In a comment, Aussie Jones asks about Article 21 of the OECD’s Multilateral Convention On Mutual Administrative Assistance In Tax Matters, which states, in part:
Article 21 — Protection of persons and limits to the obligation to provide assistance
2. The provisions of this Convention shall not be construed so as to impose on the requested State the obligation:
a. to carry out measures at variance with its own laws or administrative practice or the laws or administrative practice of the applicant State;
b. to carry out measures which would be contrary to public policy (ordre public);
e. to provide administrative assistance if and insofar as it considers the taxation in the applicant State to be contrary to generally accepted taxation principles or to the provisions of a convention for the avoidance of double taxation, or of any other convention which the requested State has concluded with the applicant State;
f. to provide administrative assistance for the purpose of administering or enforcing a provision of the tax law of the applicant State, or any requirement connected therewith, which discriminates against a national of the requested State as compared with a national of the applicant State in the same circumstances.
The U.S. government clearly is not a fan of certain provisions of Article 21, but how helpful can these clauses really be to “U.S. Persons” living in other countries?
Generally accepted taxation principles
The U.S. Congress’ Joint Committee on Taxation staff made the following comments on Article 21 a few months ago. They don’t specifically mention PFIC and “foreign trust” reporting imposed on local retirement savings which host country parliaments think should enjoy simplified and not ridiculously-complicated tax & paperwork treatment, nor FBAR fines of 129 times the tax owed, but I’d bet whoever wrote these paragraphs certainly had those factors in mind when they wrote the following, which condemns the “generally accepted taxation principles” clause as “undermining” U.S. tax enforcement efforts:
The scope and operation of Article 21, as amended by the proposed protocol, accomplishes one of the goals of the OECD transparency standards, in establishing that a requested State cannot rely on bank secrecy or lack of a domestic interest as a basis for a refusal to exchange information, but adds other new potential arguments against exchanging information, based on the requested party’s interpretation of the domestic law of the requesting party. Under Article V of the proposed protocol, and Article 21 as amended, a treaty country is generally not obligated to take any action at variance with its domestic law, including disclosure of professional or trade secrets. That principle is limited by the rule that a treaty country may not decline to provide information on the ground that the information is held by a financial institution, nominee, or person acting in an agency or intermediary capacity.
The effect of this amendment is potentially undermined by the continued inclusion of language that permits a signatory to refuse to exchange information if the requested country determines that the domestic tax law of the requester is outside generally accepted principles of taxation. Thus, the requested country is permitted to make determinations about the merits of a Competent Authorities request based on its interpretation of the domestic law of another country. The Commentary includes a brief discussion of this limitation, to the effect that a rate of tax that is confiscatory or a penalty that is disproportionate to the offense may be considered to be outside generally accepted tax principles, and urges contracting States to consult with one another in instances when such a basis for refusing to exchange information is considered.
The Committee may wish to inquire whether the United States has had experience with application of the “generally accepted principles of taxation” standard in providing administrative assistance. Specifically, it may wish to determine whether similar language exists in any bilateral TIEA or exchange of information article of a tax treaty to which the United States is a party. Although the language was in the original Article 21 that is replaced by Article V of the proposed protocol, it may not have been invoked previously, because most jurisdictions with respect to whom the treaty was in force had a network of bilateral agreements on which they relied. For example, the Committee may ask whether there have been instances in which the United States refused to exchange information based on its view that the requester’s tax regime was outside the norms of the international community. Similarly, the Committee may wish to inquire whether any country or countries have rejected requests from the United States on that basis.
