Introduction – Updated April 4, 2016
"Thanks to Elizabeth Thompson for her continued coverage of the FATCA Chronicles. Her article…" — John Richardson https://t.co/RMfux9eIAB
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) April 4, 2016
The above tweet references a comment posted at iPolitics.ca
Thanks to Elizabeth Thompson for her continued coverage of the FATCA Chronicles.
Her article contains the following statement from the Minister of National Revenue:
“Minister Lebouthillier wants to reassure Canadians that all exchanges of information are subject to strict confidentiality rules,” reads the e-mail sent by Lebouthillier’s office.
“The CRA ensures that tax cooperation with its foreign partners is done in a manner fully consistent with privacy rights in Canada. It is important to note that Canada and the United States have a long history of exchanging tax information in a fair and responsible manner, going back to 1942.”
Whether the Minister believes what she says or not, FATCA supporters in the United States have made it clear that the use of information obtained pursuant to FATCA, should NOT to be used only for tax purposes. Since this post references, Liberal Leader Justin Trudeau’s letter to Lynne Swanson, I will reference you to a blog post written by Lynne Swanson which appears on her Maplesandbox.ca blog at:
Ms. Swanson’s post references a 2012 letter written by the then U.S. Senator Carl Levin.
The letter from Senator Levin includes:
“Although FATCA is structured to address offshore tax abuse, offshore account information has significance far beyond the tax context, affecting cases involving money laundering, drug trafficking, terrorist financing, acts of corruption, financial fraud, and many other legal violations and crimes. Given the importance of offshore account disclosures, FATCA guidance and implementing rule should create account FATCA forms that are not designated as tax return information but, like FBARs, may be provided to law enforcement, regulatory, and national security communities upon request. FFIs are not, after all, U.S. taxpayers, and will not be supplying tax information on behalf of their U.S. clients; they will instead be providing information about accounts opened by U.S. persons. The U.S. Supreme Court has long held that bank account information is not inherently confidential but is subject to inspection by law enforcement and others in appropriate circumstances. Foreign account information is too important to a wide range of civil and criminal law enforcement and national security efforts to be designated as tax return information bound by Section 6103’s severe restrictions on access.”
You can read the letter yourself here:
Ms. Swanson concludes her post by asking the obvious question:
“Why bother with a warrant or surveillance when you can simply declare someone a “US person” and FATCA them?!?”
In Part 1 I described how the FATCA IGA is being applied to a U.K. PTA. My next post will continue the discussion of “Entities”. That said, this series of posts is about how the FATCA IGA works and how it may be interpreted. This post will focus on how some of the definitions in the FATCA IGA are found NOT in the IGA but in other sources.
This post will also explain how the clear definitions in the IGA (incorporation by reference from other sources) makes it clear that the purpose of the IGA is to extend beyond taxation. The IGA is supposedly justified as an extension to the Canada U.S. Tax Treaty which is found here.
Article XXVII of the Treaty reads as follows:
Exchange of Information
1. The competent authorities of the Contracting States shall exchange such information as is relevant for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes to which the Convention applies insofar as the taxation thereunder is not contrary to the Convention. The exchange of information is not restricted by Article I (Personal Scope). Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the taxation laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the administration and enforcement in respect of, or the determination of appeals in relation to the taxes to which the Convention applies or, notwithstanding paragraph 4, in relation to taxes imposed by a political subdivision or local authority of a Contracting State that are substantially similar to the taxes covered by the Convention under Article II (Taxes Covered). Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions. The competent authorities may release to an arbitration board established pursuant to paragraph 6 of Article XXVI (Mutual Agreement Procedure) such information as is necessary for carrying out the arbitration procedure; the members of the arbitration board shall be subject to the limitations on disclosure described in this Article.
To put it simply:
- The clear terms of the U.S. Canada Tax Treaty make it clear that the treaty is about taxation.
- The clear terms of the U.S. Canada IGA make it clear that it is about much more than taxation.
Yet, the Governments of both Canada and the United States claim that the IGA is justified as an extension of the tax treaty.
So much has been written about FATCA IGAs that few people consider the original FATCA legislation. The IGAs seem to have taken on a life of their own. As a reminder, the original FATCA legislation may be found in S. 1471 to S. 1474 of the Internal Revenue Code.
The title is: “TAXES TO ENFORCE REPORTING ON CERTAIN FOREIGN ACCOUNTS”.
Much has written about the reason for the FATCA IGAs. Much has written about the role that the Canadian banks played in lobbying for the FATCA IGAs. Much has written about the Canadian laws that have been changed to comply with the FATCA IGAs.
Very little has been written about how to interpret the IGAs. It is assumed that the FATCA IGAs are to facilitate the intent of FATCA as expressed in S. 1471 to S. 1474 of the Internal Revenue Code. A perusal of the definitions section of the Canada U.S. FATCA IGA suggests that this may not be true.
