08 May Are Sole Executive Agreements Next on the Roberts Court Chopping Block?
A constitutional challenge is in the works to Foreign Account Tax Compliance Act, the anti-offshoring tax measure that is the bane of ordinary US citizens worldwide. The law adds a burdensome layer of administrative requirements to longstanding citizenship-based tax liabilities. If you’re an American living in France, say hello to thousands of Euros in accountant fees.
Foreign banks are a key location for and target of FATCA enforcement, and the Treasury Department has been bringing them into FATCA’s orbit wholesale through bilateral executive agreements with industrial economies. These so-called inter-governmental agreements — “IGAs” in the FATCA glossary — facilitate FATCA compliance by allowing banks to report information to their own governments, who will pass it along to the IRS in turn. (For more on the IGAs, and to get a sense of how accountants and others will benefit, see fatca.thomsonreuters.com.) IGAs have been controversial in other countries, not the least because the regime may override domestic privacy laws. But other governments have a reciprocal incentive to sign on: we report on offshoring that’s hurting you, you help us out with offshoring that hurting us.
In the US, FATCA (much less the IGAs) has hardly been a blip on the policy screen. The interests of external US citizens consistently fail to register in US politics. But the issue has now caught the attention of the GOP anti-tax crowd. Enter Jim Bopp with a constitutional argument that FATCA and the IGAs violate the Treaty Clause, the Fourth and Eighth Amendments.
I wouldn’t be taking this too seriously (the latter two arguments are not very credible), except that Jim Bopp was the lawyer behind . . . Citizens United.
The Treaty Clause argument is a plausible one, the doctrinal terrain at least unsettled. The FATCA agreements enjoy implied congressional authorization, at best, in the form of prior tax treaties. (McGill’s Allison Christians explains the argument — and its weakness — in this excellent piece for Tax Notes.) We have Dames & Moore taking a contextual approach to the legality of executive agreements undertaken without express congressional approval (before or after the fact). More recently, Justice Roberts adopted a constricted historical view of so-called sole executive agreements in Medellin.
There is a lot of history behind sole executive agreements but not much judicial precedent. Executive agreements have figured importantly in the Obama Administration’s muscular exercise of executive branch power (see this essay from then-Legal Adviser Harold Koh in defense). Could this be another platform for the Supreme Court to advance its formalist turn in foreign relations law?
Quote: “But other governments have a reciprocal incentive to sign on: we report on offshoring that’s hurting you, you help us out with offshoring that hurting us.” Reciprocal reporting has very little to do with the incentive to sign onto FATCA. The incentive for signing an IGA has a lot more to do with the 30% sanctions imposed by the US on all US payments to any FFI who does not comply with FATCA. By signing an IGA, foreign governments greatly reduce the risk of having 30% sanctions applied to their institutions. Most countries, while having an interest in receiving reciprocal data, probably know by now that they will likely never receive it. The US is one of the top tax havens in the world and there is no impetus in Congress to change this. Any country signing up to an IGA today should certainly know it is a one-way agreement. I also would not write off the constitutional challenges of FATCA so quickly. There are 7 million US expats being treated as financial outcasts and criminals, with threats of extortionate fines and penalties for paperwork filing requirements that usually result in no taxes owed. Expats also now have to hope… Read more »
This American in France thanks you for the excellent article. Two questions: 1. In many of the IGAs (including the French one) there is a clause that prohibits discrimination against US Persons (US citizens, Green Card holders and the like). As a result of FATCA many foreign banks are either closing the accounts of US citizens or they are limiting the kinds of accounts they can have or the products they can purchase. This is a clear violation of the agreement. So who exactly is responsible for enforcing it? By what process can a US citizen experiencing this kind of descrimination seek redress? 2. Under the IGAs banks are required to find all their US citizen clients. However it is often not clear at all if someone is a US citizen or not. US citizenship law is complex and even a child born abroad to two American parents may still not be a US citizen by birth. So in a situation where the bank says that X is a US citizen but the individual in question disagrees, who makes the final determination that this individual is or is not a US citizen? Can the bank do it on… Read more »
Thanks for this response and the clarification on the incentives. Re the non-treaty constitutional arguments: The Eighth Amendment argument is a complete nonstarter (“cruel and unusual punishment” just doesn’t fit here, for many reasons). The Fourth Amendment also seems like a poor ever, since the FATCA regime does not involve a “search” or “seizure” in the typical use of the terms — the IRS isn’t actually forcing its way into your bank statements, just giving you a good reason to cough them up. But I’d be happy to hear the latter argument elaborated – maybe there’s something there that I’m missing.
When is Bond coming? See also: http://www.oxfam.org/en/pressroom/pressrelease/2014-05-02/rewriting-global-tax-rules-could-increase-developing-countries%E2%80%99-co
Victoria, thanks for these questions.
