Category Archives: FATCA self certification

Part 13: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – Colonizing other nations by imposing US taxation on the world

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Introduction – FATCA is really about extending the U.S. tax base into other nations …
In other words, FATCA is more about the “creation of taxable income” than it is about the “taxation of existing income”. This point was also made in my “Tax Haven or Tax Heaven Series“.
 


What follows is a comment that I tried to leave on the following blog post:
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Part 12: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – Including US residents who are citizens of France and other nations!

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Introduction – FATCA and U.S. residents
In Part 10 of this series of FATCA posts, I discussed the meaning of “U.S. Person”. The vast majority of people affected by FATCA are non-U.S. residents. That said, FATCA can affect U.S. residents who are citizens of other nations and have bank accounts in the United States. In some cases, the “due diligence” rules under the FATCA IGAs are making it difficult for citizens of other nations to keep access financial services (including bank accounts) in their country of citizenship. This topic is sure to gain more and more attention.
FATCA and Swiss citizens who are resident in Switzerland
 


FATCA and French citizens resident in the USA
 


The above tweet references a post at Frenchmorning.com which I was alerted on Keith Redmond’s AmericanExpatriates Facebook group. Although the post is in French you can get a rough translation with Google Translate*.
I was first alerted (in hindsight very obvious problem) by a French politician.
Here is the problem:

  1. FATCA forces French banks to hunt for customers with U.S. indicia.
  2. French citizen (and likely permanent resident of France) is living in the United States. He could be living in the United States under a number of different visas, including a “Green Card” (permanent resident visa). In addition, he might be a France/USA dual citizen.
  3. Because of a U.S. address or phone number, he washes up the shores of the “FATCA inquisition”.
  4. He is threatened with account closures and all the other disabilities that are common in Europe.
  5. He may not be able to pay his bills because of the FATCA related bank account problems.
  6. He may or may not be required to file U.S. taxes.
  7. If he is required to file U.S. taxes, he may or not be filing U.S. taxes.
  8. Either way he has a problem with his French bank.
  9. If he has a Green Card and attempts to move back to France, he may be subject to the S. 877A “Exit Tax”.
  10. Which is why the French Politician commented that “Many of our French citizens are currently “in prison in America”.

The time has come for Governments around the world to protect their citizens from the United States of America. Fortunately, France has recently taken the lead. To be specific: France has established an inquiry into how U.S. extra-territorial legislation affects the sovereignty of France.
_______________________________________________________________
* Here is the current attempt by Google to translate the French article:
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Part 10: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – But only those "Born In The USA"

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The purpose of this post is to highlight:

  • who are the targets of the “FATCA inquisition” under the FATCA IGA; and
  • who will not turn up in the “FATCA inquisition” under the FATCA IGA.

There are four parts to this post:
Part A – Who is a “U.S. Person” and how are they defined?
Part B – The FATCA IGA doesn’t hunt ALL U.S. persons. It is designed to hunt primarily for people who were “Born In The USA”
Part C – But, those “Born In The USA” may not actually be U.S. citizens or may have NO connection to the United States – Meet Tina
Part D – The FATCA IGA has been interpreted by the Canada Revenue Agency to NOT hunt “Green Card Holders” resident in Canada
Part A – Who is a “U.S. Person” and how are they defined?
If the purpose of FATCA is to hunt for “U.S. Persons”, “U.S. person” includes “U.S. citizen”, and the FATCA IGA’s state that “U.S. Citizen” is defined under the Internal Revenue Code, we must ask:
Who does the Internal Revenue Code define as a “U.S. Person”. The definitions are found in S. 7701 of the Internal Revenue Code.
S. 7701
(a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof—
(1) Person
The term “person” shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation.
(30) United States person The term “United States person” means—
(A) a citizen or resident of the United States,
(B) a domestic partnership,
(C) a domestic corporation,
(D) any estate (other than a foreign estate, within the meaning of paragraph (31)), and
(E) any trust if—
(i) a court within the United States is able to exercise primary supervision over the administration of the trust, and
(ii) one or more United States persons have the authority to control all substantial decisions of the trust.
(50) Termination of United States citizenship
(A) In general
An individual shall not cease to be treated as a United States citizen before the date on which the individual’s citizenship is treated as relinquished under section 877A(g)(4).
(B) Dual citizens
Under regulations prescribed by the Secretary, subparagraph (A) shall not apply to an individual who became at birth a citizen of the United States and a citizen of another country.
(b) Definition of resident alien and nonresident alien
(1) In general For purposes of this title (other than subtitle B)—
(A) Resident alien An alien individual shall be treated as a resident of the United States with respect to any calendar year if (and only if) such individual meets the requirements of clause (i), (ii), or (iii):
(i) Lawfully admitted for permanent residence
Such individual is a lawful permanent resident of the United States at any time during such calendar year.
(ii) Substantial presence test
Such individual meets the substantial presence test of paragraph (3).
(iii) First year election
Such individual makes the election provided in paragraph (4).
(B) Nonresident alien
An individual is a nonresident alien if such individual is neither a citizen of the United States nor a resident of the United States (within the meaning of subparagraph (A)).
(3) Substantial presence test
(A) In general Except as otherwise provided in this paragraph, an individual meets the substantial presence test of this paragraph with respect to any calendar year (hereinafter in this subsection referred to as the “current year”) if—
(i) such individual was present in the United States on at least 31 days during the calendar year, and
(ii) the sum of the number of days on which such individual was present in the United States during the current year and the 2 preceding calendar years (when multiplied by the applicable multiplier determined under the following table) equals or exceeds 183 days:
In the case of days in: The applicable multiplier is:
Current year 1
1st preceding year 1/3
2nd preceding year 1/6
(B) Exception where individual is present in the United States during less than one-half of current year and closer connection to foreign country is established An individual shall not be treated as meeting the substantial presence test of this paragraph with respect to any current year if—
(i) such individual is present in the United States on fewer than 183 days during the current year, and
(ii) it is established that for the current year such individual has a tax home (as defined in section 911(d)(3) without regard to the second sentence thereof) in a foreign country and has a closer connection to such foreign country than to the United States.
(6) Lawful permanent resident For purposes of this subsection, an individual is a lawful permanent resident of the United States at any time if—
(A) such individual has the status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws, and
(B) such status has not been revoked (and has not been administratively or judicially determined to have been abandoned).
An individual shall cease to be treated as a lawful permanent resident of the United States if such individual commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, does not waive the benefits of such treaty applicable to residents of the foreign country, and notifies the Secretary of the commencement of such treatment.
The Internal Revenue Code mandates that “U.S. Persons” are subject to U.S. taxation. “U.S. Persons” include both individuals and entities.
Individuals – include U.S. Citizens, Green Card Holders and those who meet the “substantial presence” test.
Entities – include a trust, estate, partnership, association, company or corporation.
Part B – FATCA doesn’t hunt ALL U.S. persons. It is designed to hunt primarily for people who were “Born In The USA”