This post is to highlight certain definitions found in the IGA that are incorporated by reference from other sources. I believe that the passage of time will demonstrate how important these “incorporations by reference” are.
I have alluded to these issues in other posts. This is a separate post to highlight incorporations by reference in one place.
On February 5, 2014 Canada and the United States entered into a FATCA IGA. Here is the Canada U.S. FATCA IGA:
Whether the FATCA IGA is a treaty or just some kind of “government to government” agreement (or whether this matters) all agreements contain definitions. The “definitions” are found primarily in S. 1 of Article 1. There are at least three terms that are incorporated by reference to other sources:
First – The definition of “U.S. Person”:
ee) The term “U.S. Person” means
(1) a U.S. citizen or resident individual,
(2) a partnership or corporation organized in the United States or under the laws of the United States or any State thereof,
(3) a trust if
(A) a court within the United States would have authority under applicable law to render orders or judgments concerning substantially all issues regarding administration of the trust, and
(B) one or more U.S. persons have the authority to control all substantial decisions of the trust, or
(4) an estate of a decedent that is a citizen or resident of the United States.
This subparagraph 1(ee) shall be interpreted in accordance with the U.S. Internal Revenue Code.
Note that the language says “in accordance with”. This means that the United States and the United States alone defines who is a “U.S. Person”. In both 2004 with the American Jobs Creation Act and in 2008 with the HEART Act, the “U.S. Internal Revenue Code” was amended to change the definition of “U.S. Person”. This allows the United States to expand the definition of “U.S. Person” at will. It allows the United States to claim jurisdiction over any person “at will”. I suggest that this is one of the most dangerous sections of the IGA.
A U.S. claim of jurisdiction over a person means that ….
First, they can be subjected to the U.S. tax system (we are all citizens and we should all pay our “fair share” of taxes to the United States);
Second, (see below) it allows the United States to conduct a search of a “U.S. Person’s” financial information without a warrant.
Second – The definition of “Investment Entity”:
j)The term “Investment Entity” means any Entity that conducts as a business (or is managed by an entity that conducts as a business) one or more of the following activities or operations for or on behalf of a customer:
(1) trading in money market instruments (cheques, bills, certificates of deposit, derivatives, etc.); foreign exchange; exchange, interest rate and index instruments; transferable securities; or commodity futures trading;
(2) individual and collective portfolio management; or
(3) otherwise investing, administering, or managing funds or money on behalf of other persons.
This subparagraph 1(j) shall be interpreted in a manner consistent with similar language set forth in the definition of “financial institution” in the Financial Action Task Force Recommendations.
This means that the definition of “Investment Entity” cannot be inconsistent (but does not necessarily have to be the same) with the definition of “financial institution” in the Financial Task Force Recommendations.
Third – The definition of of “Controlling Person”:
mm) The term “Controlling Persons” means the natural persons who exercise control over an Entity. In the case of a trust, such term means the settlor, the trustees, the protector (if any), the beneficiaries or class of beneficiaries, and any other natural person exercising ultimate effective control over the trust, and in the case of a legal arrangement other than a trust, such term means persons in equivalent or similar positions.
The term “Controlling Persons” shall be interpreted in a manner consistent with the Financial Action Task Force Recommendations.
This appears to mean the term “Controlling Persons” means the “person(s)” who:
(1) according to Financial Action Task Force Recommendations;
(2) exercise “ultimate effective control” over the entity.
Note that this does NOT say that the “Controlling Person” must have any legal relationship to the “Entity”. In the case of a corporation, the “Controlling Persons” need NOT be a shareholder, director or officer. The implications of this are staggering. The days of “the company is in my wife’s name” may be coming to an end.
Conclusion: The purpose, objectives and priorities of the “Financial Action Task Force” are now incorporated into the IGA. As will be seen, the purposes of the “Financial Action Task Force” are NOT primarily related to tax compliance. The “Financial Action Task Force” now affects the way in which Canadian banks interact with Canadian individuals and Canadian “Entity Accounts”.
The obvious question is …
Who or what is the Financial Action Task Force?
The Financial Action Task Force (FATF) is an inter-governmental body established in 1989 by the Ministers of its Member jurisdictions. The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. The FATF is therefore a “policy-making body” which works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.
The FATF has developed a series of Recommendations that are recognised as the international standard for combating of money laundering and the financing of terrorism and proliferation of weapons of mass destruction. They form the basis for a co-ordinated response to these threats to the integrity of the financial system and help ensure a level playing field. First issued in 1990, the FATF Recommendations were revised in 1996, 2001, 2003 and most recently in 2012 to ensure that they remain up to date and relevant, and they are intended to be of universal application.
