Ius Gentium

University of Baltimore School of Law's Center for International and Comparative Law Fellows discuss international and comparative legal issues


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Renunciations on the Rise: U.S. Natural Status Is Dangerous Under FATCA

 

Julia Brent

On March 18, 2010, President Obama signed a “jobs” bill into law, paid for by the revenue raising Foreign Tax Compliance Act (FATCA).  Execution of FATCA would access a deep pocket: there is an estimated $40 billion per year in international tax evasion.[i]  Thus far, the U.S. Treasury has taken in $800 million in FATCA-related revenue.[ii]  FATCA doesn’t change the obligations of U.S. taxpayers to pay their taxes on overseas earnings, but creates an enormous reporting obligation on 200,000 foreign financial institutions (FFIs) worldwide to pass on information from accounts of U.S. citizens to the IRS. [iii]  Failure to do report results in a 30% penalty on payments into the account, payable to the IRS.[iv]

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The simple solution is to take advantage of one of several U.S. Tax amnesty programs, and many are struggling to pay their taxes before the reporting begins.  However, the legislation has created complex problems for both the institutions and for taxpayers.  For example, an FFI to merely register its own company with the IRS (much less implement the giant reporting scheme) must master a 135-page guide of registration details.  Similarly, taxpayers face multiple forms and banker’s-box size submissions. For many, hiring an accountant to handle compliance is prohibitively expensive.[v] Some foreign individuals who were born in the U.S. but raised overseas by foreign parents don’t realize they have U.S. citizenship.  Some are “accidental Americans” because their parent was born in the U.S.  Staff at the IRS report that they have been overwhelmed by calls from Americans overseas regarding what they are supposed to furnish under FATCA.[vi]

The result of this high-consequence complexity is that many individuals overseas are eliminating their U.S. citizenship. Those that hold dual citizenship often are nationals with a quality country the EU, Canada, Australia, or New Zealand and are allowed travel without a visa through much of the world (including to the United States).[vii]  In the face of accessing the value of their U.S. passport, the conclusion by many is that there is a real danger.  Many institutions are ill-equipped to handle FATCA compliance, much less retracing steps to correct an error.  Already, the IRS has extended reporting deadlines because foreign governments and FFI’s haven’t finished developing IT systems, and aren’t prepared.  Some believe the scale of implementation is so large that the cost of implementing FATCA will “far outweigh the revenues.”[viii] Scotia Bank in Canada, alone, has already spent $100 million.[ix]  There is a high likelihood of a taxpayer getting caught between the cracks of an imperfect system, and being the victim of incorrect reporting, which comes with significant consequences.  An account holder does not have to be a U.S. citizen for their FFI to report them based on U.S. indicia the distinguishing information on their account.  U.S. indicia can mean as little as a U.S. telephone listed as contact information.  One would hope that if an account held by a true non-U.S. citizen was incorrectly reported as that of a U.S. citizen, the false report would be quickly corrected.  However, the sheer size of the players the IRS, state governments, and FFIs – creates a likelihood that corrections will take months, even years, to sort out in litigation against the IRS or a foreign tax administrator.

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In addition to imperfect reporting, those with American only or dual citizenship are concerned that FACTA requirements compromise privacy and the right to data protection as a taxpayer.  Many governments have executed Intergovernmental Agreements (IGAs), either without considering the rights of the individuals affected or complying by means of what is essentially coercion.[x]  Privacy issues for Canadians have been raised by former Canadian Finance Minister, Jim Flaherty.  His concern is the “far reaching and extraterritorial implications” of FATCA which, in effect, mandate that Canadian banks become extensions of the IRS and jeopardize Canadians’ privacy rights.[xi] Banks in Canada are not required to know the nationality of their clients, and, to conform to FATCA, Canada would have to change its privacy laws.[xii]  All the countries under the Model 2 International Governmental Agreements (IGA’s) have laws which either prevent disclosure or require individual consent.[xiii]  The difficulty with consent is that in many cases it is logistically impossible.  For example, Japanese banks have several hundred million bank accounts, not digitized, all with opening forms in Japanese.[xiv]

FATCA has changed Americans into outsiders in the international financial world.[xv]  As one officer of a global bank reported, the banks are ridding themselves of the “U.S. Person pollution!”[xvi] American Citizens Abroad (ACA) has received multiple testimonies from Americans abroad who have had their foreign bank accounts closed, been refused entry into a foreign pension fund, or who cannot enter into insurance contracts overseas.[xvii]  Some claim that “American citizens are being denied savings accounts, investment accounts, mortgages, credit cards and many of the basic financial services required to live and work in modern society, raise a family and to save for retirement.”[xviii] This is due to the fact that, while there are 780 million American bank clients overseas,[xix] this number is a drop in the bucket for banks who serve a much higher number of non-Americans.