Here is why …
In a recent paper McGill Professor Allison Christians notes that:

Perhaps surprisingly, FATCA’s identification method does not align with the statutory construction of the US Person population described above/ The misalignment is evident when comparing the three US Person categories to the FATCA indicia meant to alert financial institutions to the possible existence of a US Person. The misalignment continues to the verification phase, where taxpayers are asked to furnish various negative proofs of their status as US Persons, as Tina was asked to do. By examining the identification and verification processes, we begin to get a sense of the population actually being targeted by FATCA to enforce US taxation and financial reporting requirements on nonresidents.
FATCA has financial institutions searching for US Persons by looking for the following “indicia” of status:
1. account holder is identified as a US citizen or resident;
2. birthplace in the United States;
3. a US telephone number;
4. a US residence or mailing address;
5. standing instructions to transfer funds to a US based
account;
6. Indications of a power of attorney over the account to a
person with a US address;
7. a “care of” or hold mail address as the sole address.
In addition, where indicia are not present, a “responsible officer” must certify as to any knowledge of an account holder’s status as a US Person, and must monitor its accountholders for possible changes in circumstances.38 Other than the first factor on the list, the FATCA indicia do not align with the three categories of US Person as defined by § 7701.
…
2. Citizenship
“Citizens” are the second category of US Person described above. Only two of the indicia have any direct bearing on one’s status as a citizen, namely, the account holder’s identification as such, and her birthplace in the United States. The first of these indicia confirms the voluntary nature of the nonresident citizen’s acquiescence to her status. Announcing oneself as a US citizen to a non-US bank seems to be the clearest indication that the account holder is in fact a US citizen and therefore a US Person for tax purposes.44
Birthplace in the United States, however, highlights a major difficulty in imposing citizenship taxation. A person born within the territory of the United States is usually entitled to birthright citizenship, with few exceptions. 45 That is why Tina is automatically a citizen, without any independent action on her part or that of her parents. However, the definition of a citizen in US law is complex and is subject to widespread misunderstanding by those who receive the status by birthright but have never lived permanently in the country. 46 Moreover, citizenship can be changed by the individual through relinquishment 47 or renunciation.48 In the past, it was possible for a person to relinquish her citizenship automatically upon naturalization in another country.49 However, the US Supreme Court rejected this position and reinstated citizenship once thought lost.50 Today, the individual must display intent in order to lose citizenship status.51
The interplay of these immigration rules with taxation on the basis of citizenship is subject to intense debate and certainly exceeds any scope of common wisdom.52 In the past, expatriation would have automatically negated a person’s citizenship status for tax purposes; at present, it does not.53 Indeed, the definition of citizen for tax purposes is potentially circular in the application.54 These complications attending to birthright citizenship are sufficiently detailed and specific to the individual that they create legal uncertainty that is not answered in the tax law, let alone in FATCA indicia.
pages 15 – 17
SSRN-id2717367

Part C – But, those “Born In The USA” may not actually be U.S. citizens or may have NO connection to the United States – Meet Tina

Allison Christians is the H. Heward Stikeman Chair in Tax Law at McGill University in Montreal, where she writes and teaches in the area of national and international tax law and policy. You can follow her on the Tax, Society & Culture blog at taxpol.blogspot.com or on Twitter (@taxpolblog). She delivered the following speech at the International Conference on Taxpayer Rights in Washington on November 18.

