The FATCA IGAs Do Not Impose An Obligation Of Reciprocity On The United States

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Introduction – The Question

Over the past few months, in unrelated contexts, I have heard the question asked:

Is FATCA reciprocal?

For example the Judges hearing the appeal in the ADCS FATCA Canada lawsuit asked (clearly assuming that it did) whether the FATCA IGAs imposed reciprocal obligations on the United States. Surely it must, they assumed. Recently the head of a FATCA fact finding mission asked in a meeting of individuals the same question. In neither case was a clear “yes or no” answer provided. Some participants were adamant that there WAS reciprocity. Others were adamant that there was no reciprocity. Some simply didn’t know. This post is an attempt to analyze the facts as they pertain to FATCA, consider whether the FATCA IGAs prescribe reciprocity of obligation and ultimately explain why there is NO meaningful reciprocity of obligation.

Some Important FATCAoids

The 2010 Statute

FATCA was signed into law by President Obama on March 18, 2010. The general provisions are found in Chapter 4 – Sections 1471 – 1474 of the Internal Revenue Code. The statute is coercive and is a US demand, under threat of sanction, that non-U.S. banks deliver information, about the bank accounts of residents of their country, to U.S. Treasury. The statute contemplates a one way flow of information to the United States without ANY reciprocity from the United States. (Any discussion of “reciprocity” must take place within the context of the FATCA IGAs.)

The 2014 Implementation Of FATCA Via The IGAs

The implementation of FATCA (via the FATCA IGAs) began (in many countries) on July 1, 2014. Because the statute does NOT (IRC 1471 – 1474) obligate the United States to provide any information to other countries, any obligation of reciprocity must be found in the IGAs.

Do Bilateral Obligations Mean Reciprocity?

Non-U.S. countries are required – pursuant to the FATCA IGAs – to transfer information about the holders of local financial accounts in their country to the United States of America. Notably the vast majority of account information transferred to the United States is information about accounts held by tax residents of the transferor country. In other words: pursuant to the FATCA IGAs, account information is transferred about accounts located in a country where the account holder actually lives to a country where the account holder does NOT actually live! To put this in context, imagine the following scenario:

You have a neighbour in a Canadian small town, who earns his income in Canada and pays tax on that income to Canada. That income is deposited into a bank account at a branch located in his community. That neighbour may be having his bank account information transferred to the United States. How could this be you ask? Surely this must be a mistake? The answer is “No it is not a mistake”. It’s the result of Canada enacting a U.S. law (“FATCA”) on Canadian soil. Pursuant to that FATCA law (described in numerous CBC articles), the transfer of account information is required because your neighbour was either born in the United States or was born in Canada to a U.S. citizen parent. So what you ask? Surely the circumstances of a person’s birth shouldn’t mean that a country where they don’t live has access to their banking information in the country where they do live? Wrong again. It’s about tax residency and about the U.S. unique definition of tax residency. You see, the United States defines any U.S. citizen as a tax resident of the United States (regardless of where that citizen lives). By defining “tax residency” in terms of citizenship, the United States is claiming that the tax residents of other countries are U.S. tax residents. U.S. citizens are subject to all (tax, forms and penalty) the provisions of the U.S. Internal Revenue Code. But wait you ask! My neighbour lives in Canada, pays tax in Canada and is a tax resident of Canada! (In fact the FATCA IGAs allow the United States – by tying the definition of U.S. citizen to a definition in the Internal Revenue Code – to define ANY individual in Canada as a U.S. tax resident.) Yes, it’s true. Pursuant to the FATCA IGAs the United States is claiming Canadian tax residents as U.S. tax residents. This means that the United States is claiming the right to impose U.S. taxation on the Canadian employment income, earned by residents of Canada, which is already taxed in Canada. Yes it’s true.

You see:
1. A minority of countries have birthright citizenship (automatically confering citizenship on those born in the country); and

2. There are only two countries that impose worldwide taxation based only on citizenship.

The United States is the ONLY country that does both!

Seen in this context, it all makes sense. The purpose of the FATCA IGAs, enthusiastically signed by most countries of the world, is to ensure that the United States knows about the existence of the bank and financial accounts of people who don’t live in the United States. This is important for the United States because the U.S. tax system claims the right to impose worldwide taxation on individuals who do NOT live in the United States and pay taxes where they do live. Makes sense right?

