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FATCA and the Erosion of Taxpayer Privacy

FATCA and the Erosion of Taxpayer Privacy. Arthur Cockfield Queen’s University Faculty of Law art.cockfield@queensu.ca Pathways to Privacy University of Toronto, March 19, 2014. Overview of Talk. Why care about taxpayer privacy

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FATCA and the Erosion of Taxpayer Privacy

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  1. FATCA and the Erosion of Taxpayer Privacy Arthur Cockfield Queen’s University Faculty of Law art.cockfield@queensu.ca Pathways to Privacy University of Toronto, March 19, 2014

  2. Overview of Talk • Why care about taxpayer privacy • What is FATCA and the proposed Canada-United States intergovernmental agreement (IGA) • How FATCA and the IGA erode Canadian taxpayer privacy • Can we fix this problem?

  3. Taxpayer Privacy • Taxpayer personal information is highly sensitive and includes income, disability status, family status, charitable donations, asset ownership • In fact, concerns over intrusive and unfair taxation led to first laws to bind powers of English kings (Cockfield and Mayle, 2013, CTLJ): Coronation Charter of 1100, Magna Carta of 1215, and so on • Historically no government would assist another in enforcing its tax liabilities (the ‘revenue rule’)

  4. Foreign Account Tax Compliance Act: Background • FATCA derives from U.S. effort to fight offshore tax evasion (charitable version of history) • 1990s U.S. Senate hearings on offshore evasion; more recently 2009 USB Swiss bank scandal and 2013 ICIJ data dump • Evidence that offshore banks help hide secret accounts owned by Americans • 2010: Congress passes FATCA as part of HIRE Act

  5. FATCA: How It Works • All non-U.S. banks must figure out if they have accounts owned by ‘U.S. persons’ • If banks do not cooperate then punitive ‘withholding tax’ applies that will effectively shut them down • U.S. persons include U.S. citizens living abroad, green card holders (current and former), tax residents • Non-U.S. banks to send account information directly to Internal Revenue Service (IRS) • Then IRS will audit U.S. person: main fear are onerous penalties, denial of entry into U.S.

  6. How the IGA Works • Canadian banks cannot transfer personal financial information directly to IRS • Canada therefore agrees to enter into ‘intergovernmental agreement’ (IGA) with U.S. on Feb. 5, 2014 • Under IGA, banks send account info on U.S. persons to the Canada Revenue Agency (CRA) that in turn sends it to IRS • Unprecedented for Canada to let a foreign government unilaterally dictate how Canadian taxpayer information will be shared across a border (previously cooperate via treaty since 1942)

  7. Privacy Worries (and there are a lot!) • Discussed in comments to Dept. of Finance by Prof. Christians and Cockfield available on SSRN • IGA indicates that it will trump other Canadian laws • Therefore data protections afforded by PIPEDA likely of no force and effect because banks can give personal information to CRA for lawful purposes—trumps consent, notice, accountability, limited purposes and so on • Main privacy protections afforded to taxpayers are limited ones under Canada-U.S. tax treaty

  8. Specific Privacy Concerns • Breadth of information sharing: affects all joint account holders with U.S. persons, over 1 million U.S. citizens in Canada, former green card holders, ‘accidental Americans’, snowbirds: personal information on hundreds of thousands of Canadians sent to IRS • This is unprecedented privacy ‘give-away’ to a foreign government

  9. More concerns… • Self-certification procedures will apply to all Canadians whereby every bank consumer must certify whether they are a U.S. person (if they refuse to certify no bank services) • Social Insurance Numbers transfers • Corporate confidentiality concerns as Canadian corporations (if owned by U.S. persons) must transfer account information to IRS

  10. The IGA Trumps… • PIPEDA • Privacy Act • Access to Banking Services Act • NAFTA • Income Tax Act protections • Charter battles on the horizon

  11. Who Are Main Winners under FATCA and IGA? • U.S. indicates it will raise few revenues (globally, it hopes to raise roughly $10 billion over 10 years) • U.S. economy harmed as it cannot offer ‘credible commitments’ (Cockfield, VTR, 2013) • Main winners: tax lawyers, accountants and bankers (note banks may raise administrative fees for all bank customers to pay for compliance costs) • Therefore U.S. implementing act should have been named ‘HIRE Lawyers, Accountants and Bankers Act’

  12. What Can Canada Do? • Dept. of Finance wants to legislate IGA as of July 1, 2014 • Now that Canada has signed IGA it is in compliance with US demands • Delay legislation to study Charter and taxpayer privacy issues • Challenge U.S. action as violation of international law (e.g., NAFTA, WTO)

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