1. Interesting. In theory such discrimination might constitute a breach of the agreement. But it’s unlikely that the US will act on the breach, since the US central motivation for the agreements is information. The only effective route for enforcing these provisions would be political — as in, get Congress motivated to force the IRS to do something about it. You would have a better sense than I about this probability, after your recent trip to Washington to meet with officials on the subject!
2. Also interesting. Follow-up question: do you know if the State Department will issue documentation to the effect that someone is a non-citizen? (Their is of course the Certificate of Loss of Nationality, but that only applies where one was a citizen and is no longer.) I am unaware of such a document, but again, you are much closer to the ground than I am. Alternatively, I suppose a person could get a lawyer’s opinion for use with banks, but of course that would just add another expense on top of others.
Peter, These questions have been on my mind a lot lately. I did ask Question 1 in Washington and the answer was, “We’re not sure….” But wouldn’t it depend on what kind of agreement it is? If it truly is a competent authority agreement then there is an existing mechanism to resolve those kinds of matters. The same procedure as one would use to resolve a case of double taxation under the tax treaties. The folks in D.C. were very sympathetic but I didn’t see much will to act. In part because nothing is getting done right now but also because (just my view) no one can figure out who exactly is responsible for and who represents Americans abroad. Is it State? (For some things, yes.) Is it the individual Congressperson? (Well, they have a lot on their plate already with their constituents in their home districts.) About the only person who will consistently go to bat for us is Nina Olson, the National Taxpayer Advocate and even that is qualified support. About question 2. My view so far from the ground is that confusion reigns. The banks are not comfortable in the role of deciding people’s citizenship… Read more »
Interesting question. Indeed, how does one prove a negative – that one ISN’T a citizen? I think (let me confirm) that someone might have to fill out this form and submit it to the Embassy. It’s the DS-4079.
http://www.state.gov/documents/organization/97025.pdf
But if they do determine that you are not a citizen then what would they give you? Can’t be a CLN. Perhaps a letter from the consulate? Let me ask….
…oh, and see also http://www.thenewamerican.com/world-news/item/17987-a-new-world-tax-regime
“The Fourth Amendment also seems like a poor ever, since the FATCA regime does not involve a “search” or “seizure” in the typical use of the terms — the IRS isn’t actually forcing its way into your bank statements, just giving you a good reason to cough them up.” That is questionable. You don’t cough them up. Your bank provides them to the IRS with a forced consent, as if you don’t consent, your account is closed. So this is a seizure without any suspicion of fraudulent activity. The information sent is also outstanding: not only interest income, but full account balances and transactions. “Eighth Amendment argument is a complete nonstarter” You’re right on this one. FATCA and the IGA in itself don’t have any penalty attached. However people are terrified of the FBAR penalties (even the civil non willful are exorbitant). Also, some banks in Switzerland in particular, require people to enter the only compliance program available from the IRS: OVDI to keep them as customers. This almost ensure that these people forego 27.5% of their max balance (i.e the penalties are not based on the tax due, but on the max value of the account). That might be considered… Read more »
There is something strange at work here. The IGAs which you indicate are vulnerable to a Constitutional challenge under the Treaty Clause are not part of FATCA. They were developed by the Treasury as the most efficient method to implement the statute.
Accordingly, even if the Constitutional challenge were successful under the Treaty Clause, it would presumably only strike down the IGAs, but this would leave the validity of FATCA unaffected.
Under this scenario, the first “victims” of the challenge would be the foreign financial institutions finding that they have to directly register with and make full disclosures to the IRS instead of to their national revenue agencies, and could not rely on an agreed framework under their respective national laws to achieve compliance with the statute.
It could very well be that without IGAs the Treasury and the IRS determine that they are incapable of implementing the law with their limited (and stretched) resources, but this is a different matter altogether.
Ted Baumann’s point is well taken. Allison Christians reaches the same conclusion in the paper linked in the post. The IGAs have in effect softened FATCA. If they are nullified, the law will revert to its more intrusive original form. That could (as Ted suggests) end up undermining the regime altogether. Something to watch.
A violation of the Eighth Amendment a non-starter?
How is a fine of 50% of the highest yearly account balance for six years which equals 300% not cruel and unusual? This punishment is for failing to fill in a form that virtually nobody heard about until about two years ago?
For Americans abroad, 300% may be 300% of ALL the money they earned during their entire lifetimes.
Like pornography, cruel and unusual punishment may not have a universal definition, but a person definitely knows it when they see it.
My main concern about Jim Bopp’s constitutional challenge (bless his soul) is that the status of the US constitution (supposed supreme law of the land) has been reduced to that of a doormat.
As well intended as it was, the US constitution is a failure. It no longer protects American citizens from the leviathan that the US government has become.