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These difficulties explain why the amount of renunciations since FATCA was implemented has quadrupled.[xx]  Renunciations have caused such a backlog of paperwork that, in November last year, the fee for renunciation was increased by 400%.[xxi] The U.S. response has been inadequate:  Robert Stack, Treasury Deputy Assistant Secretary of International Tax Affairs, described the claim that Americans living abroad will give up their U.S. citizenship because of liabilities and burdens created by FATCA as Myth No. 3.[xxii]  Meanwhile, the New York Times reports, “The bureaucratic burden of identifying, verifying and reporting has caused many banks to regard American clients, particularly those of moderate means, as more trouble than they are worth.”[xxiii]

There is currently a push to make renunciation “easy and harmless,” financially and mentally, since new regulatory burdens on non-resident US citizens make living with that status nearly impossible.[xxiv]  Recently, a “renunciation meeting” was held in Canada, the first of its kind, to permit 22 Americans together to renounce their U.S. Citizenship, in spite of the $2,350 fee and paperwork. Tara Ferris, then Senior Counsel at Chief Counsel IRS, and others did an outstanding job in drafting the internal revenue rules and regulations of FATCA, an unprecedented behemouth of legislation.  However, the code implements policies that have significant unintended consequencesMass renunciations, a sort of reverse of our naturalization ceremonies, may become a thing of the future.[xxv]

[i] http://www.fas.org/sgp/crs/misc/R40623.pdf, Summary

[ii] Id.

[iii] http://www.acfcs.org/fatca-may-identify-tax-cheats-but-its-dragnet-for-financial-criminals-may-produce-an-even-bigger-yield/

[iv] http://fatca.thomsonreuters.com/about-fatca/

[v] http://cnsnews.com/news/article/gabrielle-cintorino/tax-laws-pushing-americans-living-abroad-renounce-their-us

[vi] http://www.bloomberg.com/news/features/2015-04-08/an-emotional-audit-irs-workers-are-miserable-and-overwhelmed

[vii] http://opiniojuris.org/2012/01/08/fatca-fallout-mass-renunciations/

[viii] http://www.acfcs.org/fatca-may-identify-tax-cheats-but-its-dragnet-for-financial-criminals-may-produce-an-even-bigger-yield/

[ix] http://business.financialpost.com/news/fp-street/electronic-spying-a-big-issue-for-banks-scotia-ceo-waugh-says

[x] http://www.keepcalmtalklaw.co.uk/accidental-americans-the-us-citizenship-conundrum/

[xi] http://sundominica.com/articles/fatca-and-you-1462/

[xii]http://web.archive.org/web/20130601041733/http://americansabroad.org/issues/fatca/fatca-is-bad-for-america-why-it-should-be-repealed/

[xiii] https://www.irs.gov/Businesses/Corporations/FATCA-Governments

[xiv] http://web.archive.org/web/20130601041733/http://americansabroad.org/issues/fatca/fatca-is-bad-for-america-why-it-should-be-repealed/

[xv] Id.

[xvi] http://www.finance.senate.gov/imo/media/doc/Republicans%20Overseas,%20Inc.1.pdf, page 3

[xvii] Id.

[xviii] http://www.finance.senate.gov/imo/media/doc/Republicans%20Overseas,%20Inc.1.pdf

[xix] http://money.cnn.com/2016/02/08/news/americans-citizenship-renunciation/

[xx] http://intltax.typepad.com/intltax_blog/2016/02/new-expatriate-record-2015-nearly-4300-expatriations.html

[xxi] http://www.bbc.com/news/35383435

[xxii] https://www.treasury.gov/connect/blog/Pages/Myth-vs-FATCA.aspx

[xxiii] http://www.nytimes.com/2015/05/14/opinion/an-american-tax-nightmare.html?_r=0

[xxiv] http://www.keepcalmtalklaw.co.uk/accidental-americans-the-us-citizenship-conundrum/

[xxv] http://opiniojuris.org/2012/01/08/fatca-fallout-mass-renunciations/

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The Israeli Parliamentary Elections & What They Mean For Israel-United States Relations

Yasmine Akkad

On March 17, 2015 Israeli parliamentary elections were held, resulting in the re-election of Prime Minister Benjamin Netanyahu of the center-right Likud party.  Despite Mr. Netanyahu’s eventual victory, the parliamentary race was a close one.  A poll from March 13, just a few days before the election, showed the center-left Zionist Union party in the lead.  Furthermore, comments made by Netanyahu in the days leading up to the elections, have stirred public debate.  Most notably, U.S. officials have publically denounced Netanyahu’s statements, highlighting the changing nature of U.S.-Israeli relations.

