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 …

Virginia La Torre Jeker, writes:

Peter Cotorceanu’s article details how countries signing a “reciprocal” Model 1 IGA got the short end of the reciprocity stick.The USA will not provide its ‘reciprocal’ FATCA partners any information about the following types of accounts held at US financial institutions:

Depository (i.e., cash) accounts held by entities. This includes entities that are resident in the FATCA partner country, or,

Non-cash accounts, whether held by individuals or entities, even those that are resident in the FATCA partner country, unless the accounts earn so-called US-source income.

Furthermore, the US will not provide information to its ‘reciprocal’ FATCA partner about the “controlling” persons of any entities having accounts in US financial institutions. This is so regardless of whether the entities are from the reciprocal partner country or from third countries, and even if those entities are owned and controlled by residents of the reciprocal partner country.

Given the paucity of information that will be given by the US to its IGA “reciprocal” partner, it seems obvious that many non-US persons will continue to feel quite secure in holding accounts at US financial institutions, despite FATCA “reciprocity” with their home countries.This could be a nice boon to the US financial market in the brave new world of financial transparency! Is it possible? Is FATCA actually poised to help the (holier-than-thou) USA to become an even more enticing tax haven?”

Mr. Cotoreanu’s article (well worth the read) is here:

Trusts & Trustees-2015-Cotorceanu-tandt_ttv178

Much of Mr. Cotoreanu’s analysis is based on a discussion of “entities”. Want to know more about “entities”. You may want to read an earlier post about the role of “passive entities“.

An analysis of the Canada U.S. FATCA IGA demonstrates that Mr. Cotorceanu is correct. The lack of reciprocity is enshrined in the Model 1A IGA.

FATCA-eng

Analyzing the Canada U.S. FATCA IGA

First: The General Principle of Reciprocity

IGA Article VI – 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.”

Notice that this uses the word “equivalent”. It does NOT say identical. If “equivalent” means “functionally equivalent” then this means information that would have the same relevance in Canada’s tax system which is “residence based”. This suggests that the test of “equivalent” would be satisfied as long as it were an account holder of a Canadian resident.

Therefore, the USA can claim “equivalence” by reporting far less information to Canada than Canada is required to report to the USA.

Second: Article II of the IGA page 9 – So, what SPECIFICALLY is the U.S. agreeing to report for Canada? What is Canada getting in this deal?

IGA Article I – Definitions

The term “Canadian Reportable Account” means a Financial Account maintained by a Reporting U.S. Financial Institution if:

(1) in the case of a Depository Account, the account is held by an individual resident in Canada and more than $10 of interest is paid to such account in any given calendar year; or

JR Comment: Note that this is restricted to (1) an individual that is “resident in Canada”. Note also that it MUST be an interest bearing account. This means that one could simply hide money in a U.S. “non-interest” bearing account.

(2) in the case of a Financial Account other than a Depository Account, the Account Holder is a resident of Canada, including an Entity that certifies that it is resident in Canada for tax purposes, with respect to which U.S. source income that is subject to reporting under chapter 3 of subtitle A or chapter 61 of subtitle F of the U.S. Internal Revenue Code is paid or credited.

JR Comment: Note that this includes “entity accounts” only to the extent that “certifies that it is resident in Canada for tax purposes” … AND is subject to the Internal Revenue Code provisions above

JR Comment: This is a very narrow range of accounts and does NOT generally include “Entity Accounts”.

IGA Article II – Reporting Obligations

IGA Article II page 9 – What is the U.S. reporting obligation on “Canadian Reportable Accounts”to Canada? Exactly what information is to be reported?

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.

JR Comment: Note that this is restricted to “U.S. Source” income. What if a Canadian resident opened a U.S. brokerage account to hold ONLY non-U.S. accounts? Would this avoid the “U.S. Source” income requirement?

JR Comment: What does “subject to reporting under chapter 3 of subtitle A or chapter 61 of subtitle F of the U.S. Internal Revenue Code” mean?

Chapter 3 of subtitle A – withholding taxes – what is subject to withholding?

Chapter 61 of subtitle F – how the withholding actually works

As you can see there is very very little (and nothing of consequence) that the U.S. is obligated to report.

In addition (and this is even more important):

Because the reporting obligation is defined by the Internal Revenue Code, the U.S. can change its reporting obligation by changing the definition in the Internal Revenue Code. This is another example of a term in the Canada U.S. FATCA IGA that is “incorporated by reference” to another source.

Third: IGA Article II page 9 – So, what SPECIFICALLY is Canada agreeing to report to the U.S? What is the U.S. receiving in this deal?

The short answer is everything. But, by continuing to track the language in the IGA we see that Canada has:

– agreed to supply the United States with any information that it desires;
– with respect to any “class of persons or entities” that the United States chooses to define as a “U.S. Person”;
– agreed to undertake very specific “due diligence” procedures to locate those persons and entities
2. The information to be obtained and exchanged is:

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 Entityand 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 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 H older during the calendar year or other appropriate reporting period.

Fourth: Reciprocity and “due diligence” requirements – Sweet deal for the United States indeed! Canada is required to search under threat of penalty – no such requirement of “due diligence” for the United States

Canada is required to undertake “due diligence” procedures to “Review, identify and report” a “U.S. Reportable Account”. The United States has no reciprocal obligation. Canada’s “due diligence” obligations – AKA the “Let’s send a FATCA Letter” are found in Annex I of the IGA starting on page 19.

