There has been a lot of bantering across multiple threads about the nature of the FATCA IGAs which the IRS is entering into with other Treasury technocrats. I have come to realize that I didn’t have a clear understanding of the difference between a Tax Treaty, which requires ‘Advise and Consent’ versus this animal called an IGA which apparently does not.
I asked the question of the two who I consider to be the resident IBS experts, Tim and Jim over on this thread here, but I think they missed seeing it.
I wondered if anyone besides me was struggling to understand the technical nature of these things, and so I asked again via email on this Thanksgiving, and to my surprise, in spite of the holiday, I got a couple good answers. It was very much appreciated. Thought I would share it here for others that are looking for clarity.
I have restated my original question below, and then provide the answers I received via email which might clarify the issue for others. If it is just me, that is confused, than I guess this will just be a handy link for me to use for tweeting, if nothing else. 🙂
In my original question, I wrote:
Technical question. Are these IGAs actually considered a treaty? Or are they just an administrative agreement between regulatory bodies and need no further Parliamentary or Congressional approval?
I think for U.S., Treasury is trying to say that they can do this without any “advise and consent’ process as they are already have the regulatory power. In Canada, I am less sure about what that process is in relation to the States, so just looking for any clarity to my befuddled mind you can provide.
Tim, you speak of them as Treaties, and maybe from the Canadian side they are, but can one side consider them that, and the other decide that it is not?
I am somewhat confused by these Treasury technocrats who are shrewdly manipulating the FATCA process to get something in place that was never the intention of Congress. They did NOT sign up for a DATCA or a GATCA, and that is clearly what US Treasury is trying to create, IMHO.
From my reading, I think they are very much trying to keep any of this from rising to the level of Congressional or Parliamentary over sight, but then my understanding is lacking in these areas. It seems to me, for them to win, any process that is required must just be perfunctory in nature, so no debate occurs. Help flesh out this picture for me, if you can.
First comes Tim’s answer.
The answer is yes they believe they can do it by regulator fiat without the advice and consent of the Senate. Now is that actually the legal correct answer, “who knows?” I guess the question is do you want to spend the money to fight them in court on a fairly academic point. Clearly though out most of American history all treaties required the ‘advice and consent’ of the Senate to come into force. However, the executive branch since World War Two and especially since the 1980s has drifted from this view. I would also add this is not necessarily a Democrat Republican thing. Ronald Reagan’s Administration entered into to several of these “Executive Agreements” and more recently some Democratic Senators such as Ron Wyden of Oregon have criticized the Obama Administration for entering into these types of agreement also (in areas other than tax).
Tim followed later with this.
From the US State Department:
What is the difference between a treaty and an executive agreement?
As explained in greater detail in 11 FAM 721.2, there are two procedures under domestic law through which the United States becomes a party to an international agreement.
First, international agreements (regardless of their title, designation, or form) whose entry into force with respect to the United States takes place only after two thirds of the U.S. Senate has given its advice and consent under Article II, section 2, Clause 2 of the Constitution are “treaties.”
Second, international agreements brought into force with respect to the United States on a constitutional basis other than with the advice and consent of the Senate are “international agreements other than treaties” and are often referred to as “executive agreements.” There are different types of executive agreements.
Now is the above really b****t? Personally I think yes, and I suspect several Supreme Court Justices like Scalia, Thomas, Alito and probably both Roberts and Kennedy would agree with me. Again the question is are you going to spend the money required to sue the government on this point?
Then Jim Jatras weighed in
Yes, Tim is right. (Sorry to be so late responding — it’s Thanksgiving here, just got free).
That’s part of the shell game here. Yes, from the constitutional perspective of the non-US “partner” (UK, Canada, etc) the IGA very well may be a treaty and have to run the parliamentary traps as such. In most cases (again, depending on the particulars of the legal system of the non-US “partner”) domestic legislation would be required to implement the IGA. But since most of these countries (like UK, Canada but unlike the US) are parliamentary systems it is presumed that because the Government rests on a parliamentary majority, they can enact anything the Government agrees to with the US.
At the George Mason seminar, I asked Jesse Eggert of Treasury specifically what kind of instrument the IGA is. He confirmed that it is *not* a treaty but is an Executive Agreement.