Israel Vote

Election Breakdown

Israel has a parliamentary system with the 120-seat parliament commonly referred to as the Knesset.   This system is based on nation-wide proportional representation, which means that voters elect nationally registered political factions—like Netanyahu’s Likud party—and not local candidates.  For Americans, who, unlike Israelis, vote for individual candidates, this type of electoral system is foreign.

Knesset elections must be held once every four years, though many coalitions do not survive a full term due to political instability.  Such was the case recently, when in December of 2014, the Israeli government collapsed.

Election turnout this year was 72.3%.  Netanyahu’s Likud party gained the most Knesset seats, with the Zionist Union party coming in second.  The Joint List, which is an Arab Israeli coalition, came in third.

Controversy

Prior to the elections, the Netanyahu Administration’s stance concerning Palestine was that a two-state solution was possible.  However, in the days leading up to the election, and in the face of unfavorable poll numbers, Netanyahu said he would not allow the creation of a Palestinian state if re-elected.  Furthermore, in order to mobilize more supporters, Netanyahu warned, “The Arabs are voting in droves.”  Arab Israelis make up about 20 percent of Israel’s population and 15 percent of the country’s eligible voters.

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Such remarks by Mr. Netanyahu were met with harsh criticism, particularly from U.S. President Barack Obama.  In an interview with the Huffington Post, Obama said Netanyahu’s remarks upended the Israeli-Palestinian peace process and ran counter to the very nature of Israeli democracy.  According to Obama, Netanyahu’s statements will discourage people from thinking negotiations are possible.  In regards to the comments about Arab voters “coming in droves” Obama said “we indicated that that kind of rhetoric was contrary to what is the best of Israel’s traditions—that although Israel was founded based on the historic Jewish homeland and the need to have a Jewish homeland, Israeli democracy has been premised on everybody in the country being treated equally and fairly.”  Obama warned that if people were not treated equally and fairly, democracy in the country would be undermined.

What This Means

Netanyahu has since apologized for his remarks and said he had not meant to offend Israeli Arab voters.  Mr. Netanyahu also softened his stance saying that he wanted a two-state solution, but that “circumstances have to change.”

Some may call Netanyahu’s apology progress, while others may call it back-pedaling.  Regardless, such public denouncements by Mr. Obama are not only harsh, but also indicative of the strained relationship between the two world leaders.  For example, earlier in the month, Netanyahu addressed Congress in a passionate speech about Iran.  The only problem was that U.S. House of Representatives Speaker John Boehner invited Netanyahu without consulting with President Obama first.  Ouch.

Netanyahu Congress

So, what does this mean?  The strained relationship between Obama and Netanyahu is undoubtedly tense.  But a lack of support for Netanyahu in the White House is not indicative of a lack of support for Netanyahu—after all, the Israeli leader was invited to address Congress.  So, despite what some may call a departure from normal U.S.-Israeli relations, the bond between the two countries will not be broken.  The United States has always been, and I think will continue to be, Israel’s biggest ally.

Yasmine Akkad is a second year law student at the University of Baltimore School of Law J.D. Candidate (’16).  She holds a Bachelors of Science in Law and American Civilization and a minor in English from Towson University.  Her primary interests include international law and international human rights law.  In addition to being a CICL Fellow, she competed in the 2014-2015 Jessup International Moot Court Competition, Mid-Atlantic Region. 

Sources

http://www.bbc.com/news/world-middle-east-31968676

http://www.ibtimes.com/israel-election-results-2015-what-does-future-hold-arab-political-power-1851294

http://www.israelelection2015.org/blog/2015/3/13/march-13-smithreshet-bet-poll

http://www.bbc.com/news/world-middle-east-32026995

http://www.nytimes.com/2015/03/22/world/middleeast/obama-says-he-told-netanyahu-that-campaign-talk-hurt-the-peace-process.html

http://www.bbc.com/news/world-us-canada-32044016

http://www.nytimes.com/2015/03/04/world/middleeast/netanyahu-congress-iran-israel-speech.html


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Terror Victims’ Pursuit of Justice and the Necessary Limitations of Courts