Three Key FATCA Obligations Imposed on Canada’s Banks:

1. On Canada: The Obligation To Proactively Identify Accounts Held By U.S. Citizens

Pursuant to the FATCA IGA, the Canadian bank is required to take steps to proactively identify accounts held by U.S. citizens (including Canada/US dual citizens who live in Canada). The process of identification takes place in two ways:

– through inquiries at the point of attempting to open the account; and

– by sending “FATCA Letters” to existing customers.

The FATCA IGAS do NOT require the United States to proactively search for U.S. accounts held by Canadian tax residents.

2. On Canada: The Obligation To Report The Existence Of The Account To The United States

Once the account holder is deemed to be a “U.S. Citizen” the existence of the account must be reported (even in the absence of activity).

The FATCA IGAs do not appear to require the United States to report the bare existence (without any activity) of the account to Canada.

3. On Canada: The Obligation To Report Information About The Activity And Account Balances

The reporting of the account must include reporting of the activity inside the account and account balances.

Specifically the U.S. Canada FATCA IGA describes the following obligation on Canada:

a) In the case of Canada with respect to each U.S. Reportable Account of each Reporting Canadian Financial Institution: (1) the name, address, and U.S. TIN of each Specified U.S. Person that is an Account Holder of such account and, in the case of a Non-U.S. Entity that, after application of the due diligence procedures set forth in Annex I, is identified as having one or more Controlling Persons that is a Specified U.S. Person, the name, address, and U.S. TIN (if any) of such Entity and each such Specified U.S. Person; (2) the account number (or functional equivalent in the absence of an account number); (3) the name and identifying number of the Reporting Canadian Financial Institution; (4) the account balance or value (including, in the case of a Cash Value Insurance Contract or Annuity Contract, the Cash Value or surrender value) as of the end of the relevant calendar year or other appropriate reporting period or, if the account was closed during such year, immediately before closure; (5) in the case of any Custodial Account: (A) the total gross amount of interest, the total gross amount of dividends, and the total gross amount of other income generated with respect to the assets held in the account, in each case paid or credited to the account (or with respect to the account) during the calendar year or other appropriate reporting period; and (B) the total gross proceeds from the sale or redemption of property paid or credited to the account during the calendar year or other appropriate reporting period with respect to which the Reporting Canadian Financial Institution acted as a custodian, broker, nominee, or otherwise as an agent for the Account Holder; (6) in the case of any Depository Account, the total gross amount of interest paid or credited to the account during the calendar year or other appropriate reporting period; and (7) in the case of any account not described in subparagraph 2(a)(5) or 2(a)(6) of this Article, the total gross amount paid or credited to the Account Holder with respect to the account during the calendar year or other 11 appropriate reporting period with respect to which the Reporting Canadian Financial Institution is the obligor or debtor, including the aggregate amount of any redemption payments made to the Account Holder during the calendar year or other appropriate reporting period.

The FATCA IGAs impose more limited reporting obligations on the United States with respect to certain accounts held by Canadian tax residents.

Specifically the U.S. Canada FATCA IGA describes the following obligation on the United States:

b) In the case of the United States, with respect to each Canadian Reportable Account of each Reporting U.S. Financial Institution: (1) the name, address, and Canadian TIN of any person that is a resident of Canada and is an Account Holder of the account; (2) the account number (or the functional equivalent in the absence of an account number); (3) the name and identifying number of the Reporting U.S. Financial Institution; (4) the gross amount of interest paid on a Depository Account; (5) the gross amount of U.S. source dividends paid or credited to the account; and (6) the gross amount of other U.S. source income paid or credited to the account, to the extent subject to reporting under chapter 3 of subtitle A or chapter 61 of subtitle F of the U.S. Internal Revenue Code.

Clearly this is far less than the FATCA reporting obligations imposed on the Canadian banks.

