they end up in some class action suit, they may as well add my name to the list as well. Otherwise, I could consider legal aid if I end up needing to go down that road.
Ultimately, my best protection all around will be to stop being a US person, which is what I intend to do anyway, and then make sure I go to the bank with a CLN in hand.
@mjh,
Yep, the best protection is to get out and as is often said, “while the going is good.” ;-P