Update: August 11, 2014
In response to Hazy,
“I believe all IGAs have a most favoured nation clause (MFN) which means that if one country gets a better deal, than other countries can obtain the same.”
You are correct BUT, the most favored provision solely applies to provisions under Article 4 and Annex
The “Reciprocity Clause” is an Article 3 provision therefor the “better deal clause” does not apply.
Here is that section on most favorable language;
“Canada shall be granted the benefit of any more favorable terms under Article 4 or Annex I of this Agreement relating to the application of FATCA to Canadian Financial Institutions afforded to another Partner Jurisdiction.”
Sooooooo Canada was outsmarted by the likes of Czech Republic, Jamaica, South Africa, Mauritius which got a far better deal.
George requests Domino’s comment (just below) be its own post, asking
The following recent comment needs to be on the front page as this is hot news. Basically, very recent IGA agreements have a sunset clause if the USA does not provide reciprocity.
What does this tell me about Canada? You guys need to notify your friends in the NDP, maybe post what you send off to them. Demand Canada gets the same deal!!
Here is a link to the South Africa IGA;
And yes, that new clause is in there.
I’m not sure if the Obama administration has made any progress with Congress regarding FATCA reciprocity since this post was published, but I’d like to refer you to the last line of the post:
“The proposal would be effective for returns required to be filed after December 31, 2015.”
Recently I perused a few of the Model 1 IGA agreements, and noticed that quite a few of the more recent ones (e.g. Czech Republic, Jamaica, South Africa, Mauritius) contain the following clause at the end of Article 3:
“This Agreement shall terminate on September 30, 2015, if Article 2 of this Agreement is not in effect for either Party pursuant to paragraph 9 of this Article by that date.”
Now I’m the first to admit that comprehending the endlessly recursive legalese of the U.S. Tax Code can make your head spin, and I invite others here to verify (or more likely refute) my conclusion here, but it appears to me that that a large number of IGAs will automatically terminate on 30 September 2015 unless DATCA is fully operational. Meanwhile the struggling effort to get congressional approval for DATCA is only aiming for compliance by 31 December 2015.
The Article 3 clause is quite explicit. There doesn’t appear to be any discretion on behalf of the parties. They will simply terminate.
I’ve read unbelievable estimates of the cost FATCA compliance for FFIs running into the billions for some of the larger banks alone. I thought these claims were somewhat hyperbolic until I read some of the relevant tax code,associated regulations, IGAs and FFI agreements. The compliance departments of FFIs will be relying more on lawyers and accountants than the IT department in this regard.
Anyway, my point is that this compliance burden is is purely for the identification of U.S. persons. DATCA’s compliance burden will currently require identifying residents of 35 Model 1 IGA partner jurisdictions, with another 60 or so in the works. I haven’t seen this asymmetry being mentioned elsewhere.
It’s my opinion that the U.S. financial industry (and their lobbyists) wield sufficient power to unilaterally kill FATCA; however, the biggest players in the industry might benefit as compliance costs crowd out the smaller players (more whales vs minnows). I’m curious to see how this plays out.
George also says:
Brockers in Canada need to ask their MPs why didn’t they negotiate that deal!! More importantly when will Canada get that deal?
I just looked at the Canada IGA and Canada will not get that deal under the most favored rule!!
This is from Canadian Parliamentary Hearings, the wishy-washy answer from General Director, Tax Policy Branch, Department of Finance, Brian Ernewein to NDP MP Murray Rankin’s question on reciprocity:
Murray Rankin Victoria, BC
We talked earlier about the reciprocity of this, and a lot of people have been challenging that notion that this was reciprocal. Under international law, as I understand it, there need to be gains to both countries as a consequence of an international agreement such as this. I’d like to know if any analysis has been done of the gains to Canada we achieve by entering into an agreement of this sort.
I understand the lack of economic sanctions is a gain, if you will, but what about other gains for us? Is there a reciprocal agreement that the United States has entered into? Talk about those things, the gains and the reciprocity.
General Director, Tax Policy Branch, Department of Finance
Thank you for acknowledging at least that there is this point about issues avoided. I think there also is the point that we do gain some additional information immediately from the U.S. in relation to the collection of taxpayer identification numbers, which will help in our own data matching. That’s immediately.
