Presidential Executive Order on FATCA IGA reciprocal reporting

1(a). FINECEN Enhanced CDD on legal entity customers rule to be published
Treasury is to publish their August 2014 proposed rule on Enhanced Customer Due Diligence for Legal Entity Customers. The rule is mainly to facilitate FATCA IGA commitments to exchange information. The IGAs are a Presidential Sole Executive Agreement which did not require Congress authorisation. The President can issue an Executive Order to enable the IRS to collect information obtained by banks and exchange it internationally according to the FATCA IGA commitments.

1(b). Federal Register on beneficiaries of legal entities
The administration partially unveiled legislative proposals it said would combat money laundering and financial chicanery, and for the first time, establish a central federal registry of the real owners of all companies created and operating in the United States.

Proposed legislation that the White House will send to Congress would require companies to report adequate and accurate beneficial ownership information at the time of a company’s creation or when company ownership is transferred.

The proposal would create the registry under the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, allowing law enforcement to gain easier access to information on true ownership of companies.

The IRS presently gets information on company owners, through employer identification numbers, but law enforcement generally cannot see this information without a subpoena. The White House plan gives IRS benefit for law enforcement.
Barack Obama s'attaque au paradis fiscal du Delaware
December 7, 2016 -- Barack Obama tackles the tax haven of Delaware.

A month and a half from his departure from the White House, US President Barack Obama is keeping his promise to reform the opaque tax regime of Delaware, Wyoming and Nevada.

According to our information, confirmed on Tuesday, December 6 by the secretariat of the Treasury, the American administration is preparing to adopt the text that will oblige the real beneficiaries of the famous opaque offshore companies, registered in these three tax havens made in USA, to reveal their identity To the tax authorities. This text is finalized and is about to be officially published. It will apply from 2017, for newly created companies, as for old ones.

Response to "Panama papers" Concretely, this new regulation of the Internal Revenue Service (IRS), the US Treasury, and the Treasury is aimed at single-shareholder and limited liability companies, called "single LLCs". It will require their owners to identify themselves with the tax authorities, which is a real step forward in terms of transparency.

Indeed, no such obligation now affects these individual companies, as long as they do not own a US shareholder or do business in the United States. The secret of business prevails there, and these offshore entities opened in twenty-four to forty-eight hours, are, for this reason, highly valued by the rich foreigners. They are invisible to the tax authorities.

These companies have found themselves at the heart of numerous international scandals of fraud and tax evasion, including recently, in April, that of "Panama papers", revealed by the American investigative journalism consortium ICIJ and its media partners, including The world. Many illicit schemes went through "single LLCs" domiciled in the state of Delaware.

It was also in response to the "Panama papers" that the reform about to be adopted by the Obama administration was announced in the spring. The democratic government wanted "to enter the United States in the global transparency movement", had explained to the World Deputy Treasury Secretary Robert Stack. The Obama administration also intends to set an example, by fighting the opacity on its territory, while silenced the criticisms formulated against it.

Trump, a fan of tax havens

But the adoption of the new regulation is now taking a special place in the context of the election of Donald Trump. The newly elected president is, in fact, an adept assumed tax haven, for his own affairs. While he has consistently refused to publish his tax returns, his campaign team recently said that Donald Trump, "a talented businessman", "does not pay more taxes than law".

Will the president-elect question the new regulation? Any attempt to do so would require a public announcement and would not go unnoticed. The new regulation, designed to avoid new cases of tax evasion committed by foreign taxpayers in the United States, would hardly have provoked opposition ...

In detail, the new regulations of the tax administration and the Treasury will therefore make it possible to treat companies registering under the status LLCs as corporations, from the year 2017: their real owners will have to declare the transactions Which they will carry out with these offshore companies once a year and it is on this occasion that the tax authorities will be able to identify them. They will get a tax identification number from the administration, in exchange for which their business and tax benefits will be maintained. The first declarations are expected in 2018, for 2017.

The companies created next year will immediately apply these new transparency requirements, while the former companies will also have to submit to them for future declarations. This will satisfy the tax administrations of foreign countries, which would investigate possible frauds committed by their taxpayers.

On the other hand, under another rule, which is currently being finalized, banks should be required to identify the actual owners of newly established companies before opening accounts.
2. FINCEN's rule on Enhanced Customer Due Diligence for Legal Entity Customers
FINCEN has announced that it will shortly publish its rule on Enhanced Due Diligence on for Legal Entity Customers. See Reuters news and NY Times.

This will oblige most types of Financial Institutions in the US to identify the ultimate individual beneficial owner(s) of legal entity customers, such as partnerships, LLCs, etc. This will likely be extended to trusts in future amendments.

3. FINCEN's rule is for FATCA IGA reciprocal exchange of information commitments
3. Many practioners opine that FINCEN's due diligence rule is not associated with FATCA. However, FINCEN explicitly describes one of the main purposes of the Enhanced due diligence rule is for FATCA IGA Reciprocal reporting. See page 3 of 24 the rule, top of middle column....

