The Foreign Account Tax Compliance Act, legislation that requires financial institutions worldwide to cooperate with US tax authorities or face a 30 per cent withholding tax, is failing on two fronts: It ends multilateralism in tax matters and it is a gross violation of the rule of law, says Allison Christians, H. Heward Stikeman chair in Tax Law at Canada’s McGill University.
Speaking at the CFR Speaker Series on 14 January, Christians, an expert on tax treaties, said FATCA means an end to the traditional multilateral approach in tax cooperation and its intergovernmental agreements used to implement the law may even be unconstitutional.
Tax sovereignty in the traditional sense meant that each state has the right to define its tax state without interference. In areas of overlaps or conflicts states would cooperate because states cannot enforce residence-based taxation without help. Multilateralism would help everyone equally and all should be involved, she explained.
Jurisdictional reasonability requires therefore that any theory of jurisdiction asserted by a state to pursue its own interest must take into account the sovereign interests of other states and those of the international community.
FATCA in turn states there are no boundaries to the tax state by extending its jurisdiction to all taxpayers and all the financial institutions in the world that may serve it. In the process it breaks with the norms of state-to-state cooperation and potentially damages international relations and trade agreements. The law imposes sanctions, in the form of a withholding tax on those foreign institutions that do not comply. However, in international law sanctions are only applied in very serious cases, Christians said. “If you got international law experts to look at this, I think they would be horrified.”
The disregard by FATCA for the sovereignty of other states puts it also in direct conflict with many foreign laws. As a result financial institutions in some countries are facing the dilemma that by complying with FATCA and cooperating with, from their perspective, foreign US authorities, they would break the confidentiality and privacy laws of their home country.
To fix the issue, the US Treasury proposed two types of intergovernmental agreements. Yet these agreements could make matters worse from a rule of law perspective and might violate the US constitution, said Christians.
In the past there has been a debate in the US whether executive agreements, like NAFTA, were constitutional. One thing that emerged, Christians said, was that only Congressional executive agreements would “pass muster”. This means that Congress has to assign the authority to the US president in law to enter into certain agreements.
“What was suspect were executive agreements that did not have prior Congressional approval. This is what an IGA is. It is a sole executive agreement.”
The only agreements that are not considered treaties, which have to be authorised by Congress, would be competent authority agreements but Christians believes the FATCA IGA, although it purports to be one, is not a competent authority agreement either. The language of the IGA states that it is authorised by the double taxation treaty between the US and the FATCA partner.
“But that has to be a lie because why would the UK, Mexico or Denmark have to go through parliamentary ratification processes but in the US nothing is needed.” She further speculated that the agreements that have been signed so far, were not signed by a competent authority but rather an embassy diplomats.
The IGA itself could thus be subject to challenge as being unconstitutional, and “if you sign an IGA which turns out to not to be law, then every financial institution in your jurisdiction is retroactively subject to FATCA”, she concluded.
Sticks only, no carrot here
In any event, 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.”
She argued there will be too many people who are going to recognise that reciprocal information exchange would hurt US competitiveness as a tax haven. “This only works if everyone else has to stop being a tax haven and the US can continue to be a tax haven.”
It is one of the many mixed messages that are delivered to the public, she said, referring to a steady news diet claiming that the state is losing control over its people and resources.
“Between creative tax planners and dodgy clients and complicit governments the world over the state is losing its touch when it comes to taxation. And the result is massive debts and deficits, the dismantling of the welfare state etc.”
The new narrative recasts the Googles and Starbucks in a moral or ethical role or at least in a corporate social responsibility role, while the state is put into a policing role.
Because states are responsible for academic growth, leaders have to put in place policies that promote growth. That means having competitive regulatory policies, said Christians.
At the same time there is an imaginary line that is being drawn between what is considered fair and unfair. “If you happen to fall on the wrong side of the line you are facing sanctions.”
But in a competitive world that is based on cooperation, the primary objective becomes to “cooperate in principle and defect in practice”, she noted, a practice that results in a “nationalistic and mercenary view in relation to everybody else in a struggle for global resources”.
To illustrate this view she quoted Senator Paul Ryan who said in 2010: “We need to have a tax system that makes America a haven for capital formation. Let’s make this country a tax shelter for other countries instead of having other countries be a tax shelter for America. This would ultimately raise revenues and promote economic growth.”