* * * * *

I would like to tell you a story about the taxpayer’s right to know what the law requires of her and to have the law administered fairly. This is just one story based on things happening now, but it is a common story. I’m telling this story instead of giving an exposition on the underlying legal texts because sometimes the rules are too complicated and too technical for anyone to really understand, even tax lawyers. Moreover, reading the law itself doesn’t explain what isn’t written on the books, which can matter more in how things play out in human terms. As you will see, the implementation of the law gives rise to a taxpayers’ rights issue — one that wouldn’t be clear from reciting the law alone.
The story I am going to tell you is about a woman named Tina. She’s Canadian. She is 62. Tina is nearing retirement age and has been a cautious and diligent person all her life, carefully saving for her old age following the textbook investment advice that tells us we should invest in low-load pooled investment vehicles — mutual funds — and hang onto them for the long term.
Tina isn’t buying and selling investments, following market trends, or taking risks. She doesn’t have time for that. Tina is married with two kids and lives in the family home she bought with her husband some 30 years ago. She’s hanging in for slow and steady, reliable, low-risk growth, planning for retirement in Canada. As a child, Tina occasionally took a trip down to the United States. Visiting Florida in February is still a tempting prospect, given the harshness of Canadian winters, but Tina has only dreamed of that kind of vacation so far. She is careful with her money, plans to live on her savings, and doesn’t want to burden her kids.
One day, Tina finds the following letter in her mailbox. It’s from her neighborhood bank where she has been banking all her adult life, where she has her checking and savings accounts.
Read Tina’s story and the story of all Tina’s at Tax Analysts.

 
Part D – The FATCA IGA has been interpreted by the Canada Revenue Agency to NOT hunt “Green Card Holders” resident in Canada


See the post referenced in the above tweet.
 

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Part 9: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – "Place of birth", the Canadian teenager and the new account

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The above tweet references the following interesting comment on the Isaac Brock Society.

I think you’ll appreciate this. One of my minor children has some money saved up from baby sitting and odd jobs. The amount is now large enough that she asked me to help her invest the sum for down the road. So off we go to my favourite discount brokerage, RBC Direct Investments to open an investment account for her. Because she’s a minor, the account has to be opened as “BC_Doc In Trust For Canadian Born Teenage Daughter.”
So we get logged in to the RBC website and proceed to the application screen. So far so good. Then the Unaskable Questions start getting asked:
1) Trustee– Are you a U.S. Citizen or a U.S. resident for tax purposes?
a) Dare to click “Yes” and up pops a notice, “To comply with regulations, you will be presented with a W9 form with your application package.”
b) Social Security Number (SSN)– Write it down heren Now consider yourself officially marked and packaged for the IRS. Good luck sucker.
2) Is the Beneficiary a U.S. Citizen or a U.S. resident for tax purposes?
a) Go ahead, I dare you– click “Yes”– Guess what, you’re going to receive another one of those tasty W9 forms so we can serve your minor up to Uncle Sam as a tasty treat.
b) Social Security Number (SSN)– welcome to our data base kid. If you’re lucky, in a few years, we’ll draft you and send you off to some country whose name you can’t pronounce to die so that a bunch of Homelanders can get fat sitting on their couches while they watch Netflix and oil their guns.
3) How many countries is the beneficiary a resident of for tax purposes?
Reason– You may have told us you’re only Canadian but it really doesn’t matter what you think kid– if the U.S. says you’re American, then by God, “Congress has spoken.”
a) Beneficiary’s country of residence for tax purposes?
4) Beneficiary’s country of birth?
a) Select your country of birth– by now, you know where this is headed. It’s part of a new U.S. policy called, “Leave no (ex-pat) American behind.” Even if they don’t want to be American. Or consider themself to be American. Or didn’t even know they were American.

The appropriateness of the “place of birth question” …
Here is the part of the FATCA IGA that governs “due diligence” requirements for new account openings – (Annex I – Part III – Starting on page 26).

III. New Individual Accounts
The following rules and procedures apply for purposes of identifying U.S. Reportable Accounts among Financial Accounts held by individuals and opened on or after July 1, 2014 “New Individual Accounts”.
A. Accounts Not Required to Be Reviewed, Identified, or Reported
Unless the Reporting Canadian Financial Institution elects otherwise,either with respect to all New Individual Accounts or, separately, with respect to any clearly identified group of such accounts, where the implementing rules in Canada provide for such an election, the following New Individual Accounts are not required to be reviewed, identified, or reported as U.S. Reportable Accounts:

  1. A Depository Account unless the account balance exceeds $50,000 at the end of any calendar year or other appropriate reporting period.

2. A Cash Value Insurance Contract unless the Cash Value exceeds $50,000 at the end of any calendar year or other appropriate reporting period.
B. Other New Individual Accounts.
1. With respect to New Individual Accounts not described in paragraph A of this section, upon account opening (or within 90days after the end of the calendar year in which the account ceases to be described in paragraph A of this section), the Reporting Canadian Financial Institution must obtain a self-certification, which may be part of the account opening documentation, that allows the Reporting Canadian Financial Institution to determine whether the Account Holder is resident in the United States for tax purposes (for this purpose, a U.S. citizen is considered to be resident in the United States for tax purposes, even if the Account Holder is also a tax resident of another jurisdiction) and confirm the reasonableness of such self-certification based on the information obtained by the Reporting Canadian Financial Institution in connection with the opening of the account, including any documentation collected pursuant to AML/KYC Procedures.
2. If the self-certification establishes that the Account Holder is resident in the United States for tax purposes, the Reporting Canadian Financial Institution must treat the account as a U.S. Reportable Account and obtain a self-certification that includes the Account Holder’s U.S. TIN (which may be an IRS Form W-9 or other similar agreed form).
3. If there is a change of circumstances with respect to a New Individual Account that causes the Reporting Canadian Financial Institution to know, or have reason to know, that the original self-certification is incorrect or unreliable, the Reporting Canadian Financial Institution cannot rely on the original self-certification and must obtain a valid self-certification that establishes whether the Account Holder is a U.S. citizen or resident for U.S. tax purposes. If the Reporting Canadian Financial Institution is unable to obtain a valid self-certification, the Reporting Canadian Financial Institution must treat the account as a U.S. Reportable Account.