... Facilitating reporting and investigations in support of tax compliance, and advancing national commitments made to foreign counterparts in connection with the provisions commonly known as the Foreign Account Tax Compliance Act (FATCA)

4. Although Congress did not authorise FATCA IGAs, are they a delegation of power by Congress
Congress approved the FATCA Statute when it was surreptiously attached to the Hiring Incentives to Restore Employment Act 2010. Thereafter, Treasury modified the Statute into Treasury Regulations, which were not approved by Congress. IRS then made further modifications to the Regulations so that it was palatable for partner jurisdictions. For instance. routing of information via governments, de minimis thresholds for reporting, new types of non reporting FIs and additional excluded accounts. Also withholding penalty for non-compliance was added. All these modifications were not mentioned in the Congress authorised Statute. The agreements with partner jurisdictions are known as FATCA Intergovernmental Agreements (IGAs). Congress did not authorise the IGAs.

So are the FATCA IGAs binding on the USA if they are not approved by Congress? Are they a delegation of Power by Congress?

Susan Morse, professor at Texas University at Austin has written a paper explaining why the FATCA IGAs are binding executive agreements but may also indirectly be Congress sanctioned legislation. Susan opines:
  • IGAs may be Congress-Executive Agreements. The grant of congressional-executive authority to Treasury to negotiate tax information exchange agreements does not explicitly cover the FATCA IGAs. The section refers to only a narrow category of TIEAs — those with a list of Caribbean Basin countries. Yet this section has previously received a broad judicial interpretation. Even if the Statute is not clear, case law suggests that courts would enforce FATCA IGAs as valid information exchange agreements. The court has previously relied on congressional acquiescence in the President’s concluding [tax information exchange agreements] with other countries, as evidenced by the Senate’s ratification of an updated Mexico-U.S.treaty after the negotiation of the TIEA.
  • IGAs may be Treaty Based Agreement. Opponents say that treaty information provisions do not support the exchange of information contemplated by FATCA, because FATCA imposes a withholding tax, absent compliance, in violation of the treaties’ restrictions on U.S. taxation of interest, dividends, and capital gains paid to treaty residents. Further in violation of treaties, FATCA also provides that a non-U.S. account may be subject to withholding if an FFI fails to provide sufficient information. Yet FATCA is consistent with U.S. treaty obligations. FATCA only imposes an information requirement relating to certification of treaty eligibility in order to avoid a withholding tax. FATCA is like the regulations, require the provision of a Form W-8BEN to evidence non-U.S. status or treaty status before the application of reduced rates of withholding. FATCA permits non-U.S. beneficial owners or FFIs to claim a refund if a withheld FATCA tax exceeds the U.S. tax liability otherwise due and other requirements are satisfied. Neither the requirement of a Form W-8BEN nor the requirement of information exchange under an IGA violates tax treaties’ commitments to reduced rates of tax.
  • IGAs are Binding Administrative Guidance. Because the framework and substance of IGAs is incorporated into the regulations under FATCA, it presumably merits the generous Chevron deference, which basically says if Congress has not specifically forbid it, the President can issue an order covering this issue.
  • Summary: The FATCA is a presidential executive order and is also likely meets the requirements for Congress-executive agreements and / or Treaty based agreements. The U.S. might bring FATCA IGAs into future tax treaty ratification rounds to cement the position that the IGAs are valid and enforceable congressional executive agreements or treaty interpretations.

Susan Morses paper is a retort to Professor Allison Christians, McGill University Faculty of Law in Montreal, a vocal opponent to FATCA. Her essay questions the legality of non congressed approved FATCA IGAs in her renowned essay Dubious Legal Pedigree of IGAs and why it matters. Prof Christians also surmises the IGAs are presidential sole executive agreements that do not need Congress approval.

5. Can a Presidential executive order implement FATCA IGA's commitment of reciprocal exchange of information?
Has Congress delegated power to the US president to issue an executive order for IRS to collect the information from Financial Institutions mandated by FINCENs new rule. Could this executive order allow the IRS to exchange this information as per the FATCA IGA commitments?

There is no constitutional provision nor statute that explicitly permits executive orders. United States presidents can issue executive orders to help agencies of the executive branch manage the operations within the federal government. Executive orders have the full force of law when they take authority from a legislative power which grants its power directly to the Executive by the Constitution, or are made pursuant to Acts of Congress that explicitly delegate to the President some degree of discretionary power. An executive order of the president must find support in the Constitution, either in a clause granting the president specific power, or by a delegation of power by Congress to the president.

As promulgated in Susan Morse's paper, IGAs have a strong case as valid congressional-executive agreements or treaty based agreements. Regardless of their status as international agreements, IGAs should bind the U.S. government as administrative guidance. Therefore FATCA IGAs including its reciprocal exchange of information is part of the delegation of power to the president by Congress. A presidential executive order would assist the IRS, an agency of the executive branch. Therefore the president could issue an executive order to effect exchange of information as per the FATCA IGA commitments.

6. Can Congress overturn an executive order which facilitates FATCA Reciprocal reporting?
Congress has the power to overturn an executive order by passing legislation in conflict with it. The president retains the power to veto such a decision; however, the Congress may override a veto with a two-thirds majority to end an executive order.

Congressional override of an executive order is a nearly impossible event due to the supermajority vote required and the fact that such a vote leaves individual lawmakers very vulnerable to political criticism. In the current environment it is unlikely any lawmaker would want to veto automatic exchange of information