(Again, Tim is right.) The article and section authority for a treaty is spelled out in the Constitution. But just try to get any coherent explanation for what an EA is and where it gets legal authority. Ditto with “Executive Orders” which are also standard features of what passes for American “law”. But EAs and EOs have become so prevalent the courts don’t strike them down and Congress rarely raises a fuss.
They don’t call it the “imperial Presidency” for nothing.)
Btw, one of the questions in the Ron Paul + 3 Senators letter to Geithner in July was the legal authority and type of agreement the IGA is. The response (which Eggert drafted) ignored that question.
Nov 24: Updated with response from Treasury to Geithner
With respect to Fatca IGAs this means that while the non-US “partner” country may have to jump through a bunch of hoops, Treasury doesn’t expect to have to break a sweat fooling around with some pesky democratic process. They claim they have all the legal authority they need to impose the Fatca-like requirements in the IGA Art 2(b) on US domestic institution just by issuing regs without new statutory authority from Congress.
(And since on the US side it’s not considered a treaty, no need for Senate advice and consent). Now, the Art 2(b) regs would be quite burdensome, as is but far less so that those the non-US “partner” agrees to impose on itself under Art 2(a). So it’s not at all “reciprocal“.
But to save face for the non-US “partner” and let everyone pretend the IGA is an act between consensual adults, the US promises in Art 6 that someday, somewhere in an alternate universe it will provide information to the non-US “partner” on an equal basis.
Treasury concedes, however, that would require new legislation, which is why it won’t happen before (as Nikita Khrushchev said in a slightly different context) “shrimps whistle.” The Art 6 promise is just window dressing so the non-US “partner” can claim the IGA is “reciprocal” to whomever is naive enough to believe it.
I followed up with this:
Maybe we should be approach the ACLU or some deep pockets somewhere to file a suit. Even if nothing happens with it, and it goes no where, I think it was Patric (or was it Jim) that pointed out, it still gets attention and might help change the narrative of this stealth GATCA process.
I wonder what the cost would be for just the filling and a Press release to follow? Of course, Treasury would immediate oppose it, but again, doesn’t that get attention? We desperately need to do something to get attention in DC and the media, is there a strategy where this might work?
To which Jim Jatras responded:
Filing a lawsuit (or several suits — for example, trade violations are likely to carry more weight with the courts than constitutional arguments), and associated media, could be a useful complement to a broader media and lobbying campaign to implement a strategy to repeal Fatca. But as a stand-alone without such a campaign, it’s probably not the best use of resources.
Tim weighed in:
Perhaps some more “conservative” political group in the US might be interested its hard to say. Under US law it is not necessarily an open and shut case. The legislation for example Canada would have to implement to hold up its side of an IGA is far more problematic from a Canadian constitution standpoint.
I came back with this:
Thanks James and Tim, that clarifies the issue for me. But surely there is some monkey wrench that we can throw into the machinery. I don’t know what it is, as my ignorance of the process shows, but there must be some technical thing we could do to slow it up. However, if the Congressman who write the letters, here, here, here, here and here just accept the responses without calling in Treasury for questioning in their committees, or pushing back harder, I guess we have little hope!
And Tim had additional comments on New Zealand, Australia and Canada.
Remember even in a parliamentary system parliament is not necessarily a rubber stamp. In New Zealand for example NZ Labour, NZ Greens, and NZ First could probably kill an IGA if they wanted too or at the very least put John Key under a lot of pressure on it. Key may or may not have John Banks (an “independent” conservative leaning NZ mp with major ethics problems) as a vote on this in a few months time. In Australia and Canada you also have the Senate which could kill this if either body wanted too.
Clearly Treasury is hoping FATCA partner countries will try to “low bridge” any type of domestic approval needed for these agreements under their domestic laws. The problem is all of these countries have dramatically different budget cycles. The main French 2013 budget bill for example is going to be voted in the next week or two with no FATCA IGA provisions and no actual IGA signed between France and the US yet. So unless France wants to make implementation of FATCA a “freestanding” law they would have to wait until very late next year to get it into place before 2014 as part of an omnibus budget bill. That seems very risky to me. In Canada for example if implementation is a “freestanding” piece of legislation I can’t see it passing and I can’t really see the Conservatives whipping the vote too strongly either.
And then added this on Germany:
German banks fear being unfairly disadvantaged if US institutions would be spared tougher capital rules due to be introduced in 2013. Their warning comes as US regulators seek to ditch the landmark Basel III accord.
Growing resistance in the United States to implement new banking rules under the so-called Basel III agreement has raised concern among senior German banking officials.