“Explanation Of Proposed Protocol Amending The Multilateral Convention On Mutual Administrative Assistance In Tax Matters”, pp. 26–27. Joint Committee on Taxation, 21 February 2014. Paragraph breaks and emphasis mine; footnotes omitted. They refer to a “brief discussion of this limitation” in “The Commentary”, which I reproduce below to save non-academic readers the trouble of citation-chasing:
197. Sub-paragraph e enables a requested State to refuse to provide assistance “if and insofar as it considers the taxation in the applicant State to be contrary to generally accepted taxation principles”. This might be the case, for instance, where the requested State considers that taxation in the applicant State is confiscatory, or where it considers that the taxpayer’s punishment for the tax offence would be excessive …
199. It is suggested that consultation between competent authorities should also take place whenever there is some doubt as to whether the taxation in the applicant State is of such a kind as to justify a refusal under the provisions of sub-paragraph e.
“The Multilateral Convention on Mutual Administrative Assistance in Tax Matters Amended by the 2010 Protocol”, pp. 82–83. OECD Publishing, 2011. DOI 10.1787/9789264115606-en. Emphasis mine. I omitted Paragraph 198 because it discusses the “contrary to the provisions of a convention for the avoidance of double taxation” limitation, which is not helpful for us thanks to our host countries’ surrender of sovereignty through U.S. tax treaty “saving clauses”.
If you find the above quote confusing, it may be helpful to replace “requested State” with your country (e.g. “Canada”) and “applicant State” with “the United States” in your head as you read it. I leave it to your imagination exactly how the U.S. Treasury & State Departments might threaten the “requested State” in those blandly-described “consultation[s] between competent authorities”.
The Commentary goes on to discuss the intent of the non-discrimination clause. As others (most recently Osgood) have concluded in the comments, both the OECD non-discrimination clause and the non-discrimination clauses in the U.S. bilateral tax treaties are likely to be non-starters for “U.S. Persons” outside of the U.S., so if you’re pressed for time or sick of reading bureaucratese, you’re welcome to skip to the end of this post.
200. Sub-paragraph f is designed to ensure that the Convention does not result in discrimination between nationals of the requested State and nationals of the applicant state who are in the same circumstances. In the exceptional circumstances in which this issue may arise, sub-paragraph f allows the requested State to decline a request where the information requested by the applicant State would be used to administer or enforce tax laws of the applicant State, or any requirements connected therewith, which discriminate against nationals of the requested State. Sub-paragraph f is intended to ensure that the Convention does not result in discrimination between nationals of the requested state and identically placed nationals of the applicant state.
Nationals are not identically placed where an applicant State national is a resident of that State while a requested State national is not. Thus, sub-paragraph f does not apply to cases where tax rules differ only on the basis of residence. The person’s nationality as such should not lay the taxpayer open to any inequality of treatment. This restriction should apply both to procedural matters (differences between the safeguards or remedies available to the taxpayer, for instance) and to substantive matters, such as the rate of tax applicable.
The OECD’s non-discrimination clause is focused on cases where the applicant State (e.g. the U.S.) is discriminating against a resident non-national (a Canadian expat in the U.S.) in favour of a resident national (a U.S. citizen); the Commentary specifically points out that it does not intend to cover discrimination between residents & non-residents.
However, various U.S. treaties have broader non-discrimination clauses which might be read to protect nationals of either party against discrimination by either government. Indeed, the U.S. is clearly worried that these non-discrimination clauses might affect their efforts to get a “requested State” to assist them in imposing requirements against a resident dual national (a Canadian citizen in Canada with “clinging U.S. nationality”) in a way that does not apply to a resident single national. As such, some of their bilateral treaties have a second saving clause about the definition of “identically placed”, in addition to the more-widespread one stating that they may tax their citizens as if the treaty did not exist. For example, from the 1982 treaty with New Zealand:
Article 23: Non-discrimination. Citizens of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is more burdensome than the taxation and connected requirements to which citizens of that other State in the same circumstances are or may be subjected. This provision shall apply to persons who are not residents of one or both of the Contracting States. However, for the purposes of United States tax, a United States citizen who is not a resident of the United States and a New Zealand citizen who is not a resident of the United States are not in the same circumstances.