Clark Smith

In a decision last month that reverberated most through the international banking community, a Brooklyn jury in a federal trial held liable Arab Bank for “providing material support to Hamas.”  In Linde v. Arab Bank, families of a number of American victims of terror attacks in Israel, Gaza, and the West Bank during Palestinian uprisings from 2001 to 2004 were pitted against an international bank with branches in those areas.  Filing suit in 2004, the victims’ families accused Amman-based Arab Bank of knowingly assisting Hamas financing a “death and dismemberment benefit plan” for martyrs and their families.  The case itself was described by lawyers as significant because it was the first civil case pertaining to terror financing to reach trial in a US court.  Despite the outcome, and noting that damages have yet to be addressed, attorneys for Arab Bank predict the verdict will be overturned on appeal due to errors pertaining to, among other things, the threat of sanctions against a foreign bank for failing to turn over lawfully private customer data.  In addition to the concerns of the international banking community, the verdict also raises questions about the impact to US intelligence efforts in tracking terrorist actions via their financial activities and to the President’s ability to carry out foreign affairs without interference from the Article III judiciary.

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Since 9/11, the financial industries, indeed many technology-based data transfer industries, have stepped up their cooperation with governments’ anti-terror efforts.  But this verdict could lead to US-based banks severing relationships with foreign banks and customers, thus increasing the challenge to intelligence and other national security organizations in tracking terrorists’ financial networks.  Banking industry officials point out that the verdict may lead to US banks limiting risk by limiting business in designated regions.  The market for such illicit services will not diminish, however, but instead be driven deeper underground where they become much more difficult, and require more resources, to track.  Prudently, banks are likely to await the outcome of the appeal before taking specific actions to limit their risk.  But while governments’ ability to successfully track terrorists’ illicit financial networks is also at risk, a likely greater concern is the President’s ability to carry out the nation’s foreign affairs reasonably unimpeded.

Financial District And Banks In Jordanian Capital

While Arab Bank intends to address a number of substantive errors on appeal, their primary complaint was their inability to present a proper defense after being sanctioned for refusing to provide customer records protected by Jordan’s privacy laws.  The judge further permitted jurors to infer from the bank’s refusal to violate the Jordanian privacy laws that Arab Bank knowingly and willfully aided terrorists.  The State Department had urged the White House to support Arab Bank’s position in an amicus brief to the Supreme Court, asserting that forcing the bank to proceed under the sanctions put at risk a number of US foreign policy goals, including Middle East peace efforts.  Although the White House ultimately asked the Court not to review the issue, the Solicitor General’s amicus brief pointed to a number of lower court errors in their analysis which could undermine the President’s ability to carry out foreign affairs.

“The lower courts erred in suggesting that petitioner’s reliance on foreign bank secrecy laws in this private action did not reflect good faith simply because petitioner previously produced some of the documents to the Departments of the Treasury and Justice.  That reasoning fails to account for the distinct United States and foreign interests implicated when the government, as opposed to a private party, seeks disclosure.  It also threatens to undermine important United States [] national-security interests by deterring private entities and foreign jurisdictions from cooperating with government requests.  The United States has a compelling sovereign interest in obtaining documents located abroad for use in [] proceedings through which the government [] protects the Nation.  When it decides whether to seek documents assertively covered by foreign bank secrecy laws, the government balances the need for the information sought and the public interest in the investigation against the interests of the foreign jurisdictions where the information is located and any potential consequences for our foreign relations.”

The exterior of the U.S. Supreme Court is seen in Washington

Article III of the Constitution does provide that judicial power extends to various enumerated “cases and controversies,” some of which will certainly relate to foreign affairs.  But past Court opinions have acknowledged the Article III courts’ “customary policy of deference to the President in matters of foreign affairs.”  As the Solicitor General points out, courts should weigh the interests of private citizens’ claims against the interests of the US in conducting the nation’s foreign affairs.   But in so weighing such matters, courts should not invade this province of the Executive.

This case, weighing private citizens’ interests against those of the Administration in carrying out its foreign policy, will certainly be worth following on appeal.  In the unlikely event that the decision is upheld, the effects on national security and broader foreign policy interests could have far-reaching consequences on how the US engages abroad, friend and foe alike.

 

Clark Smith is a third-year law student pursuing a concentration in International Law. He has undergraduate and graduate degrees in Political Science and International Relations. In addition to being a Student Fellow, he is the Submissions Editor for the Journal of International Law. His previous experience includes work in both security and policy and his previous overseas postings include Western Europe, the Balkans, the Middle East, and South Asia. His professional interests include international development.