“Americans must not be allowed to ditch at the last minute an accord they had negotiated themselves,” said Andreas Dombret, senior board member of the German central bank, in a statement released Wednesday.
Dombret added that any attempt at “watering down” the Basel III agreement was bound to lead to “new strains” in financial markets.
The above definately shows a certain degree of militancy on the part of German Banks to the US Treasury albeit on an issue unrelated to FATCA.
Finally Jim weighed in with his last ‘post Turkey’ analysis.
Good question. I think the Germans are quite aware the IGA obligations are not reciprocal. From the German Embassy speaker at the George Mason event, it’s unclear if they really believe the US will follow through later. I’m guessing they know it’s a fig leaf. As you say, they aren’t *that* thick.
From what I hear, German banks were among the most active in pleading for their goverment’s help in the form of an IGA. Will they balk based on details? Possible, but I doubt it.
Two other factors:
1. Not to be too stereotypical, but Germans (and especially their bankers!) follow orders. It never would occur to them not to follow a rule. Fatca is a rule. Therefore they must obey. Period.
2. They are particularly deferential toward the US. As the Embassy guy told me re repeal prospects (paraphrase), “No. I know Americans well enough that once they make up their minds to do something, they do it”.
The article you sent is interesting though. Maybe they’re getting fed up? Aside from all else observed above, German bankers do get pretty hardheaded when it comes to money: how much will this cost? Of course if Berlin did balk on Fatca, that could be a damaging as Ottawa’s doing so. But I’m guessing they will sign. If they do, I think prospects for pulling out later are small. Besides, in terms of the bandwagon Treasury is trying to create, the signing now is the problem more than what they might do at some future point.
Re ur: ” I guess we have little hope!”
No, that’s not at all the case. I hate to say it, but it all comes down to money, money, money. Institutions that should be fighting Fatca are instead already spending millions to manage their compliance with Fatca and thereby (whether or not that’s their intention) helping lock it into place.
Think of what could be done if the same institutions (who can well afford it) were willing to commit in aggregate a few hundred thousand dollars to this effort. Picture the IBS Appeal and other initiatives, maybe better stated but to the same effect, on numerous websites and publications in Canada — and thousands of people, (as opposed to a few dozen activists) writing in in opposition to an IGA.
Picture similar initiatives to inform Americans (fewer than one in a thousand of whom, if that, have heard of it) and mobilize them to contact their Congressmen and Senators. As the recent posting about Reagan on IBS noted, politicians see the light when the feel the heat. They feel the heat when media are banging on a issue and they hear from constituents.
But that doesn’t happen unless a campaign is stirred up — how can people get riled up about something that’s never been brought to their attention? And that, pure and simple, takes money. A small group of volunteers just doesn’t have the ability to reach a wide enough circle of people to have the impact needed in the required time frame.
Also (there’s no nice way to say this), a lot of people are like lemmings, and politicians even more so. When things appear in media, when ads appear in influential publications, when commentators with known names say thus and such, it has a *validating* effect on the message, and politicians take notice. Absent that, they don’t.
In an earlier email I believe I mentioned a chat I had yesterday with a former colleague at the Senate who’s been banging his head against the wall at his current firm (he’s now in the private sector) to suggest that they fight FATCA. The response he’s been getting from others in his firm is that they’ve invested so many millions of dollars already, and uncounted man-hours, on figuring out how to comply with FATCA, it’s hard for anyone to admit that may have been a waste and another approach might be possible, even as a hedge.
(There’s no overestimating the damage caused by people motivated by the fear of looking foolish. Luckily, among my many faults that’s not one of them!).
At one point my former colleague asked me if I saw any movement in the direction of repealing Fatca in Congress. This set me to thinking. I’ve heard that question in one form or another several times and it struck me as misplaced, but I couldn’t quite think why. Then this thought occurred to me: Picture a big rock on a hill near a steep slope. Someone suggests, “You know, if we could get a little muscle together, I bet we could roll it down the hill. It isn’t far and look at that slope!”. A listener looks at the rock and then at the speaker and replies with a shrug, “I don’t think so. The rock doesn’t appear to be moving . . . “. Of course it’s not moving — nobody’s pushing it yet.
