Recently I posted Arrow’s article at the Vancouver Sun concerning Peter Hogg’s letter to Finance Canada on LinkedIn. I just read a very interesting response from Jeff Mukadi, a Toronto tax law and compliance professional. (All emphases are mine).
He has published an article, ““FATCA Getting Rid of U.S. Clients Will Not Get You Off the Grid,” Journal of International Taxation, November 2012. He argues that foreign citizens affected by FATCA should bring their governments to court through class action suits to invalidate FATCA/IGA’s for unconstitutionality. He discussed some excerpts of the article; and makes a very strong case for the absence of reciprocity and true quid pro quo. “Reciprocity is not simply an exchange of one thing for anything, but one right for the same right and one obligation for the same obligation.” As we all know, this is simply not what the US is “offering.”
What is most interesting is his suggestion that FATCA cannot be implemented in Canada not only because of our privacy laws but more importantly, because of the Foreign Extraterritorial Measures Act (R.S.C., 1985, c.F-29). This Act was designed specifically to “deny effect to extraterritorial Acts of foreign governments violating Canadian sovereignty.” The US National Defense Authorization Act (“Cuban Assets Control Regulations,” July 8, 1963) was such a measure and prompted the issue of the Foreign Extraterritorial Measures Act (United States) Order of October 9, 1992 (SOR-92-584). By authority of the Canadian Attorney General jointly with the Secretary of State for External Affairs, SOR-92-584 prohibited a Canadian corporation, or director, officer, manager, or employee in a position of authority of a Canadian corporation, from complying with this U.S. law. So in addition to not joining the “Coalition of the Willing” in 2003, we have another instance of Canada standing up to the US. Mr. Mukadi emphasizes the fact that since FATCA is even more agressive than the US National Defense Authorization Act, “it is certain that SOR-92-584 will always be invoked as a precedent against any attempt to implement or enforce FATCA in Canada.” Since governments are not taking care of their primary duty, that of defending their sovereignty and protecting citizens, it might be easier to fight FATCA in the courts. And until this happens, we cannot know if we can be safe from FATCA.
He indicated he would send me the article so I hope I can pass on more. I also contacted Allison Christians to see if we could get her take on it. In any regard, this sounds like another specific “weapon” we can use in this fight and I believe we should let our government know we are aware of it.
UPDATE: Mr. Mukadi has kindly provided a copy of his article: FATCA JOIT Article November 2012 – Final Galleys Mukadi FATCA
this is the Canadian government site for the extraterritorial measures act
I wish Jeff would learn to take a breath and a paragraph break in his writing. 🙂 He would be more effective if he would. He does make a very good argument!
Here, in readable form…
Without being a constitutionalist, I believe that any act by any government that would put the country’s sovereignty at risk should be declared unconstitutional., All countries signing FATCA IGAs are basically abdicating a portion of their sovereignty to the U.S. because they are agreeing to enforce another country’s public law without getting the same thing in return.
If you have read my article “FATCA Getting Rid of U.S. Clients Will Not Get You Off the Grid” in the November 2012 of the Journal of International Taxation at p.36, you would have found my argument and suggestion that in face of their governments’ abdication to the U.S., foreign citizens affected by FATCA should take their governments to courts (through class actions) and get invalidation of FATCA IGAs for unconstitutionality.
Below are some excerpts of it. If you need the full article I could email it to you.
. . .Reciprocity is the basis of bi-lateralism in treaty law and in international law or relations. It does not exist without implied equality. Paraphrasing Michael Byers, reciprocity involves the idea that bilateral relationships between two “formally” equal partners are not unidirectional, but necessarily suggest some element of quid pro quo. Specifically “in the context of general customary international law any state claiming a right under that law has to accord all other states the same right.”
Reciprocity is not simply an exchange of one thing for anything, but one right for the same right and one obligation for the same obligation.
In the context of the G5 FATCA model IGA, or any other agreement, to ascertain whether FATCA country partners are on a level playing field with the United States, it must be determined “what quid is in exchange for what quo.”
Under the G5 FATCA model IGA, country partners of the United States agree and commit themselves to implementing FATCA’s reporting regime for their financial institutions, collecting information on U.S. accounts, and reporting it to the IRS in exchange for “information regarding certain [FATCA Partner] accounts maintained by U.S. financial institutions” If this apparently simple exchange is dissected, its real meaning can be understood.
First, FATCA, a U.S. law, introduces a reporting regime, and establishes specific requirements, for financial institutions of country partners. Like any law, it would not be effective without a penalty, and it provides one for the country partner’s non compliant financial institutions. The country partner commits to enforce FATCA on its territory, which means that it will compel its financial institutions to comply with all requirements under FATCA or incur the FATCA penalty.
In exchange, the country partner gets information related to its residents’ accounts from the U.S. government that is “maintained” by U.S. financial institutions (USFIs). It does not matter how this information is collected, when it is collected, or whether it is collected at all by USFIs. .. . . . . .
