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;
IGA: AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE REPUBLIC OF SOUTH AFRICA TO IMPROVE INTERNATIONAL TAX COMPLIANCE AND TO IMPLEMENT FATCA
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.
Thanks for this and all the information you’ve provided here, Domino. Canada has indeed been duped. We have a Prime Minister who would love to be American and all of his Conservative MPs vote in lockstep with him to waive the rights of many Canadians in many different ways.
I would hope this is not what those asleep in Canada really want. But who am I to say?
Timely, new from Virginia La Torre Jeker:
Sorry to rain on the parade, but a close reading of the two IGA’s does not suggest to me that Canada did much different than SA as regards confidentiality of data or reciprocity. In both cases, the US commits to deliver far, far less and from far, far fewer FI’s than Canada or SA do. The US has the same deadline (Jan 1, 2017) to get it done and has the same weasel words in art 6 about trying their best etc to get reciprocity. The sanction for the US not delivering is Canada or SA can cancel. By the way, Canada or SA could collect and not remit the data until they see the very limited, promised US data. I doubt either will do it, but it is perfectly permissible under the IGA’s. Canada’s confidentiality protection clause refers to the Convention (US Canada tax treaty) which in turn requires data turned over to be treated as tax data and used only for the purposes of collecting taxes covered by the Convention. I would think a case can be made that FBAR is certainly out of the Convention and not tax per se – in theory, they couldn’t use FACTA data to seek to collect FBAR fines etc, but don’t hold your breath. SA says “tax only” in their IGA – I give that the same odds of success as Canada.
In short, I don’t see that SA did any better or worse on the key points.
Thanks for the clarification.
One really has to wonder what “hard bargaining’ Canada really did when negotiating the IGA. Not very much!!
It looks like Germany got the same deal as the UK, can amend the agreement up to 31 December 2016 signed Model 1a. The US has agreed to send data by 1/1/2017.
Germany surprises me about FATCA. They make such a big deal about the NSA and the Bundesnachrichtendienst, and at a stroke of a pen give away private financial data to the US without a fight. The Germans always publicly say that they’re not big fans of wiretapping etc because of the Nazi times or defenders of privacy. I guess the German arguably more valuable financial information to piece together someone’s lift is less important.
Austria got screwed. No termination agreement just can terminate with 12 months notice and signed a Model 2.
All the jurisdictions with a sunset clause mentioned in my previous post have three additional paragraphs appended to Article 3:
Paragraph 8 requires that the US Competent Authority (IRS) and the relevant jurisdiction’s Competent Authority (IRS equivalent) assess each other’s ability to: (1) safeguard the privacy of exchanged information and (2) provide the infrastructure to enable such exchange. Each competent authority, once it is satisfied that both these boxes have been ticked, must provide written notification to the other.
Paragraph 9 provides that the obligation to exchange information only commences upon “the later of the written notifications described in paragraph 8”. However, in a move reminiscent of the tax treaties’ “Savings Clause”, all these jurisdictions except one have agreed to start exchanging information with the US as soon as they advise the IRS that they are satisfied with the IRS’ privacy safeguards and exchange infrastructure, even if the IRS hasn’t made such a determination of the relevant partner jurisdiction. The one jurisdiction that has negotiated a fully bilateral paragraph 9 is South Africa.
Paragraph 10 provides that the IGA will terminate on 30 September 2015 if either of the two written notifications has not been provided by that date.
There are a number of considerations here. It seems likely that the IRS has the requisite expertise to implement the necessary procedures and safeguards to satisfy the partner jurisdictions of these requirements. However, it might be worthwhile investigating whether the US’s information protection laws, or the IRS’ regulations relating to privacy of data fail to meet the statutory or constitutional standards required in other jurisdictions, many of which are more privacy oriented than the USA. For example, if there is recent evidence of another Federal department or agency gaining access to IRS data to, say, prosecute fraud, then this evidence could be forwarded to the 16 partner jurisdictions’ competent authorities (and media), which in turn might preclude some of them from providing the required written notification.