The non-discrimination clause (Article XXV) in the Canada–U.S. treaty, and the U.S.’ interpretation of it as laid out in the “Technical Explanation” of the 2007 Protocol, is far more complicated; I won’t try to unravel it here, but I’ll just end with this quote from the Technical Explanation:
Whether or not the two persons are both taxable on worldwide income is a significant circumstance for this purpose. For this reason, paragraph 1 specifically refers to taxation or any requirement connected therewith, particularly with respect to taxation on worldwide income, as relevant circumstances. This language means that the United States is not obliged to apply the same taxing regime to a national of Canada who is not resident in the United States as it applies to a U.S. national who is not resident in the United States. U.S. citizens who are not resident in the United States but who are, nevertheless, subject to U.S. tax on their worldwide income are not in the same circumstances with respect to U.S. taxation as citizens of Canada who are not U.S. residents.
The State Department, the Treasury Department, and the Senate know exactly what they are doing when they use these treaties to buffalo other countries into accepting the extraterritorial asset reporting with heart-stopping fines that the Homeland imposes on the American diaspora in the name of “horizontal equity”, and they have known for decades. They know that what they are doing would be regarded as discriminatory if they did not make sure the letter of the law went directly against the spirit of the section headings. You take the risk on yourself and your family if you accept their pleas of good-faith ignorance and claims that you should just sit tight while they make all efforts to fix the situation.
@Osgood, Good morning. 😉
Once again, great find.
And yes we must be ever so watchful as there will be a slippery slope.
Who else is at risk? A US Citizen permanent resident elsewhere could face possible passport revocation. I believe that in some countries you need to maintain a valid foreign passport to keep your residency status sorted.
But is a relinquished US Citizen who is living in his country of retained citizenship at risk of asset stripping if he/she is fully compliant with the domestic tax laws?
The big GATCA question is does anyone think the US Senate will have a 2/3 majority to pass it?
It will languish in the US Senate for years and years.
“The big GATCA question is does anyone think the US Senate will have a 2/3 majority to pass it?”
“It will languish in the US Senate for years and years.”
In the article it speaks about Obama bypassing Congress to implement FATCA and within the article is the link to the OECD GATCA scheme.
They have already ratified this at the G-20 of which the US and Canada are a part and they intend to implement in Sept. of 2014.
IF they want Congress to take this up they are going to have to stop Obama. So far they have not been able to do it because Harry Reid holds up the Senate for the admin. Rand Paul has had a bill in the Senate since May of 2013 to repeal FATCA. Nevermind GATCA!
So, where do you expect the brakes to be applied? As long as the current admin is engaged in Constitutional override and overreach, they won’t be applied. With implementation on July 1 for FATCA and Sept. 2014 for GATCA I submit Mr. Bopp is the ONLY hope we have to stop FATCA. IF FATCA can be stopped, we can reasonably say GATCA won’t be going anywhere either. Without it. It is full speed ahead.
Obama did not give OECD 100 million of taxpayers dollar for nothing.
@FuriousAC, this is a new treaty. It will require Senate approval, there is nothing that O can do about that.
Now the US will “sign the treaty” as they do with many treaties but until its ratified by the US Senate it is going nowhere.
All that aside, the GATCA language is residency based.
If the US signs without reservations, FATCA is discredited.
If thy sign with reservations, they will expose themselves for what they are.
Lastly, there is no collection mechanism and your information will not be going anywhere if you bank where you live.
I would hope not. Arms have been taken up for less.
Not being one that understands anything but good old common sense, I ask why not cut all the nonsense on GATCA and FATCA and bring it down to the basics?
@Calgary411, We have to ask “What is GATCA encouraging everyone to do?”
It is encouraging everyone to bank locally not offshore and report all income to pay your tax to the country you reside in.
I would guess that you bank at a branch less than five miles from your home, that you report all your income to CRA and that you pay tax to Canada!!
If you banked at First National Bank of Atlanta you would be banking offshore!!