The FATF monitors the progress of its members in implementing necessary measures, reviews money laundering and terrorist financing techniques and counter-measures, and promotes the adoption and implementation of appropriate measures globally. In collaboration with other international stakeholders, the FATF works to identify national-level vulnerabilities with the aim of protecting the international financial system from misuse.
Interestingly, the Financial Action Task Force exists for the purpose of “combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.” It is NOT primarily about tax evasion in general or about locating “U.S. Persons” in particular. At a bare minimum, this means that the Canada U.S. FATCA IGA (although it may have more than one purpose) includes the purpose of combating terrorism, money laundering and the proliferation of weapons of mass destruction. Is there something about a “U.S. place of birth” that makes one more susceptible to these objectives?
Does S. 15 of Canada’s Charter of Rights and Freedoms have any bearing on this?
Equality before and under law and equal protection and benefit of law
15. (1) Every individual is equal before and under the law and has the right to the equal protection and equal benefit of the law without discrimination and, in particular, without discrimination based on race, national or ethnic origin, colour, religion, sex, age or mental or physical disability.
FATF Recommendations …
The most recent recommendations of the Financial Action Task Force came in 2012 as follows.
Senator Carl Levin – FATCA as a mechanism to …
In 2013, Lynne Swanson writing on her Maple Sandbox blog, commented that:
In Obama’s 2009 press conference on FATCA, he credited Carl Levin for being one of the masterminds on FATCA for combating offshore tax evasion.
In 2012, Carl Levin wrote a letter to IRS, demanding (page 11)
Although FATCA is structured to address offshore tax abuse, offshore account information has significance far beyond the tax context, affecting cases involving money laundering, drug trafficking, terrorist financing, acts of corruption, financial fraud, and many other legal violations and crimes. Given the importance of offshore account disclosures, FATCA guidance and implementing rule should create account FATCA forms that are not designated as tax return information but, like FBARs, may be provided to law enforcement, regulatory, and national security communities upon request. FFIs are not, after all, U.S. taxpayers, and will not be supplying tax information on behalf of their U.S. clients; they will instead be providing information about accounts opened by U.S. persons. The U.S. Supreme Court has long held that bank account information is not inherently confidential but is subject to inspection by law enforcement and others in appropriate circumstances. Foreign account information is too important to a wide range of civil and criminal law enforcement and national security efforts to be designated as tax return information bound by Section 6103’s severe restrictions on access.
The complete text of Senator Levin’s letter is here:
Is the FATCA IGA a substitute for a “search warrant”? Does a FATCA IGA create an automatic mechanism for surveillance?
At the close of her post, Ms. Swanson asks the following question:
Why bother with a warrant or surveillance when you can simply declare someone a “US person” and FATCA them?!?
S. 8 of the Canadian Charter of Rights and Freedoms …
S. 8 of the Canadian Charter of Rights and Freedoms protects against “unreasonable search and seizure”.
Search or seizure
8. Everyone has the right to be secure against unreasonable search or seizure.
Can the provision be used to protect Canadian citizens and residents from the FATCA inquisition? Is there something about having been born in the United States that creates a presumption of tax evasion, money laundering or terrorist financing?
Summary and conclusions …
It is reasonable to conclude that:
– the true objectives and possibilities for FATCA are largely found in the provisions that are “incorporated by reference”;
– the U.S. and the U.S. alone decides the definition of “U.S. person” allowing the United States to claim ANY citizen or resident of ANY nation as a U.S. tax subject
– the FATCA IGA, in its plain terms, make it clear that the FATCA IGA allows for a “search and seizure” of financial information, for reasons that are unrelated to taxation, and that are without a “reasonable basis” or without “probable cause”
Funny, none of these things can be found in S. 1471 to S. 1474 of the Internal Revenue Code which are FATCA’s enabling legislation. Who knows what the original purpose of FATCA was. Have the FATCA IGAs taken on a “life of their own” that has grown beyond the original purpose of FATCA? To put it another way, have the FATCAnatics said:
“We don’t know what the original purpose of FATCA was. We don’t care what the original purpose of FATCA was. We are going to force FATCA IGAs on the world. The FATCA IGAs although motivated by S. 1471 – S. 1474 of the Internal Revenue Code, are completely independent agreements.
When the “incorporations by reference” are considered, it is reasonable to conclude that the FATCA IGAs have objectives that are not expressed in S. 1471 to S. 1474 of the Internal Revenue Code. It’s clear that the IGAs are more about the sentiments expressed in Carl Levin’s letter than they are about taxation. Yet, the FATCA IGAs have been justified as extensions of existing tax treaties. Go figure …
John Richardson – Follow me on Twitter @Expatriationlaw