A frank acknowledgement of the inequality in obligation is found in Article 6 page 16 of the U.S. Canada FATCA IGA which states:

Article 6 Mutual Commitment to Continue to Enhance the Effectiveness of Information Exchange and Transparency 1. Reciprocity. The Government of the United States acknowledges the need to achieve equivalent levels of reciprocal automatic information exchange with Canada. The Government of the United States is committed to further improve transparency and enhance the exchange relationship with Canada by pursuing the adoption of regulations and advocating and supporting relevant legislation to achieve such equivalent levels of reciprocal automatic information exchange.

https://home.treasury.gov/system/files/131/FATCA-Agreement-Canada-2-5-2014.pdf

This is a frank acknowledgement (replicated in Article 6 of all the other Model 1 IGAs). Notice the language “equivalent levels of reciprocal automatic information exchange”. The use of the word “equivalent” suggests that the goal is not sharing identical information. Because the U.S. defines “tax residency” in terms of citizenship, the U.S. will always be seeking a greater quantity of information.

Can One Rationally Make The Case That the FATCA IGAs Create “Reciprocity” when “equivalent levels of reciprocal automatic information exchange” is lacking?

Let’s consider this from the following three perspectives:

A. The Language Of The IGA: “Some” Obligation Of Information Transfer On The United States
B. Academic Commentary: What The United States Agreed To Do Was What It Was Already Required To Do Under Existing Treaty Provisions – Christians and Cockfield 2014
C. IRS Commissioner Rettig Sets The Record Straight: The United States Does Not Do What The IGAs Require It To Do – 2022

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A. Language Of The IGA: “Some” Obligation Of Information Transfer On The United States

A Government Of Canada Press Release – 2014

In early 2014 the Government of Canada issued a press release announcing that it had agreed to a FATCA IGA with the United States. That press release included the following:

Reciprocity

The IGA is reciprocal, meaning that information will flow both ways between the tax administrations of the two countries to assist each in administering its own domestic tax laws. The information exchanged will provide tax authorities with greater information on accounts held by their taxpayers in the other country.

Note that the press release relies on a rather odd definition of “reciprocal” – “information will flow both ways”. This definition of “reciprocal” assumes that the transfer of any information from the United States would qualify to make the agreement “reciprocal”. This is NOT consistent with most dictionary definitions of “reciprocity”.

The complete press release can be found here:

CAN-US-Reach-Agreement-on-FATCA

One gets the impression that the Government Of Canada was anxious to pretend that it was receiving something in return for agreeing to implement FATCA (a U.S. law) on Canadian soil.

An Acknowledgement Of The Inequality From A Private Law Firm – 2014

At roughly the same time as the Government Of Canada press release a private Canadian law firm provided a more realistic statement of (1) what the FATCA IGA obligated the U.S. to do along with (2) a clear acknowledgement of the inequality of obligation.

“Under the Canada–U.S. IGA, the United States has committed to providing the CRA with information on accounts of Canadian residents held through U.S. financial institutions. The commitments to provide the CRA information include the obligation to provide information with respect to bank deposit accounts and interest-bearing accounts at insurance companies held at U.S. financial institutions by individual Canadian residents and certain other “financial accounts” held by individuals and entities resident in Canada. The scope of this obligation is narrower than the obligation imposed on Canadian FFIs with respect to U.S. accounts, both with regard to the accounts on which information is to be provided (e.g., Canadian FFIs are required to provide information on bank deposit accounts of U.S. entities, not just accounts of individual U.S. residents) and the types of such information (e.g., Canadian FFIs are required to provide information, in the case of custodial accounts, on the gross interest, dividends and other income generated in the account, whereas U.S. FFIs will only be required to provide information on U.S.-source dividends and certain other U.S. source income that is already being collected under U.S. domestic law). The United States does agree, under the Canada-U.S. IGA, to pursue “the adoption of regulations and advocating and supporting relevant legislation” to achieve “equivalent levels of reciprocal automatic information exchange.”

https://www.osler.com/en/resources/regulations/2014/canada-signs-fatca-intergovernmental-agreement-witReciprocity

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B. Academic Commentary: What The United States Agreed To Do Was What It Was Already Required To Do Under Existing Treaty Provisions – Christians and Cockfield 2014

If Canada is receiving any information from the US:

