On October 8, 2015 I will be speaking to a group of Law Students at the University of Windsor on FATCA, FBAR, CBT and the ADCS-ADSC.ca lawsuit. This post is a synopsis of the issues and list of readings that are designed to introduce the issues. It is my hope that this will create more interest in the academic community on these topics.
Those interested are encouraged to check back as this page goes through its inevitable updates.
“Tax havens” vs. “Bank Secrecy” and a world of residence based taxation
Governments in general and the U.S. government in particular, have become more concerned that U.S. citizens either move their capital from the United States or hide their capital from the United States. People who would move their capital from the United States so that they could generate a better “after tax” rate of return. People who would hide their money from the United States so that their capital and income would escape U.S. Taxation. Any country with tax rates lower than U.S. tax rates would be considered to be (from a U.S. perspective) a “tax haven”. Any country that does not disclose the identity of its customers to the United States would be considered to be engaged in “Bank Secrecy”. As more and more income is generated from capital, governments the world over, have become concerned about capital escaping taxation. This concern has culminated in the OECD “Common Reporting Standard” which will “keep the capital of a country’s residents” in that “person’s country of residence”. In other words, countries are concerned that the residents of a given country, pay tax to that country. This principle reflects the principle that all countries (save one) impose taxation based on the fact of “residence” in the country.
FATCA and U.S. citizenship aka “place of birth taxation” or how to impose U.S. taxation on the world
In 2010 the U.S. Congress passed and President Barack Obama signed into law the U.S. “Foreign Account Tax Compliance Act” which is known as FATCA. It was aimed at resident U.S. citizens, green card holders, etc. President Obama, Senator Carl Levin and others claimed that the purpose of FATCA was to combat tax evasion, tax havens and bank secrecy. That may be a partial truth.The truth is that FATCA attacks “middle class” Americans abroad AND expands the U.S. tax base into other nations.
President Obama signed FATCA into law on March 18, 2010. Senator Carl Levin, a co-sponsor of the FATCA legislation, declared that “offshore tax abuses [targeted by FATCA]cost the federal treasury an estimated $100 billion in lost tax revenues annually” 156 Cong. Rec. 5 S1745-01 (2010). FATCA became law as the IRS began its Offshore Voluntary Disclosure Program (OVDP), which since 2009 has allowed U.S. taxpayers with undisclosed overseas assets to disclose them and pay reduced penalties. By 2014, the OVDP collected $6.5 billion through voluntary disclosures from 45,000 participants. “IRS Makes Changes to Offshore Programs; Revisions Ease Burden and Help More Taxpayers Come into Compliance,”
http://www.irs.gov/uac/Newsroom/IRS-Makes-Changes-to-Offshore-Programs;-Revisions-Ease- Burden-and-Help-More-Taxpayers-Come-into-Compliance (last visited Sept. 15, 2015). The success of the voluntary program has likely been enhanced by the existence of FATCA.
How can FATCA be used to expand the U.S. tax base into other nations?
FATCA is a U.S. law which is intended to apply to banks and other financial institutions outside the United States including Canada.
FATCA is designed to force non-U.S. financial institutions, under threats of punitive sanctions, to:
– identify those who the U.S. deems to be “U.S. persons”
– turn their banking information over to the Internal Revenue Service
– subject them to U.S. taxation
What is a “U.S. person”?
It’s important to note that the United States and the United States alone decides who is a “U.S. person”. The term “U.S. person” includes (but is not limited to) ANY person who was born in the United States, regardless of where that person lives in the world, unless that person can demonstrate that that he is NOT a U.S. citizen. (The United States confers citizenship on any person born in the United States.) It can also be imposed on those born abroad with a U.S. citizen parent dependent upon residency requirements. In other tax information sharing agreements, the definition of who is to be taxed is agreed upon/fixed by the countries involved. The U.S. can change its definition as it wishes.
What are the tax obligations of U.S. persons?
U.S. persons are required to pay taxes to the United States in accordance with exactly the same provisions of the Internal Revenue Code that apply to U.S. residents. Those “U.S. persons” who live outside the United States are deemed to live in the United States.
Who are the “U.S. persons” most affected by FATCA?
The principal effect of FATCA is on those who happened to have been born in the United States but reside in and are citizens of other nations. It is estimated that there are at least one million Canadian citizens who have a U.S. birthplace and are the target of FATCA. To put it simply, FATCA operates to locate people who were born in the United States and do NOT live in the United States. The purpose is to force them into the U.S. tax system. To repeat: the principal effect of FATCA is to impose U.S. “place of birth taxation” on the citizens and residents of other nations who were born in the United States.
How has FATCA and U.S. “place of birth taxation” affected the citizens and residents of other countries?