There is NO reciprocity on the issue of “searching for accounts”.

Fifth: The IGA allows Canadian Banks to “Report” ALL accounts (whether “reportable” or not) with “U.S. indicia”.

This issue was recently discussed in a post by Elizabeth Thompson at Ipolitics.ca. I offered a comment explaining exactly why and how the U.S. Canada FATCA IGA (although it doesn’t require the reporting of “non-reportable accounts”) specifically allows for the banks to report ALL “U.S. Person” accounts. This is a clear IGA provision to benefit Canada’s banks. After all, Canada’s banks were the best lobbyists for the IGAs that the U.S. could ever have!  The Canadian banks lobbied for and supporting the IGAs because of the benefits to the banks. I intend to make this the subject of a separate post, but for those wish a preview, see my comment.

The Canada US FATCA IGA chronicles are  a combination of:

1. Extortion – might makes right; and

2. The simple reality that functional “equivalence” means very different things in a “residence” based system of taxation. This is a clear demonstration of the evil of “citizenship-based” taxation.

But wait, how can this apply to me? I’m a Canadian citizen residing in Canada

That is irrelevant. You are in the “Service of the USA”. You are subject to “citizenship-based taxation”. Please keep in mind that these obligations include reporting on the financial affairs of citizens of other nations who just happen to have been born in the USA. Canada’s banks are required to report their own Canadian citizens to the U.S. Internal Revenue Service. How can this NOT conflict with Article XXVI A S. 8 of the Canada U.S. Tax Treaty which reads:

8. No assistance shall be provided under this Article for a revenue claim in respect of a taxpayer to the extent that the taxpayer can demonstrate that

(a) where the taxpayer is an individual, the revenue claim relates to a taxable period in which the taxpayer was a citizen of the requested State, and

Message in a bottle: “Citizenship-based taxation” and the “colonization of the world”

The USA is using “citizenship based taxation” to impose U.S. taxation on all countries of the world. This is done through the taxation of “U.S. Persons” – “Weapons of Capital Extraction” – who are resident in other nations. Unless the world “wakes up”, “citizenship-based taxation” will result in the USA colonization of the world, with all countries reporting directly to the IRS.

When it comes to a conflict between Canadian and U.S laws: “U.S. Persons” resident in Canada are required to obey U.S. law

FATCA imposes the Form 8938 reporting requirement on citizens of other nations who were born in the U.S. Pay particular attention to S. 6038D of the Internal Revenue Code:

Note the definition of what “reasonable cause” does NOT include:

“(g) Reasonable cause exception

No penalty shall be imposed by this section on any failure which is shown to be due to reasonable cause and not due to willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information is not reasonable cause.”

To put it simply: If you are a “U.S. Person” you are the “Property Of The USA”.

To end at the beginning …

It is clear that that FATCA does NOT include “reciprocity” in any meaningful sense.

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

  1. PastBeyond60

    Unfortunately I’ve come up empty in trying to find just the right words to express my gratitude and deepest thank you for everything you have done and continue to do to regarding this most heinous situation.

    I have so many questions, fail to understand so much, remain mired in naiveté, confusion and rage without any foreseeable abatement.

    In a rather scattered, as that is how it all flows through my head all at once and all of the time, these are the issues I cannot come to terms with, I can only sputter “why”:

    1. Why is the remainder of the world allowing them to get away with this? Fear, lack of understanding of the true impact and motivators of the US or inertia? If indeed it is fear then the G19 only need to ban together, they are not without recourse. Why have they not done this? How can it be facilitated? If it is ignorance, what are the venue’s to cure this? If it is inertia, how does one motivate?

    2. Why does the OECD NEVER mention the US as non-participating in the CRS? Because the are the largest funders of the OECD? Is that all it takes to not be called out as recalcitrant, hypocritical, immoral and unethical? Can the condition exist where the US is the only outlier, where the US has FATCA and the remainder a CRS?

    3. How does one have a voice in government? How can the government consistently ignore the issues, never read the volumes of information sent informing them, never answer any questions, never be held accountable? In the recent privacy commission hearing NOTHING of importance was discussed, the participants were clueless in spite of having been fully educated, were completely disinterested in the subject and failed to address any salient points. This disregard and dismissal is occurring both in Canada and the US. Where/how does one find a voice? Why do they not care that their country is being abused even if they have no concern for the people involved?

    4. Does Mr. Lew actually believe what he is saying? Is he a moron or too clever by half? Is Lagarde and the IMF buying his Kool-aid? Why are they NEVER called out in substantive venues? Again, because of fear or lack of understanding? How does one get the attention of Ms. Lagarde?

    5. Why is it that those with a US taint have NO human rights? If this abuse was being unleashed upon another group there would be outrage. Imagine if the banks stopped taking Muslims/Asians, whomever that were NOT American, had to violate only on this subgroup, it would not be tolerated . But for Americans….they have no human rights as they are intrinsically viewed as exceptional, they cannot be violated.

    “FATCA is incredibly vicious, punitive, pure extortion, a violation of the sovereignty of other nations and frankly a manifestation of pure evil.” And the world is allowing this to happen, why? What are the venues to awaken the world to this atrocity? NO ONE IS LISTENING! NO ONE CARES!

    We need a plan.

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