Anyways something is going to come to a heed on the Fatca and Gatca front because they are not the same animal. A lot of chickens will be flushed out of the hen house….
Well, there is a collection mechanism and that is called the IGA. It matters not if the banks send it to CRA and CRA sends to IRS. It gets SENT.
As far as FATCA and GATCA go, Rand Paul has stated he will filibuster in the senate against both. That can go on for just so long and then Reid will call a vote. You expect Reid and the Democrats to vote against what the admin wants?
And I can tell you that the OECD head does not feel any ratification by any country to be a deterrent. As far as they are concerned, it is full on implementation.
So, I get what you are saying, George. I just have no confidence whatsoever that the process will be respected.
And then there is the TPP. Another horrendous kettle of fish.
Sufficient to say this: At the moment we do have protections and it is important to emphasize that to our government. And insist they recognize and honour that.
@FuriousAC. To pass in the US Senate it MUST have 67 votes. The votes do not exist, Repubs have pledged to repeal FATCA so no way will they vote GATCA.
The Dems have a bare majority not a super majority.
Also the FATCA IGA has no collection mechanism its solely data.
@George: Your comment:
“Also the FATCA IGA has no collection mechanism its solely data.”
Data for sure, and damn dangerous data at that! The consequences of which will be devastating to many millions of people in Canada and around the world.
It has overwhelming consequences to the financial future of millions because who gets that data and what they do with it is of paramount importance.
Getting really tired of all this talk of “just data”!
To pass in the US Senate it MUST have 67 votes. The votes do not exist, Repubs have pledged to repeal FATCA so no way will they vote GATCA.
Admin has made it clear they will bypass Congress and already have done so.
Now we know why the U.S. Treasury will delay some rules if foreign banks make good-faith compliance efforts. Foreign banks are asking their American clients to sign W9s with waivers of confidentiality. The Treasury is using those banks to get around violating privacy rights of overseas Americans under the 4th Amendment.
“Now the US will “sign the treaty” as they do with many treaties but until its ratified by the US Senate it is going nowhere”
It depends on who you mean when you say US will sign the treaty.
Treasury has negotiated IGAs ( quasi treaties that tramp on the in place US Canada Tax treaty and privacy overrides)
Treasury has signed the IGA with Canada NOT the authorized authority in the US nor has it been to the senate. A BIG issue with Rand Paul and Mr. Bopp, as it is with many others.
So to say that a treaty is going nowhere unless and until the senate engages is to deny the facts in FATCA implementation and IGA implementation by a bureau of the US and not by authorized treaty protocols.
An admin work around Congress and they are doing that with GATCA as well, as pointed out in the article links provided in previous posts.
Lets not kid ourselves with what is intended with semantics that have no meaning in reality.
I just hope and pray Mr. Bopp is on his considerable gain, for if he cuts FATCA off at the pass, we have a chance GATCA will not get to implementation in Sept.
I agree with George on this one. A big problem with FATCA is that it is a dishonest bit of legislation. it was sold on the basis of being about offshoring, but if you work in a foreign country, pay the same taxes as the native population, and you bank there, that’s not offshoring.
I wouldn’t get my blood pressure up over the OECD. It is not a strong institution, so it can’t force its members to cooperate. The only institution that really take action against the U.S. is the World Trade Organization, but one of the big players like the EU or India would have to bring a case forward..The OECD also has rules that countries can use to justify not collecting confiscatory taxes..
Personally, I would prefer GATCA over FATCA. I don’t like FATCA because many provisions of U.S. tax law seem to be thinly-disguised attempts to force U.S. citizens and greencard holders abroad to offshore their money to the U.S. The FATCA IGA deals are also really uneven. The big players have gotten much better deals. Germany, for example, will be getting its residents’ U.S. dividend and interest information as part of its IGA and the U.K. has a raft of non-reportable accounts.