I don’t know how it is in the Canadian parliament, but US Senators and Congressmen — and even more so, their staff — respond to message that is validated by money. Sometimes when I talk with people on the Hill who are receptive on the message re Fatca, they ask, “So, where’s industry on this?”. We know the short answer — at best, sitting on their hands; at worst, effectively helping the other side.
If you open up any edition of Politico or Roll Call it’s full of expensive issue ads placed by companies, unions, associations, etc, giving their point of view for or against something or other. The validating message is the answer to the question of “Who cares about this issue?”. The answer is: these people do — you can tell, because they’re putting their money where their mouth is.
So ask the same question, “Who cares about Fatca?” Right now, the answer, sad to say, is “no one with a lot of political throw weight”.
You have a several-million-large community of expats but their influence is dispersed (they aren’t a voting bloc in anyone’s district or state) and they don’t have the kind of money you need to “pay if you want to play”. That’s not to say merits on an argument are entirely irrelevant and you can’t get a fair hearing, even on a somewhat more modest issue like citizen-vs-resident-based taxation. But even that wouldn’t be easy. The institution isn’t used to changing things just because something makes sense. It’s used to responding to pressure, which gets right back to money.
So, all this back and forth and trying to get the word out is useless? No. I’m convinced we can get the rock to the slope, and if we do, Fatca a goner. But to mix the metaphor a bit, the best “push” we can give is to find the right kind of support — a firm, association, or even wealthy individuals, which I expect nobody on these messages is — who can give this the visibility it needs. That’s how we enlarge the public notice (I have yet to talk with anyone about Fatca who wasn’t appalled by it — but many, many more people need to hear about it than can be reached by word of mouth), get media coverage, and make politicians take notice.
So what does this tell you?
It sure feels to me, that these Fatcanatics are winning right now. They are pulling a fast one, on the American people by forcing countries into these IGAs, without any discussion in Congress about what is happening. With budget talks and fiscal Cliff around the corner, is anyone going to risk any political capital by opposing what is seen as needed tax revenues to defend offshore tax cheats? That is how it will be spun.
However, as Rumsfield once said, their are “unknown unknowns”, and it could be that something totally unrelated to FATCA (like Germany opposition over U.S. re-nigging on Basill III) could come out of left field, and derail this freight train. U.S. Hubris might still undermine this fiasco. However, while we can be morally right in our opposition to FATCA, strategically, at this stage of the game, I think they have out flanked us, unless as Jim says, some deep pockets can step forward for active opposition and lobbying. I don’t think we can depend on a “unknown” miracle to save America from itself!
Surely, somewhere in this long list of FATCA Comment letters is someone willing to spend some money on something besides just compliance efforts.
Finally, speaking of IGAs, and the difficulty of putting these all together before they expire in 2016, Jim Calvin at FSI has some interesting comments here. There are other complexities that could undermine the entire process. As he says, in conclusion “The bilateralism of FATCA seems almost quaintly simple compared to the multilateralism envisioned by the IGAs.”
Nov 24: Updated For our Records.
Here is IGA Model I
and IGA Model II
Existing bi-lateral agreements on the exchange of information don’t amount to a hill of beans according to Todundsteuer on the
Eight reasons Canada MUST say NO TO FATCA! – updated
“Right now Canada is the only country for whose residents American banks are required to report bank and portfolio interest to the Internal Revenue Service which then passes it on to the CRA. In other words, with respect to interest income FATCA would add nothing to what Canada is already getting but that is already more than any other country gets.
Besides interest, dividend and other “Fixed or Determinable Annual or Periodic” income earned by NRA (including Canadians) is required under existing US reporting to be reported to the US government under Chapter 3 of the Internal Revenue Code and, of course, on income tax returns filed under Chapter 61. Chapter 3 information includes dividends, capital gains, interest, pension, rents, gambling winnings, scholarships, compensation of artists and athletes, etc.; i.e. the whole schmear.
Although the US is not obligated to automatically share Chapter 3 or Chapter 61 information with its treaty partners, there are strong – but never publicly confirmed rumors – that the US Treasury for many years now has been routinely, i.e. automatically, reporting Chapter 3 information on CD ROM to its treaty partners; gratis. Return information under Chapter 61 (e.g. a 1040NR filed by a Canadian NRA) is not routinely shared but can be shared on request under the terms of the information sharing articles of most existing double taxation treaties.
So, Canada does stand to gain some tax relevant information that it did not have before but . . .