1. Canada is NOT because of the FATCA IGAs but rather because of pre-existing exchange mechanisms. See this article by Alison Christians and the late Art Cockfield. Go to the part starting at page 13. They explain that the information that Canada is receiving is NOT because of FATCA but because of pre-existing obligations. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2407264 Specifically at page 13 see:

“C. Introduction of Non-Reciprocity

The IGA is characterized by its terms and in official statements as a “reciprocal” arrangement, but it is asymmetrical in substance, even putting aside the exceptional extraterritoriality of the U.S. abuse of the residence principle. Canada is undertaking significant obligations under the IGA at great expense and with no ascertainable benefit. The United States is the beneficiary of these efforts, but is undertaking very minimal new obligations at virtually no added expense itself. The two tables below demonstrate an example of the lack of reciprocity created by the IGA by comparing the reciprocal exchange that is currently enabled between Canada and the United States, to the new, asymmetrical obligations undertaken by each party under the IGA.

1. Existing Symmetry vs. New Asymmetry Since 1997, the United States has required U.S. banks to determine if their account holders are Canadian residents, and if so, to report interest paid on such accounts to the IRS.30 In addition, U.S. payers are generally required to report the payment of other passive income items, such as dividends, to the IRS. In Canada, financial institutions (as payers or agents) are required to report amounts paid or credited to non-residents that are subject to Canadian withholding tax. Each country therefore has in place the means to collect relevant tax information from its own financial institutions regarding the residents of the other, and by all accounts, each country does in fact exchange this information.31

Under the IGA, Canada undertakes a long list of new reporting and exchange requirements while the United States undertakes virtually no new reporting or exchange efforts.

Since the United States defines the term “residence” to include both physical residence in the U.S. and citizenship or possession of a U.S. green-card regardless of physical residence, the relevant indicia of U.S. status include place of birth, mailing address, telephone numbers, standing transfer orders, powers of attorney, and signatory authority. For Canada, residence generally refers to physical residence in Canada, with other facts and circumstances considered where relevant, but it does not include worldwide taxation on the basis of Canadian citizenship or immigrant status alone. As there will be no new due diligence requirements placed on US financial institutions, there is no list of relevant indicia of Canadian status to be considered in this context. Instead, pursuant to existing law, account holders certify their own status as residents or non-resident aliens under U.S. law. Accordingly, the current and any future definition of residence for Canadian purposes are ignored by the United States and have no impact on U.S. financial institutions.

The “two tables” described in the Christians/Cockfield article are in the following tweet and reply (making it clear that a picture is worth a thousand words):

Table 1

Table 2

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C. IRS Commissioner Rettig Sets The Record Straight: The United States Does Not Do What The IGAs Require It To Do – 2022

Surely (people reason), the United States is required to reciprocate. With all this information being sent to the United States, the United States must be sending similar information to the other country. People are wrong. The “FATCA of the matter” is that the United States is not even doing the disproportionately small things that the FATCA IGAs require it to do.

See the following recent commentary ..

Ross McGill – American Expat Finance

Meanwhile, the U.S. is in breach of certain reciprocal information-sharing obligations it theoretically agreed to when it introduced the Intergovernmental Agreements (IGAs) that detail how FATCA is to be enforced by the various countries around the world that have signed up to it.

Unlike these countries, all of which have signed FATCA IGAs with the U.S., the U.S. has not enacted domestic legislation to force U.S. financial institutions to collect and share information about non-resident account holders (that is, account holders who are citizens of countries other than the U.S. who also live outside of the U.S., but who have bank or other financial accounts in U.S. institutions).

https://www.americanexpatfinance.com/opinion/item/1017-ross-mcgill-fatca-isnt-the-problem-cbt-is

Bright Tax

Get a little, give a little: Respecting reciprocal reporting

FATCA was always intended to be reciprocal – an equal handoff between foreign governments and the US. Intention hasn’t translated to action, however. Foreign countries have been providing the US with this information since 2014, but these efforts have been one-sided.

While IRS Commissioner Retigg believes in “transparency where transparency is appropriate,” he elaborated. “We are forced to make difficult decisions regarding priorities, the types of enforcement actions we employ, and the service we offer.” Limited resources and pushback from the American Banking community (which has already rejected a homeland version of FATCA), make reciprocal reporting seem unlikely anytime soon.