It has been confirmed that TD Canada Trust has sent a “FATCA Letter” to an 8 month old baby!
Screen shot 2016-04-20 at 7.12.33 AM
For comments on the above “TD Green Chair” see the following post at the Isaac Brock Society.
 
#youcantmakethisup
 
 

Part 8: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – The Canadian "not for profit" and other FATCA Free Entities/Zones

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FATCA is about withholding and reporting. The basic principle is that a financial institution will:
1. Withhold payments unless the “RIR” (“Review, Identify and Report”) rule has been satisfied; and
2. The individual or entity has “reported” his or her possible U.S. status.
It’s that simple. That said, there are some “entities” that are NOT required to report. It is possible that a Canadian “not for profit” (that meets certain requirements) may be exempted from the burdens of FATCA compliance.
In other words, it is possible that the world may still include (other than Algonquin Park) certain “FATCA Free Zones”.
This issue was discussed in the following memo from KPMG.
KPMG fatca-and-not-for-profit-entities-v2
The KPMG memo includes:

FATCA Classification
Both the FATCA Regulations and the IGA describe various entities whose obligations under FATCA are reduced or eliminated.
A Canadian not-for-profit entity would generally be classified as one of the following “Excepted NFFEs” under the FATCA Regulations:
1. A “Section 501(c) Entity,” which includes such things as charitable organizations, corporations holding title to property for exempt organizations, civic leagues, social welfare organizations, certain associations of employees, labour, agricultural and horticultural organizations, business leagues, chambers of commerce, real estate boards, social and recreational clubs and certain credit unions;
2. A Canadian non-profit organization (NPO; as that term is defined in the FATCA Regulations) that is established and maintained in Canada exclusively for educational, charitable, scientific, artistic, cultural or religious purposes if:
a.The NPO is exempt from income tax in Canada;
b. The NPO has no shareholders or members with a proprietary or beneficial interest in its income
or assets;
c. With certain limited exceptions, applicable Canadian law or relevant formation documents of the NPO do not permit its income or assets to be distributed to, or applied for the benefit of, a private person or a non-charitable entity; and
d. Applicable Canadian law or formation documents generally require all assets of the NPO to be distributed to another NPO or
the Canadian government on its liquidation or dissolution.
3. An active NFFE. An NFFE is active if less than 50 percent of its gross income for the preceding taxable year (calendar or fiscal) is passive and less than 50 percent of its assets produce, or are held for the production of, passive income (based
on a weighted average percentage of such assets tested quarterly). For this purpose, passive income includes dividends, interest, rents, royalties, and similar amounts, as well as net gains from sales of assets that give rise to passive income.
….
FATCA Obligations
If it qualifies as an Excepted NFFE, a not-for-profit entity may avoid FATCA disclosure obligations (and penal withholding) by providing payors of US-source withholdable payments with a certification of its status as such.
Not-for-profit entities should be prepared to certify their classification on updated documentation (i.e., Form W-8BEN-E)
when requested by a US withholdingagent. For these purposes, the definitions in the Regulations continue to be controlling.

Conclusion:
Yes, it’s true there are “FATCA Free Zones” left in the world. Who could use a “not for profit” for tax evasion?  Certain “non-profits” (like Algonquin Park) may be a “place of refuge” for those “U.S. Persons in our midst” (only kidding, it’s vital that ALL “US Persons” be identified).
Thank God for Canadian “not for profits”!
 
 

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Part 7: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – Which country decides the nature of the "Entity"?

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On May 13, 2014, Calgary lawyer Roy Berg appeared as a witness before the House Finance Committee in Ottawa. His testimony was in relation to Bill C – 31 AKA Canada’s FATCA implementation legislation which was called:
CANADA–UNITED STATES ENHANCED TAX INFORMATION EXCHANGE AGREEMENT IMPLEMENTATION ACT
This legislation was for the purpose of the Canadian Government complying with Canada’s FATCA obligations under the IGA. The text of the proposed laws is at the end of this post.*
I will let Mr. Berg’s testimony speak for itself. It is interesting in at least one significant respect. Mr. Berg’s testimony illuminates the problem when the U.S. and Canada define the same term in different ways. I remind you that under the Canada U.S. FATCA IGA, that each country is free to interpret the agreement. See for example S. 2 of Article I of the Canada U.S. IGA which reads as follows:

Any term not otherwise defined in this Agreement shall, unless the context otherwise requires or the Competent Authorities agree to a common meaning (as permitted by domestic law), have the meaning that it has at that time under the law of the Party applying this Agreement, any meaning under the applicable tax laws of that Party prevailing over a meaning given to the term under other laws of that Party.