The only information the US is promising under its reciprocal model IGA is information that US Financial institutions already are set up to provide. In other words, unless the FATCAT partner insists on full reciprocity, the FATCA IGA would impose no real material added cost to US financial institutions or the US treasury. They already have paid for the IT systems that capture this information.
The real reason why FATCA offers potential partner countries less even less than the information the US already collects is attributable to the lax standards imposed on US banks for determining who is a NRA.
Although the US has strict KYC (Know Your Customer) rules for account openings, etc. it allows customers to self-certify their foreign citizenship/residency status for US Chapter 3 withholding/reporting purposes.
FATCA imposes no comparable duty on US financial institutions to sift through their databases to look for indicia of foreign partner state tax residence.
Unlike most countries on the planet, the US not only has no national identification card it also has no national or state system of residency registration. By and large, the US has only a limited grasp of who its own citizens are much less where they are located. Where foreigners claiming favorable treaty residence might actually live is similarly beyond its grasp.
In most countries, if you want to claim residence in a foreign country to avoid source withholding or obtain reduced rates of tax on various investments in that country you ordinarily have to produce something called a “certificate of residence” issued by the authorities of the country in which you claim tax residence.
Thus, the IRS will – for a fee, of course – provide US citizens with such a certificate so that they can obtain the benefits of non-residency in whatever place on earth they have invested in. The US, however, does not require such evidence of foreign residency. It allows but does not even require self-certifying NRAs to provide – much less confirm – their foreign tax identification number(s).
Nor – unless you’ve been bad/delinquent – does the US ever require “backup” withholding on FDAP income for people who (self-)certify that they are US citizens or residents. Thus, a lot of foreigners – a few Canadians among them, no doubt – can open US bank or brokerage accounts and so long as they keep their reportable earnings below a certain threshold can earn several thousands of USD “tax-free” and unreported every year.
FATCA imposes no requirement on the US to correct this sorry state of affairs. Note that the UK IGA does not require the US to provide the UK tax number of any UK resident whose income it reports to the UK under FATCA.
Why? Because it would cost a lot of money and further discourage investment in “Tax Haven, USA”.
The PATRIOT Act passed after 9/11 spooked many US banks and financial institutions away from allowing any foreigner to open account who could not proved US residency. But it wasn’t just the new and more extensive KYC requirements that motivated them. When American banks were faced with the requirement to modify their account holder information databases to accommodate foreign identification numbers that did not fit into the XXX-XX-XXXX of the US Social Security Number/ITIN format, many of them simply stopped offering accounts to foreigners rather than make the expensive IT changes.”
Here is the reply from Treasury back to Ron Paul. I will also post it here and on the original Ron Paul post.
Thanks for posting the Mexico annoucement on IGA. I also posted it here on the 22nd, and just updated Ask your FATCA question thread.
@Badger and Tiger..
Here are a couple email responses related your questions on Mexico
I would say it is a misunderstanding. As I understand and I think I understand it pretty clearly Mexico has no choice but to sign an agreement similar to that of the UK. However, I am not sure what to make of the fact that no agreement has been published yet. Mexico is pretty desperate to obtain non resident alien with holding information on its residents from the US.
I hate to suggest it, but Mexico probably does have some legitimate interest in some kind of reporting from the US, especially given the extent of criminally derived, mainly drug-related income in Mexico. (However given the large number of government officials involved in such activities, Mexico’s asking for asset information may include a substantial element of be-careful-what-you-wish-for.) In any case, there’s no need for FATCA for the US and Mexico to work out a reasonable approach to this.
You have to remember too there is already reporting from the US to Canada on Canadian resident held deposits in US banks. Mexico for a long time has simply been asking for the same treatment as Canada. This is also a Canada specific reason as to why an IGA doesn’t make sense for Canada as to already receives the “reciprocal” information being offered.
Comment 3 speaks to what I meant by the previous post from yesterday. Canada’s treaty with the U.S. already has Cdn. financial institutions having ‘U.S.Persons’, with accounts at their firms, signing a W-9 if any of their assets are U.S. So the way I interpreted the Mexico/U.S. IGA was that it would be an exchange of info not unlike what Canada and the U.S. already does based on the treaty between our two countries.
Thank you for the pdf of the letter from Treasury to Ron Paul. I’ll use it in correspondence as proof of US perfidy and intent to deny any true reciprocity – speaking out of one side of the mouth to Canada and other countries, and saying something different to the politicians and banks in the US.