Hesitation for the US to ‘give what they’re getting’ may ultimately stir up additional unintended consequences. Some worry other nations could hide their wealth in the US without fear of it being discovered by tax authorities in their home countries.

In the meantime, more than 100 countries (not including the US) have started incorporating a separate solution. Common Reporting Standard (CRS), like FATCA, works to fight against tax evasion and protect the integrity of tax systems by sharing relevant taxpayers’ information across country lines.

https://brighttax.com/blog/fatca-update-april-2022/

American Expat Financial News Journal

Although it’s said that FATCA was originally intended to be reciprocal, thus far, it’s believed few if any countries actually currently receive any information from the U.S. about bank and financial accounts any of their own taxpayers might happen to have in the U.S., even though they have been providing the U.S. with such information about its taxpayers and Green Card holders since 2014.

Meantime, more than 100 countries, with the exception of the U.S. and a few others, have been automatically exchanging similar information about one another’s taxpayers’ accounts under an Organisation of Economic Co-operation and Development program similar to FATCA, known as the Common Reporting Standard, which came into force a few years after FATCA (2017/2018).

Commissioner Rettig’s statement on FATCA reciprocity came in response to a question during an almost three-hour Senate Finance Committee hearing, on the subject of “The IRS, the President’s Fiscal Year 2023 Budget, and the 2022 Filing Season,” which may still be viewed in its entirety by clicking here.

A 40-second clip of Commissioner Rettig’s comment may be viewed on C-Span by clicking here.

https://americanexpatfinance.com/news/item/943-breaking-irs-commissioner-rettig-says-he-supports-reciprocal-fatca

Finally, consider the words of IRS Commissioner Rettig himself:

Conclusion – The Answer:

It is reasonable to conclude that the U.S. Canada FATCA is not reciprocal. Next time you hear someone ask the question:

“Is the Canada U.S. FATCA IGA reciprocal?“

You should answer “No”. The Canada U.S. FATCA IGA is NOT reciprocal in either intent or effect!

By the way, the U.S. has signed the same FATCA IGA with other countries. It doesn’t provide reciprocity to those countries either.

John Richardson – Follow me on Twitter @Expatriationlaw

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Appendix – Further resources …

I came across this resource rich comment from Badger at the Isaac Brock Society:

https://isaacbrocksociety.ca/2013/09/20/from-us-treasury-myth-vs-fatca/comment-page-9/#comment-594976

US ‘reciprocity’ is one of the true MYTHs about FATCA. Funny though, it is not on the Treasury list!

The US has no intention of full and automatic reciprocity. Nor does it have authority to promise it.
…”Christians is adamant that “there is not now and there never will be” reciprocal information exchange. “In no way is the US in a sole executive agreement with no Congressional approval going to bind Congress to enact legislation that would see the US provide the same level of information to other countries”

“The IGA itself is not reciprocal, it is only aspirational, she noted. For instance it states: “The [Government of the] United States acknowledges the need to achieve equivalent levels of reciprocal automatic information exchange with [FATCA Partner]. The [Government of the] United States is committed to further improve transparency and enhance the exchange relationship with [FATCA Partner] by pursuing the adoption of regulations and advocating and supporting relevant legislation to achieve such equivalent levels of reciprocal automatic exchange.”

Words like “committed”, “enhance”, “advocate” and “pursuing the adoption” rather than “adopting” indicate that reciprocity “is never going to happen”, said Christians. “Any time the US says it is committed it means that it is not going to take place.” …” from http://www.compasscayman.com/journal/2013/02/06/Taxes-FATCA-%E2%80%93-symbol-of-the-mercenary-tax-state/

See also:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2292645

What You Give and What You Get: Reciprocity Under a Model 1 Intergovernmental Agreement on FATCA

Allison Christians
McGill University – Faculty of Law
April 12, 2013
Cayman Fin. Rev. April 2013

and these blog entries:

http://taxpol.blogspot.ca/2013/04/fatca-reciprocity-in-obama-2014-budget.html
http://taxpol.blogspot.ca/2013/02/obama-admin-taking-high-road-on-fatca.html
http://taxpol.blogspot.ca/2013/01/why-fatca-is-tax-treaty-override.html

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