Also, if FATCA comes in, but not GATCA the U.S. just becomes the last tax haven standing. The U.S. response when it found HSBC in the U.S. obviously accepting Sinoloa cartel money.was weak and shows that the U.S. is not really serious about fighting international financial crime..
I would hope that the U.S. government would have the sense to realize that going after middle class or even upper middle class people in much poorer countries who have fallen afoul of the rules would look really bad, but the IRS hasn’t shown good judgment. Per capita, almost all of the countries in the world are poorer than the U.S., so where would they draw the line? It is pretty clear that many Latin American countries have privatized pension systems based mainly on foreign collective investment vehicles. It is pretty clear that many greencard holders and citizens haven’t been aware of things like self-employment and controlled foreign corporation rules. If the letter of the law were applied, it could do real damage.
@Furious and @Publius.
The problem with FATCA vis a vis Canada.
The fear is that some yahoo in Congress will do a spreadsheet of the data dump from CRA and calculate the maximum FBAR fines.
They will then take that HUGE number, write a new law called GOTCHA, bury it one of many omnibus bills and then demand that Canada hand over all those Canadian tax dodgers and assist the US in its collection efforts, otherwise there will be a 50% cross border financial penalty!!
Thats the problem when you ask High How? when someone tells you to Jump.
@FuriosuAC, trust me when I say we are on the same team. I just am not worried on collection because the documents do not allow for it and the US already waived collection decades ago with OECD.
@FuriousAC, ” I don’t like FATCA because many provisions of U.S. tax law seem to be thinly-disguised attempts to force U.S. citizens and greencard holders abroad to offshore their money to the U.S.”
Damned each way we turn.
The UK is clamping down on any accounts outside the UK;
The US has FATCA.
Each way you turn you are damned!!
1.) Cash in the mattress.
2.) Bank solely in the country you are resident is the only reasonable and
dare say defendable path!!
I had a question about what the situation between Canada and the U.S. was prior to the IGA, ironically while reading up on the situation in Mexico (which does seem to have made non-reportable all of the accounts, such as afores, that would have caused problems). Here is what the article said:
“An automatic system of exchange would allow Mexican authorities to clamp down on illicit funds leaving their country.
The U.S. and Canada employ such a system. The U.S. Treasury already collects the requisite information on Canadian citizens’ accounts in the United States and sends it to Canada automatically, and vice versa. The Canadians have the same form of automatic tax information exchange with Mexico. This means that the only exchange relationship missing between NAFTA countries is between the United States and Mexico.”
Has this article just got it wrong in assuming that U.S. citizens were U.S. residents? What kind of arrangement has been in place? Is the existence of this system the reason why FATCA hit Canada so hard, so early and why Canadian politicians think that the IGA is actually a carve out? At any rate, it seems like a limited version of the OECD standard has already been in place within NAFTA for Canada.
If the accounts that were in the IGAs didn’t have to be reported at all, that would make CBT less problematic, but that is not IRS policy. The IGAs just add to the general confusion of CBT.
“What kind of arrangement has been in place? Is the existence of this system the reason why FATCA hit Canada so hard, so early and why Canadian politicians think that the IGA is actually a carve out”
The existence of the US Canada Tax Treaty 1996 along with NAFTA is the reason an IGA is totally unsuportable, along with the fact that Treasury negotiated with a sovereign nation which already has a Tax Treaty with the US. The IGA allows FATCA to be implemented in Canada when FATCA is illegal and requires countries to override their own privacy laws. They are so afraid of the 30% withholding the banks are hiding under the skirts of the Canadian government , trembling like children afraid of the big , bad wolf!
Experts in Canada ( Allison Christians and Arthur Cockfield John Richardson) and the US
( James Jatrus, Rand Paul and now ‘superlawyer’ Bopp) have all weighed in on the issue of the necessity of the IGA for Canada.
It simply is not necessary and it aims to protect the banks with carve outs for them and complete betrayal of the individual in favour of the banks.