FATCA-eng
Note the problems created by definitions.
Mr. Berg’s testimony included:

Good afternoon, Mr. Chairman and members of the committee.
My name is Roy Berg. I’m a U.S. tax lawyer with Moodys Gartner. I was born, raised, and educated in the U.S. I practised in the U.S. for 17 years in tax law before immigrating to Canada three years ago. Therefore, I think there are very few individuals who have more personally and professionally vested in this issue than I do.
On March 9, 2014 our office submitted extensive analysis and commentary to the Department of Finance regarding our concerns about the draft legislation, and on April 10 we submitted a brief on these concerns to the committee. I will be happy to elaborate on any of the materials we have submitted, as they’re quite detailed and quite specific.
Before I summarize our comments on the draft legislation, however, I want to emphasize that we do agree with the Minister of Finance that entering into the IGA with the U.S. was beneficial to Canada. Had Canada not entered into the IGA, Canadian financial institutions would have faced the unenviable dilemma of either complying with Canadian law and risking FATCA’s 30% withholding tax or complying with FATCA and risking violating Canadian law.
Unfortunately, as FATCA is drafted and the IGAs are designed, there is no middle ground. Those are simply the facts. Life under the IGA is better than life without the IGA. As Senator Patrick Moynihan of the U.S. said, “everyone is entitled to his own opinion, but not his own facts”.
The committee is likely going to be aware of rather jingoistic hyperbolic rhetoric admonishing Finance for ceding Canadian power, ceding sovereignty, and also encouraging Canada to stand up to FATCA. As the committee hears such comments, we encourage it to remember that FATCA is U.S. law, and the way it’s designed, it’s enforced not by the IRS, not by the Treasury, but by the markets themselves. In that, it is like a sales tax. The withholding obligation is on the person making the payments.
While the IGA is unquestionably beneficial to Canadians, the legislation before you requires refinement, specifically in the manner in which a financial institution is defined under the legislation. The definition is actually much more narrow in the legislation than in the IGA, the intergovernmental agreement.
The Department of Finance disagrees with that assertion. The Department of Finance believes that the definition of financial institution under the legislation is consistent with that in the IGA. However, in our briefs and in our submissions to Finance, we go through the legal analysis to support our position.
One thing I believe the Department of Finance does not disagree on is that the definition of financial institution is more narrow in the regulations and the implementing legislation of other FATCA partners. Therefore, the definition of financial institution for certain Canadian financial institutions will be different under Canadian domestic law from what it will be under U.S. domestic law, for example.
This difference will likely lead to unintended and unnecessary withholding of certain Canadian trusts that otherwise have no U.S. connections at all, for example, a spousal trust created at death, where the spouse, the beneficiaries, and the trustees have no U.S. connections whatsoever, and the only connection would be a U.S. bank account.
In that case, under Canadian domestic law, that trust would be defined as a non-financial foreign entity, whereas in the U.S., it will be defined as a foreign financial institution. Payments coming out of the U.S. to that Canadian trust will be subject to withholding, because under U.S. law, when there’s a discordance between the stated classification of the entity and the classification of the entity under U.S. law, there is mandatory withholding.

________________________________________________________________________________________
*What follows is Part 5 of Canada’s Bill C-31 – The Canada–United States Enhanced Tax Information Exchange Agreement Implementation Act – the Bill which is the enabling legislation to implement the Canada U.S. FATCA IGA – signed by the Harper Government.
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Part 6: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – Breaking open the Family Trust one country at a time

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Introduction
Part 5 of this series introduced the idea of the “Great FATCA Entity Hunt”. The key is to seek “USness” hiding behind ANY entity anywhere in the world.
Not even the lowly family trust is safe from suspicion of a possible U.S. connection. In fact, FATCA is “breaking open” family trust outside the USA. Gotta make sure that there is NO U.S. involvement. Really, you can’t make this kind of intrusiveness up.
In each of the following two examples, notice how is is local accountants who are carrying the search for “U.S. persons”. All “entities” throughout the world are under suspicion of being American.
First, let’s begin with a family trust in the U.K.


The post referenced in the above tweet includes:

The first Charles and Margaret Stewart knew about FATCA was when, earlier this month, a letter arrived from their accountant, Grant Thornton, warning that a “review” was required into a trust they had established for their daughter in 2004. The letter said: “There are certain steps you need to take. The starting point will be to carry out a detailed review…” It estimated the initial costs would be £350 plus VAT, possibly more, “based upon the time spent on the matter”.
The Stewarts established the trust 10 years ago to buy a property for their adult, dependant daughter, in order to safeguard the property as her home for as long as she needs to live there. The property, near Charles’s and Margaret’s own home in Leicestershire, generates no income. None of Mr Stewart, 74, pictured, his wife Margaret, or their daughter has any US connections.
Although it was established for wholly innocent reasons, this trust along with an estimated 100,000 others now falls within the far-reaching scope of FATCA.
Once the review is undertaken, if the accountant is satisfied the trust does not need to fulfil any further obligations under FATCA, there are no further costs – and no information will be passed on to HMRC or the American authorities. “This whole process seems extraordinary,” said Mr Stewart. “The trust just has a property inside that is not providing any income so I don’t understand why it needs to be reviewed, simply to satisfy regulation introduced by another country.”
In its letter, Grant Thornton is mildly apologetic, saying it “regrets having to write about new compliance requirements and related costs” but adds “this is something that will have to be dealt with.”
It is not alone as other accountancy firms are also carrying out reviews and are charging for their services, with “initial review” fees ranging from £200 to £500. Although most high-profile firms refuse to publicly criticise FATCA, in private they condemn the measures as “indiscriminate” and “blunt”.
Gary Heynes, a tax partner at rival accountant Baker Tilly, said the firm had started mailing affected clients over the past week. Mr Heynes said: “It is extraordinary that a trust with no US assets and no US beneficiaries can be subject to these US reporting requirements and need to be reviewed.”
Ronnie Ludwig, of accountancy firm Saffery Champness, said: “These US regulations are a complete nightmare for trustees to get their heads around. We will be spending a lot of our time reviewing each of our client’s trusts between now and the end of October.”