There are three obvious short term effects:
A. The closure of and inability of “U.S. persons” to have bank accounts (what bank would want to deal with U.S. persons?)
B. The huge demand for those who were “born in the USA” to renounce U.S. Citizenship (in Toronto there is currently a one year wait to renounce U.S. citizenship)
C. The pressure on citizens and other residents to enter the U.S. tax system. This is a very costly decision which will (in addition to the payment of taxes) impose severe life restrictions on them.
How has FATCA and U.S. “place of birth taxation” affected the Treasuries of other nations?
By imposing U.S. taxation on the citizens and residents of other nations, the U.S. is (in effect) imposing taxation on other nations. For example, a Canadian who was born in the USA would NOT (under U.S. law) be entitled to a “tax free” capital gain on the sale of his/her house.
(There are many other examples.) This has a significant impact on the sovereignty of other nations.
Response of the Government of Canada
On February 5, 2014 the Government of Canada (largely from the pressure of Canada’s banks) agreed to assist the United States in imposing FATCA on Canada. Canada and the U.S. entered into an “InterGovernmental Agreement” (IGA). Pursuant to this IGA, the Government of Canada changed various Canadian laws to facilitate the “search for U.S. persons” in Canada. In Canada, discrimination against those born in the United States is now MANDATORY.
Can the United States enforce tax judgments in Canadian courts against Canadian citizens and residents?
The “revenue rule” is a well settled principle of international law that one nation’s courts cannot be used to enforce the tax claims of another jurisdiction. Therefore, the United States could NOT, under common law come to Canada and ask the Canadian courts to enforce tax claims against Canadian citizens or residents.
The Canada U.S. Tax Treaty makes it clear that the Government of Canada will NOT assist the United States in enforcing U.S. tax claims against those who were Canadian citizens at the time that the tax claim arose.
Therefore, at the present time the United States could NOT expect either the Canadian courts or the Canadian Government to enforce U.S. taxation against Canadian citizens who are resident in Canada.
On the other hand, things can change …
The Response of the Alliance For Canadian Sovereignty
The “Alliance for the Defence of Canadian Sovereignty” was formed in 2014 for the sole purpose of challenging the Government of Canada’s authority to facilitate the hunt for “U.S. persons” in Canada. The legal challenge is based on numerous grounds including violations of the Canada-U.S. tax treaty and various sections of the Canadian Charter of Rights and Freedoms. Two Canadian citizens and residents (Gwen Deegan of Toronto and Ginny Hillis of Windsor) are the plaintiffs.
The legal issues raised by FATCA, the IGA, “place of birth taxation” and more
Leaving aside the moral question of whether taxation can be imposed based SOLELY on “place of birth”, the legal issues include:
– issues of law of citizenship in a modern world: when can a country impose citizenship on those who do NOT reside in that country?
– issues of extra-territorial taxation and the sovereignty of nations:
at what point do the taxation policies of one nation intrude on the sovereignty of other nations?
– issues pertaining the Canadian Charter of Rights: is the Charter to protect people or banks? Does the Charter allow for different classes of citizenship?
Why not a “class action” against the Government of Canada?
The rules for class actions vary from jurisdiction to jurisdiction. In general, the defendant must be known to have committed an “actionable wrong”. Second, the “actionable wrong” must be such that it’s easy to quantify the damages for all persons. In this case, although the Government of Canada has clearly committed a “moral wrong”, it’s not clear that they have committed a “legal wrong”. The existing lawsuit against the Government of Canada will determine whether the Government of Canada has committed a “legal wrong”.
The Faculty of Law of the University of Windsor invites you to the following special event:
When: Thursday October 8, 2015 – 12:30 p.m. – 2:00 p.m.
Where: Faculty of Law – Farmer Conference Room – Main Floor
Who: John Richardson, B.A., LL.B., J.D. (Of the bars of Ontario, New York and Massachusetts), Toronto citizenship lawyer and Co-chair of the Alliance for the Defence of Canadian Sovereignty
This event will be of special interest to anybody who is a “U.S.person”, who is married to a “U.S. person” and who is concerned with the Sovereignty of the Nation.
Suggested background reading …
Chapter 10. Justice Martineau Ruling on Three Motions
Chapter 11. Judgement & Reasons
Cook v. Tait
Tax Compliance & Effects
Academic articles on FATCA and research on “place of birth taxation”
Submissions on FATCA and citizenship taxation – House Ways and Means – 2013
Submissions on FATCA and citizenship taxation – U.S. Senate Finance Committee – 2015
Note that all of these submissions are summarized at: http://fatca.eu.pn
U.S. law student essays in support of citizenship-based (“place of birth”) taxation and FATCA.
It would be interesting to get some “law student” papers written from a Canadian perspective.
Comments from Americans Abroad