All they had to do is say NO. And WAIT.
Efforts are underway in the US to kill this monster and our government would have done much better to join that effort than sign an IGA with a rogue and illegally operated bureaucracy like the IRS.Treasury is not an authorized authority and our negotiators HAD to know that.
It is an ugly and despicable capitulation to the bullying US Treasury.
Senator Rand Paul and many others have made the case that ANY IGAs are not authorized nor does Treasury have any legal authority to negotiate or sign IGAs with ANY country. Canada should know that instead of trying to stuff it down the throats of Canadians to save the banks hiding under their less than adequate skirts.
May 14, 2014 at 7:11 pm
@FuriousAC, this is a new treaty. It will require Senate approval, there is nothing that O can do about that.
Now the US will “sign the treaty” as they do with many treaties but until its ratified by the US Senate it is going nowhere.
Historically, the U.S. government has largely resisted the OECD’s efforts to “harmonize” global taxation policy — at least tepidly. Under the Obama administration, however, the global plot has received among its biggest boosts thus far with the adoption of FATCA and the administration’s full-blown open support for all of the key globalist talking points — automatic information exchange, global minimum taxes, giving up sovereignty, global warming-related wealth redistribution, and more.
Escape will become virtually impossible for the poor, middle, and upper-middle classes. However, as multiple analysts have already pointed out, there will be more than enough loopholes in the new world taxation regime for the truly mega-wealthy members of the global establishment to protect their own wealth from outright confiscation. The rest of humanity, though, will suffer the consequences if the brakes are not slammed on the scheme very soon.
Now in public view, the pieces of the New World Tax regime are already falling into place. With firm resistance, though, the emerging planetary taxation regime can still be stopped — along with everything such a terrifying scheme would entail.
And WHERE are we to find “firm resistance”?
Not in Congress at this time. Not in Parliament. IGA signed by Canada and under discussion right now includes language regarding being compliant with OECD practices and policies.
With the likes of John McCain and Carl Levin, who are gung ho for this evil confiscation and enforcement and care not for how it will impact their own country.
@Publius – pre-FATCA (i.e. existing) exchange of information agreements with the US are of two sorts as far as I know. Firstly, we or they can demand information about taxpayer “x” if for the purposes specified in the Treaty. Secondly, we have automatic exchange of tax info of the sort you already get on T slips. Thus if a Canadian public company pays dividends, they withhold to any non-Canadian residents – Americans investing in Canada (and vice versa) get a lower withholding rate but must file a tax declaration to qualify for it. This is the W8-BEN that you may have seen. Those T slips are automatically sent to the US and CRA.
One question??? If the CRA has been sharing info under the tax treaty and sharing it for years how come the US has never notified anyone about tax owing? Therefore how can they possibly come back now and try to collect back taxes when they ? already had info? but did nothing? Is there any way to find out from the CRA whose info has been previously sent? The CRA should at the very least be able to come up with some numbers as to how many filers have had their info shared each year?? would a FOI to seek out these numbers get information, after all you are only asking for the numbers not any other personal info.
Down the rabbit. You misunderstand. Under the existing treaty they don’t share information on Canadian residents. They share info on American residents investing in Canada
oh sorry I misread, but still wouldn’t even these numbers have some use? to see for instance just how much info the CRA already shares with the US? and since it is a joint treaty do we know if the US has been sharing their info with Canada?
When contemplating CRA sharing information with IRS using IGA guidelines, THIS is the organization into whose hands innocent individuals who have committed NO crimes whatsoever will have their personal , private information delivered. AND while IRS is at it, will share with NSA, FBI, CIA and anybody else who wants it.
Unless it is a congressional committee investigating THEIR wrongdoing.
Maybe one more thing: FATCA is NOT about tax evasion. It is about PENALTIES. The harsher the better and when people say these penalties will wipe out a lifetime of retirement savings, they MEAN it.