Second, they have trusts in New Zealand too


The article referenced in the above tweet includes:

FATCA (the Foreign Account Tax Compliance Act) came into force in July 2014. It is far-reaching and may impose a compliance burden on the trustees of New Zealand family trusts, even if no US persons are involved.
IRD has recently issued further draft guidance on the application of FATCA to trusts and in particular, on the circumstances when New Zealand family trusts will be financial institutions for FATCA purposes.
Background
FATCA is a US initiative designed to target US taxpayers who evade US tax by hiding assets offshore. It requires foreign (i.e. non-US) financial institutions (FFIs) to register with the US Internal Revenue Service (IRS) and undertake due diligence to identify and report on accounts that US persons hold with them. FFIs that do not comply are subject to a 30% withholding on US-sourced income.
Under the Intergovernmental Agreement (IGA) signed between New Zealand and the US, New Zealand agreed to implement rules to require and enable all New Zealand FFIs to comply with their FATCA obligations and, in exchange, the US agreed to treat all New Zealand FFIs as deemed compliant.
All FFIs were required to register with the IRS by 31 December 2014. However, notwithstanding this, there has been considerable uncertainty in relation to whether, and if so, how, FATCA applies to New Zealand family trusts that on their face may have no obvious US connection.

Conclusion:
It’s the job of trusts around the world to:
1. Review the trust
2. Identify any U.S. persons
3. Report those U.S. persons to the appropriate authorities.
Every person and every entity is under suspicion of being a “U.S. Person” now! In the new FATCA world, it is no longer possible to have any “trust” in your “trust”.

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Part 5: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons") – The FATCA IGA and the "Entity Inquisition"

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Introduction …
The difference between “Individual” and “Entity” accounts
FATCA-eng
If you read Annex 1 of the IGA (starting on page 20) you will that it distinguishes between “Individual Accounts” (held by a living breathing individual person) and “Entity Accounts” (an account held NOT by an individual), but by something that is NOT an individual. An example of an “Entity” would be a corporation. An account held in the name of a corporation will NOT reveal who the shareholders are. As Robert Wood recently wrote:

A key element in many tax prosecutions is the use of shell entities and hidden names. Although celebrities have their own reasons to make their financial affairs opaque, some governments now want to infer tax avoidance. In that sense, secrecy itself is under attack. For example, the U.K. has moved to make company ownership entirely transparent. The topic of company ownership transparency is being discussed in Brussels too.
Nominee ownership used to be common. Nominees are straw-men listed as owners or directors of a company, but who are acting on behalf of someone else. This once common device is now often seen as a problem that triggers others. From Spanish and other authorities, the message has been a stern one. Whatever happens in Spain, secrecy and willfulness may be linked like never before.

To put it simply: in order to know who are the real owners of an “Entity” (for example corporations in Delaware, Nevada and South Dakota and other noted tax havens) one must take specific steps to learn who the real owners are. (Yes, one of the effects of FATCA is to protect the United States from competition in the “Tax Haven Industry”.)
Following the IGA …
Annex 1 of the IGA describes exactly what needs to be done to search for “USness” for both “individual” and “entity” accounts.
The rules are found as follows (you may want to keep the IGA in front of this while you read):
Pre-existing Individual Accounts – page 20
New Individual Accounts – page 26
Pre-existing Entity Accounts – page 28
New Entity Accounts – page 31
In the case of “Individual Accounts” the named individual is presumed to be the owner. In the case of “Entity Accounts” further inquiries must be made (“smoking them out”) to determine who the beneficial/real owners are.
When it comes to an “Entity Account”, the question is:
Q. Are or have the “real/beneficial” owners ever been U.S. persons?
A. Only the accountants, lawyers and shareholders know for sure.
These inquires are made by the bank, to a representative of the “Entity”. The representative of the “Entity” will respond by obtaining the requested information and THEN informing the bank.
The Worldwide “FATCA Rollout” began with “The Great Hunt For USness In Individual Accounts” search.
The Worldwide “FATCA Rollout” continues with the “The Great Hunt For USness In Entity Accounts” search. This will be a FAR MORE intrusive search than the search for individual accounts ever was. From the U.K. PTA, to the New Zealand law firm, to the Canadian Controlled Private Corporation ALL the world is now being asked to identify “USness” associated with its entities. A “U.S. Person” in Canada is far more likely to receive a “FATCA Letter” because he is associated with an “entity”, than because he is suspected of being a “U.S. Person”.
The “FATCA Entity Hunt” is such that, that ordinary people have been deputized to assist the United States in its relentless “Hunt” for “U.S. Persons”.

FATCA Inquisition Stage 1 – Review, Identify and Report – “Individual Accounts”
Canada Day 2014 – “FATCA Hunt” Officially Began …
On July 1, 2014 “FATCA Hunt” – the hunt for those with a U.S. birthplace officially began. “FATCA Hunt” is an important initiative in the 21st century. It was a small step for man, but a large step for mankind.
That said, the rollout is coming in different stages.