As noted, at the time of this writing, Canada, the G-7 country closest to the United States, and economically probably the most dependent on the U.S. market, has not yet joined the FATCA country partners. Given the number of U.S. citizens living in Canada, having dual Canadian citizenship, or simply having close ties, and the number of Canadians having similar connections, the amount of investment that Canadians have in the United States is naturally very high. Because of this, Canadians investing in the United States rely considerably on U.S.-sourced FDAP income and gross receipts from sales of various U.S. properties, including securities as the main source of their investment income.
The Canadian government, therefore, must not make a wrong move with respect to FATCA. Indeed, Canada is the country most exposed to FATCA’s negative effects because of its strong economic and financial ties with the U.S.
One thing that is certain is that with the same goals, including possible assistance in tax collection, FATCA could violate the very convention that should normally constitute the legal basis for a U.S.-Canada agreement for the implementation of FATCA in Canada, but also, in its current form, aggressively providing for an extraterritorial regime, FATCA can be denied implementation or enforcement in Canada.
This is not simply due to possible clashes with the Canadian privacy laws, but because of Canada’s Foreign Extraterritorial Measures Act (R.S.C.,1985, c.F-29), specifically conceived and enacted to deny effect to extraterritorial Acts of foreign governments violating Canadian sovereignty.
In this regard, there is a precedent in which an Order under the authority of this Canadian Act was taken specifically against section 1706(a)(1) of the National Defense Authorization Act for Fiscal Year 1993, as passed by the U.S. Congress on October 5, 1992, which affects section 515.559 of Title 31, Part 515, of the U.S. Code of Federal Regulations (“Cuban Assets Control Regulations,” July 8, 1963).
The Foreign Extraterritorial Measures Act (United States) Order of October 9, 1992 (SOR-92-584) was issued by the Canadian Attorney General jointly with the Secretary of State for External Affairs to prohibit a Canadian corporation, or director, officer, manager, or employee in a position of authority of a Canadian corporation, from complying with this U.S. law.
Since FATCA is even more aggressive in the sense that it not only provides for a regime specifically designed for FFIs, but also obliges them and in some cases requires foreign tax administrations to perform administrative duties on behalf of the IRS, it is certain that SOR-92-584 will always be invoked as a precedent against any attempt to implement or enforce FATCA in Canada.
Many other countries including Australia, the U.K., the Netherlands, Sweden, Japan, and France have similar laws that could be relied on to block implementation of U.S. Internal Revenue Code Chapter 4 in their respective countries. Although in many cases, like French Law No 80-538 of July 1980, these blocking statutes are subject to international agreement, if it can be proved in court that the agreement is per se unconstitutional because it obviously infringes the country’s sovereignty where it compels the local administration to implement and enforce a foreign public law without equal reciprocity.
FATCA could be invalidated in many countries notwithstanding FATCA IGAs.
It may be easier to fight extraterritorial implementation and enforcement of FATCA in courts because governments are abandoning their primary responsibility of defending their sovereignty and protecting the interest of their citizens in the face of an invasive foreign tax law. Until they actually take the government to court, residents and companies of foreign countries affected by FATCA can never know if they can be protected against it. . . . .
@Patricia, Thanks, I need to become familiar with this.
@Just_Me, I know what you mean however, I’m not sure it’s ok to post his entire comment without his knowledge/permission, which is why I didn’t.
Very interesting. “…if it can be proved in court that the agreement is per se unconstitutional because it obviously infringes the country’s sovereignty where it compels the local administration to implement and enforce a foreign public law without equal reciprocity”. Is that why the IRS had jumped so quickly on the reciprocity bandwagon? Thanks, nobledreamer.
Switzerland has a criminal law, Art. 271, which prohibits acting for a foreign state (see link to Swiss-American Chamber of Commerce website with an English translation of this law). The US-Swiss FATCA IGA, however, contains under article 4 a sentence that specifically allows the banks to sign a FATCA FFI contract with the US IRS which would otherwise be a criminal act under Swiss criminal code Art. 27. Below is the relevant excerpt from the US-Swiss FATCA IGA:
Swiss Financial Institutions that, pursuant to applicable U.S. Treasury Regulations, enter into an FFI Agreement with the IRS or register with the IRS as deemed-compliant FFIs, are authorized and therefore not liable to any penalty according to Article 271 of the Swiss Criminal Code FATCA IGA.”
Swiss Criminal Code Art. 271:
As an opinion, the US negotiators will attempt to put a similar paragraph in an IGA with Canada to override Canadian law.
@noble, just me, I think it should be ok to post it–since he put it up himself; unless he complains.
This is an excellent post. Thanks.
Agree with Petros — great and interesting find and post. Thanks, nobledreamer and Just Me.
One thing that may not be clear from the article. This is not a law that is currently in force. The law authorises the Attorney General to issue orders regarding the implementation of foreign law in Canada.