It’s not delivered immediately, but we also do have the commitment to full equivalence, if you will, over time.
There is one other thing I would add and you might consider this a soft point, but I think it’s worthwhile. Even though FATCA itself started off kind of badly, in the sense that what it first proposed raised a lot of issues for a lot of us and a lot of taxpayers, the development of the intergovernmental agreement seems to us a good thing in terms of advancing exchange of information. It still has a lot of issues and in particular with the U.S. on citizenship, but as a matter of principle, it seems to us to be something that enhances taxpayer compliance.
The point I want to make is that I think as a result of the discussion around FATCA and the intergovernmental agreements, countries, particularly the G-20, have now moved forward in trying to adopt an automatic exchange of information procedure or standard. It’s coming to be known as the common reporting standard. It’s still under development, but G-20 finance ministers and G-20 leaders have committed to working to bring that to reality, and whether it’s grudgingly or not, I think the FATCA discussion and debate has sort of led to some of that evolution.
I sent this to a journalist two days ago:
I thought you might be interested in this more realistic commentary [than General Director, Tax Policy Branch, Department of Finance, Brian Ernewein (above*) ] about any U.S. reciprocity to other countries per the IGAs that come from Treasury, not from the Congress of the USA: http://www.compasscayman.com/cfr/2014/08/08/U-S–can%E2%80%99t-deliver-on-FATCA-promises/ that Canada’s Finance expounds*, along with the also false assertion that Canadian registered accounts are exempt (yes, exempt for the banks / financial institutions not for the individual *US taxpayer* at all!).
Making sense of US obligations
Members of the U.S. Congress, one chamber of which having changed party control since FATCA’s passage, have expressed skepticism and concern about Treasury’s handling of the law. Not only has Senator Rand Paul introduced legislation to repeal most of FATCA outright, a policy recently endorsed as well by the Republican National Committee, but several other members have authored letters challenging various aspects of Treasury’s implementation, and in particular the handling of IGAs.
Rep. Bill Posey, a member of the House Financial Services Committee, authored a critical letter to the Treasury Department characterizing the IGAs as “not authorized, or even mentioned, in FATCA,” and concluded that “flaws evident in the IGAs being negotiated to implement FATCA reflect flaws in the Act itself.” Of greater significance for the law’s future, he also suggested that “it is difficult to conceive of any circumstance that would justify imposing such an expensive and counterproductive domestic mandate [as reciprocal information sharing].”
Foreign governments might be excused for finding this all very confusing. After all, many were promised by the Treasury Department that the U.S. would give what it receives. In reality, the obligations specified under the IGAs only commit the U.S. to “pursuing the adoption of regulations and advocating and supporting relevant legislation to achieve such equivalent levels of reciprocal automatic information exchange.” This is a convoluted way of saying that the Treasury Department really, really wants to provide reciprocal information, and it’ll even ask nicely for actual Congressional authority to do so.
That’s right, the Treasury Department – the only U.S. body involved in authorizing, negotiating or signing IGAs – has no authority to provide reciprocal information. And since the agreements are not being submitted to the Senate for its advice and consent as constitutionally required for ratification of treaties, they haven’t true force of law within the United States. Although Treasury prefers not to advertise its need for additional authority, it’s been implicitly acknowledged by inclusions of provisions asking such authority in the administration’s budget requests, as well as by officials speaking behind closed doors.
Real reciprocity unlikely
A comparatively simple rule requiring U.S. banks to collect and report interest payments to non-resident accounts took over a decade for Treasury to push through and successfully implement. That rule met significant Congressional opposition, but ultimately lacked the significance to spur direct legislative challenge. Treasury cannot pull the same trick with FATCA, where the costs to U.S. banks would compel a real response. They have no choice but to rely on Congress for reciprocal authority, which for both political and economic reasons is unlikely to be forthcoming.
As indicated by the Posey letter, there is no domestic appetite for imposing the kind of reporting on American banks as has been placed on the rest of the world. A large reason Treasury has been able to act beyond its authority thus far is because those most afflicted by FATCA lack political power in the U.S. system. The same cannot be said of American banks, which hold considerable influence but thus far have sat on the sidelines of the FATCA debate.
A clear ideological divide between branches also makes reciprocation unlikely.