The focus has been on the possible U.S. status of the individual who was named on the account. The banks have been focusing their attention on the person whose name was on the account.
In the beginning, the banks, brokerage companies, financial managers and the rest of the Foreign Financial Institutions (“FFIs”) focused (and continue to) on their existing customer base of “Individual Accounts”. In addition, all those who opened new accounts were asked about their “U.S. status”. Most of the pain has been felt in relation to the “pre-existing accounts”. Large numbers of people have been forced to “Self-certify” that they are NOT “U.S. persons”. Canadians (with only a small number of exceptions) have not been subject to “account closures”. Canadians have been able (in contrast to their European counterparts) to retain access to bank accounts in general and their bank accounts in particular.
The situation in Europe has been different. There has been evidence of bank account closures. Their is evidence of banks that are unwilling to deal with “U.S. persons” (do you blame them?).
FATCA Inquisition Stage 2 – Review, Identify and Report on Entity Accounts – The search for the owners of “Entity Accounts” – Are they or have they ever been a U.S. person?
The focus is on the possible U.S. status of the individual, who is a beneficial owner, but who is NOT named on an Entity account. The bank is focusing its attention on the “Entity” whose name was on the account. The bank will require an individual who is the representative of the “Entity” to inform the bank of the “U.S. status” (or not) of the beneficial owner(s). To put it another way: In Stage 2 of the FATCA Inquisition, some Canadians are being asked to disclose any “U.S. person” ownership to the bank. This is a clear escalation of FATCA Hunt. Your business partners are now clearly part of the FATCA Inquisition.
You probably think that this is all an exaggeration …
What follows is a “FATCA Letter” from TD Waterhouse sent to the address on file for an “Entity Brokerage Account”. In other words, imagine that a corporation has a brokerage account. Imagine that the names of the shareholders are not in the file. It’s important for TD Waterhouse to know whether the beneficial owners are “U.S. persons”.
Take a moment to read this letter. Take a moment to read the forms (if you can understand it all). But, of above all else:
take note of the requirement to make inquiries about the possible “USness” of those associated with the entity.
FATCATDEntitySearch
Leaving aside its intent. Leaving aside its intrusiveness. Leaving aside the immorality of “Hunting” people based on the immutable characteristic of “place of birth”, consider the following question:
How could anybody even begin to understand this letter without the benefit of specialized counselling? It’s simply not possible. Therefore, the first thing one must do is bring the  “Entity Inquisition Letter” to an adviser. Expect to pay and expect to pay dearly.
What the adviser must determine is:
1. Does the beneficial ownership of the “Entity” include “U.S. Persons”. On this point I note that the definition of “U.S. person” is determined in accordance with the Internal Revenue Code. Note also that this is a “shifting definition”. That said, “Congress has spoken”.
2. What kind of “Entity” is it anyway? Is it an “FI” or a “NFFE”Remember that the U.S. Internal Revenue Code punishes: (1) all things foreign and (2) all things that involve deferral.
3. If the “Entity” is a “NFFE”, is it “active” or is it “passive”?
If it is either a “FI” or a “passive NFFE”, any U.S. beneficial owners MUST be reported. Those Canadians who use Canadian Controlled Private Corporations (which is one of the primary purposes of the CCPC) to accumulate earnings need to be particularly careful. The investment income in the corporation is reportable on your U.S. tax return

Think of it! It’s bad enough having the banks hunting for “U.S. persons”. The “FATCA Entity Inquisition” means that one group of Canadians will now hunt another group of Canadians to uncover those with a “U.S. place of birth”.
Note that the “FATCA Entity Letter” is sent regardless of whether THERE IS ANY REASON WHATSOEVER TO SUSPECT “USness”. The United States is requiring or reserving the right to make inquiries of ANY entity in the world:
Are you, or have you ever been or associated with a U.S. Person?
It is just an example of the how the United States of American is hunting the world for “U.S. persons”.
The FATCA Entity Inquisition is NOT being carried on directly by governments. The FATCA Entity Inquisition IS being carried by one group of Canadians searching for another group of Canadians that happen to (for the most part) been born in the USA!
To put it simply:
In the new world order, “If you are a “U.S. Person”, you are reportable! You lost the “birth lottery”.
Now, that’s change you can believe in.

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Part 4: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons") – Imposing FATCA on the world in two steps

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In previous posts I have described how the FATCA Inquisition has been used to determine whether the beneficial owners of various associations (PTA) small businesses (New Zealand law firms) are U.S. persons. I note that the great American FATCA Inquisition is being used to target the world. To put it simply:
All of the world is required to:

  1. Review their affairs for “U.S. Persons”
  2. Identify those “U.S. Persons” in their midst
  3. Report those “U.S. Persons” to the IRS.

Yes, the “RIR” objective really is that simple.
This post is somewhat more technical. In this post I am going to explain exactly how and why the Canada U.S. FATCA IGA requires that “U.S. Persons” be subjected to the “RIR Inquisition”. I will then show how the principle applies to U.S. “smoking them out” methodology which is the purpose of the IGA. But, first things first.
Implementing the objective – A two step process
Step 1 – Signing the IGA: Establishing the terms of the relationship between the Government of Canada and the Government of the United States
The IGA provided the legal framework and objectives for the U.S. imposition of FATCA on Canada. It was signed on February 5, 2014. Under the IGA Canada agreed to assist the United States in its hunt for “U.S. persons”. The IGA is a broad agreement which provides the general rules for the relationship between Canada and the United States. A key provision of the IGA is that Canada will change it’s domestic laws to make the hunt for “U.S. persons” (as defined from time to time by the U.S. Internal Revenue Code) mandatory.
It is the IGA that provides the framework for “FATCA Hunt”. Those who have not read the Canada U.S. FATCA IGA can read it here.
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Step 2 – Establishing the terms of the relationship between the Government of Canada and it’s financial institutions – Canada changes it domestic laws to force Canadian banks to hunt for those with a U.S. place of birth
In May 2014 the Government of Stephen Harper added Part VIII to the Income Tax Act of Canada. In general terms, Part VIII of the Income Tax Act was to:

