FATCA – NZ’s Insidious Future

Earlier this week Mark Hubbard (Laissez Faire Capitalist) wrote about the monstrosity of the Foreign Account Tax Compliance Act (FATCA). In it, he queried why those on the Left who staunchly opposed the GCSB legislation were appallingly silent on FATCA – an equally (if not more) intrusive piece of legislation passed by the U.S. government that implicates NZ.

I think its a fair claim made by him, and I will attempt to give a position from my point of view as a Left identifying person, noting that this is my personal opinion and not intended as a reflection of general left wing thought in NZ.

My view is that FATCA is undeniably intrusive and a threat to the privacy of New Zealander’s and in fact all persons who are citizens of OECD countries because Officials in NZ have indicated a willingness for FATCA to be emulated internationally as part of an OECD/G20 initiative and that all OECD countries have entered into negotiations with the U.S. regarding FATCA.

I’ve spent a bit of time lately researching the territorial rights of States, and it occurred to me that FATCA is not only intuitively inconsistent with standard conceptions of territorial jurisdiction but is also technically inconsistent.

Territorial jurisdiction is usually understood as applying to bounded geographical areas and it applies to any persons who find themselves within a States territory. Although the boundaries need not be fixed, jurisdiction is not considered as capable of extending into the boundaries of another sovereign State. In fact, its considered a fundamental breach of international law to do so except in very extreme circumstances – usually on humanitarian grounds.

Putting FATCA in context of jurisdiction – the U.S. cannot exert jurisdiction over the territory of NZ, so the U.S. is arguably in breach of this very fundamental principle of international law through the specific provisions in FATCA that implicate foreign finance institutions (FFI’s). In my view, FATCA impacts jurisdictionally on NZ despite assertions from Officials who claim that FATCA does not breach NZ’s sovereignty because:

…entering into the [intergovernmental agreement] and enacting legislation that enables financial institutions to comply with its terms  is in the best interests of New Zealand

FATCA is clearly obnoxiously coercive and should be opposed.

What exactly is FATCA?

The US enacted FATCA in March 2010. Its purported aim is to reduce tax evasion by U.S. citizens and green card holders living within U.S. territory or abroad. Hence it being a citizenship based tax model and extra-territorial legislation.

FATCA requires third party reporting, i.e. FFI’s must identify U.S. account holders and share information with the U.S. Internal Revenue Service (IRS).

If these FFI’s  do not both register with the IRS and agree to report specific information to the IRS, they risk a 30% withholding tax on every $USD transaction that goes through their institutions. Noting, that some FFI’s are exempt, such as government institutions and certain NGO’s.

However, there are leniencies if the FFI home State enters into an Intergovernmental Agreement (IGA) with the U.S as opposed to the FFI entering into a separate agreement. The purpose of the IGA’s  is to ensure that a partner government will legislate to require FFI’s to comply with FATCA.

In NZ, the IRD insist that the IGA is necessary because if NZ financial institutions (NZFI’s) enter into separate agreements with the IRS they are unlikely to be able to comply with FATCA because of NZ’s current legislative framework. That means NZFI’s would be subject to the penalties contained within FATCA. The IRD has recommended that NZFI’s instead refrain from registering with the IRS website as NZ is currently negotiating an IGA with the U.S.

The Policy & Strategy, Treasury and IRD published a report responding to submissions on the Taxation (Annual Rates, Employee  Allowances, and Remedial Matters) Bill that deals with FATCA.

The report states that it is in NZ’s best interests to proceed with negotiating an IGA because not doing so would involve ‘severe reputational risk’ since ‘all OECD countries have either signed or are negotiating, IGAs with the United States in respect of FATCA’.

This is a weak justification for allowing the U.S. to exercise a kind of quasi-jurisdiction over NZFI’s. It’s also insidious that the report portrays FATCA as consistent with the sovereign rights of NZ despite the legislative changes required to comply.

I do agree in principle, that it’s inappropriate for the NZ government to comment on the U.S. citizenship based tax model, since its part of the U.S. domestic legal system. However, I also think criticism is appropriate in the circumstances given the purpose of FATCA is to coerce domestic law changes in sovereign States so that the U.S. can access information it would otherwise not be privy to.

I do worry about the impact of the IGA’s, since international law is often created through custom, which can derive from treaties and agreements. Custom is established through widespread and consistent State practice and opinio juris (what the States believe).

These IGA’s are arguably evidence that the States who enter into them accept as a practice that intergovernmental information sharing through relaxation of domestic privacy laws is a developing norm. Additionally, that those States conceive of coercing private institutions to share private information about those who have accounts with them as acceptable State behaviour.

The only way for a State to avoid being bound by customary international law is to express a statement to the contrary of a particular practice prior to taking any action that might suggest otherwise. Arguably, signing an IGA is evidence in favour of the norm development. Other commentary of State belief may also bolster any claims of custom in future.

Speaking of future,  the report notes that :

…under the IGA and any OECD/G20 model that may be devised in the future, New Zealand will also be the recipient of information in respect of New Zealand  tax residents that have undeclared offshore bank accounts. This information will assist in ensuring that all New Zealanders also pay the correct amount of tax on their worldwide income

This statement clearly suggests that the Officials are anticipating a FATCA-like regime in NZ (and other OECD countries) in future. As the report points out, the only way for U.S citizens to avoid being captured by FATCA is to renounce their citizenship, and this is probably the only way for NZ citizens to avoid this kind of regime too.

The report also insists that intergovernmental information sharing and citizenship based tax models are pertinent to becoming a ‘good international citizen’ and has dual benefits to NZ i.e. both fiscal and reputational.

Hubbard writes that:

a faceless official who can read your financial transactions, can read your life, plus worse, this official owns your income

While his post rails against the Left in a mocking and often offensive way, the substance regarding FATCA is worth consideration irrespective of  political affiliations. If you value privacy, then you are unlikely to support FATCA.

The IGA being negotiated between NZ and the U.S will compel NZFI’s to collect and share information that is not currently collected and shared but the report considers this intrusion on privacy to be outweighed by other public interest considerations. Inferentially, NZ’s reputation and future fiscal advantages through the ability to coerce information from FFI’s in order to tax NZ citizens abroad.

For all the reasons above, I oppose FATCA and I encourage those who oppose the GCSB legislation to consider the implications of global information sharing based on an individuals citizenship and access to their financial accounts. You may buy into the ‘it targets the 1% who cares’ narrative, but FATCA is not about class. It is about privacy. It signifies the unacceptable encroachment of the State into the lives of every citizen. That is the dystopia we are heading for with FATCA.