This has only happened once, when the US passed laws that prohibited Canadian subsidiaries of US corporations from doing business in Cuba. The order required that the Attorney General be informed of any and all orders or directives from the US or US corporation to a Canadian corporation or Canadian director. The order also prohibited the corporation or director from complying with the order.
@Just a Canadian
The law is in force, but it does not automatically apply to FATCA or any other foreign law. It enables the government to block Canadians and Canadian companies from complying with a foreign law. It would require an order-in-council (i.e. regulation) specific to FATCA to prevent Canadian institutions from complying with FATCA.
You are right for Canada because it has not signed a FATCA IGA yet and that is why I made a reservation about Canada as being the country most exposed to FATCA adverse consequences and not having an IGA signed.
I talked about citizens of FATCA IGA signing countries and raised the issue that if Canada took the same road and happened to sign a FATCA IGA, for the FATCA as is, Canadians could rely on the Foreign Extraterritorial Measures Act to oppose its implementation.
In fact all FATCA IGAs do is to make Chapter 4 of the U.S. Internal Revenue Code applicable and enforceable in foreign jurisdictions either indirectly through domestic tax administrations, which become sort of U.S. foreign tax agencies, or directly when dealing with FFIs without going through domestic tax administrations.
The Foreign Extraterritorial Measures Act even in its most current version is expressis verbis about and against the kind of Act that FATCA is, and, unless repealed before a FATCA IGA is entered into by the Canadian government, it should be the legal weapon of choice for Canadians to oppose FATCA when and if it becomes enforceable in Canada.
There is consideration of what had already been granted in the tax treaty—which states that US persons are taxed in Canada (or wherever). That is where the US law first got applied in Canada and everywhere. It would need to be shown that the new portions regarding FATCA go beyond that previously-agreed-to treaty.
An interesting post…
The reason why this law is necessary is because of all the Canadian corporations (banks) jumping on the “we must implement FATCA measures” bandwagon. Nothing needs to be done about the United States “extra-territorial” law. We cannot influence a foreign power’s actions through legislation that is legal only on our own “turf”. However we can make the choice to make the banks’ decision to “implement FATCA reporting measures” a choice between a “rock and a hard place”.
Jeff sent me a copy of his entire article. Do you have it @nobledreamer? If so, could you append to your posting as a document download, as I am pretty sure Jeff wants wide distribution, eh @The Author?
Darn that lack of editing ability…. I meant, @Nobledreamer
He hasn’t sent it yet. If you send to me, I can attach it. nobledreamer16 at gmail dot com
I just sent it. I look forward to your comments
This act was proclaimed in 1985 and, it seems from my reading of the opening para on the official website, passed by Parliament in 1984.
I seem to recall that Parliament had a Progressive Conservative majority government under Brian Mulroney, and well-known friend and ally of Ronald Reagan. Nonetheless that Parliament passed this law (unless it was under the previous government of John Turner in the early parts of 1984, but then Mulroney’s government obviously did nothing to block or overturn this on taking office).
Setting aside the considerable differences between the previous Progressive Conservative Party and the present Conservative Party of Canada, I find this quite interesting …
@ Just me: Or you can send it to me.
I just sent it to Petros, and will send to you too…
Not sure how to post this separately on this site, but today’s The Nation newspaper in Thailand printed an article entitled “Removal from FATF gray list should yield benefits for Thai firms abroad” in which the author argues that this will now permit Thailand to enter into an IGA under FATCA and that many local Thai banks will be deemed compliant. The author is a principal of KPMG Thailand (of course). http://www.nationmultimedia.com/business/Removal-from-FATF-gray-list-should-yield-benefits–30202204.html
The idea that the Canadian faction of the negotiating team might attempt to put in a clause that would cause legislation to change laws has occured to all of us. But the minute they bring it to that level, the Parliament would be involved (at least as I understand it). That would slow things down, & bring the issue more to the forefront. Perhaps even producing some reaction from the public.(!)
Allison Christians, as well as Jeff Mukadi both point out that the 30% withholding penalty is out-of-line with the treaty. As well, I don’t believe there is anything in the DTA that addresses the release of non-US persons’ information (due to reporting of joint accounts with US “Persons”), etc. I don’t think it’s a stretch to imagine a challenge to that.
Can you elaborate? I’m not sure I’ve caught your thought-train. 😛
History is on our side. FATCA is war, and when was the last time US of A won a war?
The draft Swiss FATCA law (see links below in French and German) cleverly does not make direct reference to Swiss criminal code art. 271, which prohibits acting for foreign powers. Rather, the draft FATCA law references the FATCA agreement which, of course, contains the clause prohibiting prosecution for violations of Swiss criminal code art. 271.
The 1992 order-in-council was amended in 1996 in response to the Helms-Burton Act, American legislation intended to prevent commerce with Cuba. See:
This is a third party website set up by a friends-of-Cuba organisation. It appears to be a direct reproduction of the original government news release. Unfortunately, neither Dept. of Foreign Affairs & International Trade nor Library & Archives Canada appear to have an online version of the order available.