  1. Require Canadian Financial Institutions to search for both “Individual” and “Entity” U.S. accounts
  2. Require individuals and entities to disclose the “U.S.ness” of accounts to the Financial Institutions
  3. Authorize Canadian Financial Institutions to disclose “U.S. accounts” to the CRA
  4. Impose penalties on “Individuals” and “Entities” who refused to disclose the information requested by the financial institution

For example S. 162(6) of Canada’s Income tax reads:

Failure to provide identification number
(6) Every person or partnership who fails to provide on request their Social Insurance Number, their business number or their U.S. federal taxpayer identifying number to a person required under this Act or a regulation to make an information return requiring the number is liable to a penalty of $100 for each such failure, unless

  • (a) an application for the assignment of the number is made within 15 days (or, in the case of a U.S. federal taxpayer identifying number, 90 days) after the request was received; and

  • (b) the number is provided to the person who requested the number within 15 days after the person or partnership received it

To summarize – Part VIII of Canada’s Income Tax Act:

  • requires the banks to hunt for “Individuals” and “Entities” that are or are owned by “U.S. persons”; and
  • requires the “Individuals” and “Entities” to be captured. The “terms of their capture” require them to:

A. Answer all questions that are part of the “FATCA Inquisition”
B. Answer all questions truthfully
C. Either ADMIT to being a “U.S. person” or DENY being a “U.S. person”.
Once again, I remind you that the fact that someone is a Canadian citizen residing in Canada is NOT a defense to the accusation of being a “U.S. person.
How does Canada comply with Part VIII of the Income Tax Act of Canada? What are the “made in Canada” rules for  the FATCA Inquisition?
Paragraph 2 of Article 1 of the Canada U.S. FATCA IGA allows (in general) for each country to interpret various provisions of the IGA. To be specific it reads:

2. Any term not otherwise defined in this Agreement shall, unless the context otherwise requires or the Competent Authorities agree to a common meaning (as permitted by domestic law), have the meaning that it has at that time under the law of the Party applying this Agreement, any meaning under the applicable tax laws of that Party prevailing over a meaning given to the term under other laws of that Party.

The Canada Revenue Agency created its own set of guidelines for precisely how the financial institutions are to implement the broader objectives of FATCA Hunt. Those guidelines are here.
FATCA Canada Guidance gdnc-eng
Never forget that the guidelines are made pursuant to the broad terms of the IGA. Canada’s domestic laws that are to assist the United States with the implementation of the IGA.
Summary: Understanding FATCA …

When in doubt about how to interpret the Canada’s domestic laws, one should look to the provisions of the IGA. As a reminder, here is the Canada U.S. IGA which was signed on February 5, 2014.
FATCA-eng

Part 11: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – But reciprocity?

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Introduction and Synopsis …
The United States has entered into FATCA IGAs with a number of countries (including Canada). Regardless of what Government Officials say (and what the IGAs say) about “Review, Identify and Report”, there is NO meaningful “reciprocity” in the FATCA IGAs. The degree of “reciprocity” was discussed was recently discussed in the following post at Forbes (providing an unusally frank evaluation):


There are at least six different aspects of the IGAs that demonstrate a lack of reciprocity.
They include:
1. Human Targets – The United States defines “US Persons” in a far broader way than other countries define their “tax residents”. This is largely the result of U.S. “citizenship-based taxation”. Only the United States claims the right to impose taxation on (1) residents of other nations and (2) on income earned in those other nations.

2. The nature of the information exchanged – The United States wants far more information (everything) than it is obligated to provide (nothing) under the FATCA IGAs.
3. Due Diligence – The U.S is not required to actively search for the tax residents of other nations. Other nations are required to actively search for “U.S. persons”. But, it is far more than seeking evidence of “USness” in individuals (“Are you or have you even been an American citizen?). Other nations are also required to search for evidence of “USness” in entities (see point 5 below).
4. Penalties – Other nations are subject to penalties for failure to comply with the (“Review, Identify and Report”) provisions of the IGA. The United States is NOT subject to penalties. (If you don’t comply, you are subject to penalties. If we don’t comply: “Too Bad”.)
5. The FATCA Entity Hunt – The United States does NOT and WILL NOT provide information on the beneficial ownership of “entities” (Delaware, Wyoming and Nevada are in the business of providing the secrecy that enables tax evasion). Other countries are required to search for evidence of “USness” in the ownership of entities created under the laws of their countries.
6. The requirement to change domestic laws – The United States is requiring other nations to change their domestic laws to “hunt” for people based “citizenship, national origin” and “place of birth”. The U.S. Treasury may not have the jurisdiction to order state banks to provide information about “foreign accounts”. In other words: You do what we cannot do! As might be expected, the question of jurisdiction is the subject of a lawsuit in the United States courts. In fairness, it is important to note that the “Alliance For The Defence Of Canadian Sovereignty” has brought a lawsuit against the Government of Canada, questioning whether the FATCA IGA is legal under Canada’s Constitution.
That’s the gist of it. If you want to understand why, I invite you to read on.
It’s about reciprocity …


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