Category Archives: offshore tax avoidance

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

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.
FATCA-eng
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

Tax Haven or Tax Heaven 9: US Treasury Secretary Lew claims USA is a leader in information exchange!

What follows is Secretary Lew’s rather extraordinary statement. One gets the impression that he lives in a world where, the United States is simply a wise “sage” or perhaps “adviser”, for the rest of the world. In any event, the United States is (as demonstrated by Secretary Lew) clearly NOT required to live by the rules that it wishes to impose on other nations.

In fairness the following excerpt should be read in context. That said the Secretary included the following rather fantastic and incorrect claim – a clear distortion of reality:

“We fully support the call for all countries to automatically exchange financial account information.  The United States led the world in automatic exchange with the enactment of FATCA in 2010.”

What he means that he supports the call for countries other than the United States to provide financial account information to the United States.

As you know:

  1. By the express terms of the FATCA IGAs, the United States is NOT obligated to exchange FATCA  account information of significance with other nations. The exchange on the part of the USA is “aspirational” only.
  2. If there were exchange, the exchange would NOT include “identical information”. It would include “equivalent” information. Presumably “equivalent” information would NOT be identical information
  3. The United States has refused to embrace the OECD Common Reporting Standard.

Here is the Canada U.S. FATCA IGA:
FATCA-eng
To understand why the FATCA IGA’s do NOT obligate the United States to exchange information of significance, read here.
What follows is Secretary Lew’s “statement” in its entirety.
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Part 11: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – But reciprocity?

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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