I am of the impression that while there are numerous jurisdictions eager to enter into FATCA with the USA, there are others that are doing so reluctantly in order to protect the integrity of their financial industries. The former are likely to be providing the written notifications as soon as feasible, the latter might be interested in exploiting any shortcomings in these complex regulations that would keep their FFIs compliant while delaying the obligations to exchange or withhold. Ultimately it would be helpful to know if and when these written notifications are exchanged so that account holders in these jurisdictions know where they stand. It’s unlikely to be widely disseminated public information, but it might be worth contacting the relevant Competent Authorities to request that they disclose the information.
Of course, dealing with these 16 jurisdictions individually is a labour of love, and if it results in 3 or 4 of the IGAs terminating in September 2015, it would be unlikely to derail the FATCA train. What’s important to remember is that the Model 1 IGAs provide ‘participating’ status on the jurisdiction’s FFIs and protection from withholding. If the IGA terminates, all the FFIs in that jurisdiction will become ‘nonparticipating’ and subject to withholding. What is needed is for a critical mass of jurisdictions and large FFIs to fall outside of FATCA, which would make the legislation inoperable.
If I had a wish it would be that hackers gain access to the IRS’ servers and acquire and publish the tax returns (or some benign but confidential information) of the U.S. officials complicit in drafting and enforcing FATCA. This would likely prevent the 16 jurisdictions from being able to provide the required written notification, and might cause others with strong privacy laws to repudiate their FATCA obligations.
I am sure some one will correct me if I am wrong but Canada and the US have had an automatic exchange agreement for years based on residency rather than citizenship. Since FATCA only makes significant changes the Canadian requirements and not to the US requirements then technically the US is already in compliance with FATCA and the sunset clause would be rather meaningless.
Just a Canadian, yes we do have an agreement already but the info exchanged amounts to little more than “yes, this person has accounts”. Not the kind of data the US wants.
As Anne Frank points out, Canada need do nothing more than collect info and hang onto it until such time as the US forks over data in return. 2017 is a ways off. Anyone could be PM by then and the Conservatives are just as likely to be well out of power as in. It’s also possible the Charter challenge could have gutted the IGA already.
@Domino, you have found a treasure trove of information that will be of value. Thank you,
Oh, thank you to my fellow Commonwealth Citizens in SA who did a wise negotiation. I know many from SA here, who I have great respect for, but that has gone up because of what you found.
Maybe the writers of FATCA know it will never fly in the end, and all this is just a way to make all non-US banks add billions of compliance dollars to their cost of doing business for a few years. Not to mention the 30% penalties if it ever gets that far.
“I understand the lack of economic sanctions is a gain, if you will, but what about other gains for us?”
Right. I threaten to shoot you if you don’t hand over all your money. You hand it over and I don’t shoot you, and you see that as a gain. That’s called robbery.
You say you know many from SA here. Is there any way that we could make contact with each other to discuss matters of mutual concern? We’re so thinly spread here, that I rarely meet U.S. expatriates, and I’ve yet to meet another accidental American in over 30 years living in SA.
Perhaps we could mount another constitutional challenge. The first paragraph of our bill of rights states:
“The state may not unfairly discriminate directly or indirectly against anyone on one or more grounds, including race, gender, sex, pregnancy, marital status, ethnic or social origin, colour, sexual orientation, age, disability, religion, conscience, belief, culture, language and birth.”
Our constitution, having been recently drafted against the backdrop of the discriminatory policies of Apartheid, contains additional and strong anti-discriminatory protections not found in many other constitutions. While it appears to lack the ‘national origin’ term in the Section 15 of the Canadian Charter of Rights and Freedoms, it notably mandates that the state may not discriminate on grounds of birth. The IGA clearly discriminates in this way with its US place of birth indicium.
@Moose “You hand it over and I don’t shoot you, and you see that as a gain.”
Echos of compliance condor Roy Berg’s article about muggings and the IGA being a good choice.
See http://isaacbrocksociety.ca/2014/05/23/controversial-us-tax-law-affects-many-american-expats-and-how-it-may-compromise-canadian-sovereignty-this-sunday-on-contact/comment-page-2/#comment-1851352 and several later comments on muggings in that thread.
Thanks for that. And Badger’s comment about mugging there is a nice description of abuse -> Stockholm Syndrome. But I am not a psychiatrist.