In the latest In the Pages video, Filippo Noseda, legal counsel for U.K. citizen Jenny Webster, and Robert Goulder discuss the effects of the Foreign Account Tax Compliance Act on Americans living abroad and the results of Webster’s lawsuit challenging the law.
In the Pages is a video series produced by Tax Notes. This transcript has been edited for length and clarity.
Robert Goulder: Hello, I’m Bob Goulder, contributing editor with Tax Notes. Welcome to In the Pages, the video series where we take a closer look at recent commentary from our print and online publications.
Our topic today is an important one for anyone who follows international law. We’re following about the tension between two major legal regimes. In the United States, FATCA, and in Europe, the GDPR. Now, to explain FATCA, that’s the Foreign Account Tax Compliance Act, and the GDPR is the European General Data Protection Regulation. These two forces are on a collision course with each other, with some innocent taxpayers trapped in between them, and this high-stakes drama was supposed to be playing out recently in the U.K. court system in a case known internationally as Jenny’s case.
It is featured in our article that we’re profiling here called, “The FATCA Wars: Technical Knockout. Game, Set, Rematch?” The author is someone who knows the subject matter very well because he’s Jenny’s attorney. That’s Filippo Noseda, a partner with the law firm Mishcon de Reya in London and also a visiting professor with King’s College in London.
I would say welcome back to the program, Filippo, because we’ve actually featured you here previously, but it’s good to see you again.
Filippo Noseda: Thank you very much, Bob.
Robert Goulder: Before we get to Jenny’s case, your article, it’s a brilliant one, you begin by asking a question, “Does FATCA work?” Which is not necessarily an issue that was before the court, but is germane to the discussion, and you answered that question in the negative. Can you tell our audience why isn’t FATCA working?
Filippo Noseda: Thanks, Bob. FATCA was introduced following well-known private banking scandals. In 2010 Congress said, “We are going in the next decade to raise $8.6 billion out of FATCA. So, yoo-hoo, let’s sign up to it!” Say that things are a bit more complicated than that.
There was a report recently by the Treasury Inspector General for Tax Administration’s commissioner, who said that, “FATCA costs the IRS $586 million.” So half a billion dollars to implement. If you think about it, half a billion over here, $8.6 billion over there, brilliant, on the money. But it raised $14 million in penalties, and it resulted in 850 nudge letters, so it didn’t really work. And about a third of the reports that came into the U.S. were effectively — the IRS could not make any sense of it. That’s part of it.
In terms of raising money, it didn’t work. But you might say, “Look, there is already a benefit in having a system that effectively creates transparency where the IRS can look at the data.” We had congressional hearings in the U.S. where former IRS Commissioner Charles Rettig said, “Look, we are not looking at FATCA data because we haven’t got the money to implement it. We got the money to put in the system” — and I might say a word about the IT system — “but then we haven’t got the money to look at the data.”
TIGTA said effectively that “the IRS had substantially departed from its initial FATCA strategy.” Now, substantially departed from the FATCA strategy means they’re not really looking at it, and then you’ve got the security system, which is very relevant for the GDPR. There are millions of accounts that are uploaded into the system of the IRS, and there are countless official reports by the GAO, by the TIGTA, who say that the IRS is effectively incapable of keeping a lead over the data.
Robert Goulder: You also say in your article that in addition to all those problems of not really being fit to task, FATCA is also highly disruptive. We’re not talking about disruption in a benign societal way, where you have some positive knock-on effects. We’re talking about disruption that is simply inflicting pain and inconvenience for no obvious corresponding gain.
Tell us, how does FATCA adversely affect ordinary people?
Filippo Noseda: FATCA effectively is nothing else than — it’s just a withholding tax. The IRS says, “Because we know from our investigation the notice that private banks abroad help Americans hide money, we are going to slap a 30 percent withholding tax on any U.S. investment done by foreign financial institution. Unless you come and agree with us to register with us and then you have to have a compliant IT system, you have to upload all the data in accordance with a certain formula matrix, we are going to audit you.” A lot of banks said, “Too complicated.” When they see boarding Boston on your, maybe even foreign passport, they say, “Oh, you’re American, we are going to debank you.”
Part of the funding for Jenny’s case was crowdfunded, and I’ve got here a couple of comments from real people. Someone here pledged £10 on CrowdJustice saying, “My children are American and they’re seriously impacted by FATCA regulations.” Another one says, “I cannot open a savings account for my 9-month-old son who was born and lives in the U.K. because he’s also a U.S. citizen by birth. FATCA is hurting the wrong people.” Miriam, who pledged £25 wrote, “My biggest problem is my inability to open U.K. investment or bank accounts.”
That’s also Jenny’s problem. Jenny’s income is modest. She needs to build up a pension, a tax savings, and she can’t go out and get the products because banks say, “We do not want to have you.” FATCA was designed to catch rich “fat cats” typically living in the U.S. with an offshore account, but it ends up hurting people who live abroad who maybe have got a bank account downstairs and they live upstairs, and that for the U.S. is an offshore account.
These people pay all the taxes in their country of residence. As a result of policy measures introduced by the U.S. many years ago and then reintroduced to help, or to facilitate, or to actually push Americans to live abroad in order to create commerce, if you earn less than $110 — and now it goes up as indexed — $1,000 a year, you do not actually owe any tax in the U.S. on your income. Jenny is below that threshold, and therefore you have people who are treated as offshore tax evaders. They cannot open bank accounts, and they’re just ordinary Joes and Janes. They are ordinary people.
Robert Goulder: Let’s get to our case because what the whole world wanted was for these issues to be litigated in the English courts. Instead, you got what you called a “procedural war.” Can you tell us about this encounter and specifically why was HMRC so intent on making this a procedural tussle? Do you think they were worried they were going to lose on the merits if it ever got there?
Filippo Noseda: Absolutely. Look, there are a number of topics here. There are topics of data protection, which may sound quite esoteric, and we’ve seen that the U.K. courts are not really interested in data protection. … You know, part of Brexit. We’ve got data security and safety issues, which are there for everyone to see, because the lack of safety in data has been proved and effectively confirmed by U.S. authorities, and then you’ve got these day-to-day issues that have been created by FATCA. Now, HMRC is particularly at risk in a way because they were the first ones that jumped the gun.
Can I walk you back 14 years ago? When FATCA was introduced, the EU Commission said, “We are concerned that there are going to be conflicts between this rule that requires you to disclose data to the U.S. and EU rules on data protection” even before the GDPR. We found, thanks to a Dutch MP, a lady called Sophie in ‘t Veld, we were given access to stashes of internal documents from the commission that proved that the commission had opened a dialogue at the highest level with the U.S. Treasury.
They were trying to find, in the words of the commission, “Solutions which were more proportionate and more workable.” It’s a bit like O.J. Simpson’s glove; “If it doesn’t fit, you must acquit.” If the test is proportionality and you are asking to find a solution that is more proportionate, it means that what you’ve got now is disproportionate. The EU had high-level talks; they had commissioned their data protection authorities to come up with opinions, and the opinions were quite clear: FATCA clashes directly with EU data. There was an opinion issued in June 2012 where the EU body that represented every data protection authorities at national level said that, “A bulk processing of data, which does not look at any indicia of tax evasion, is not the right way of achieving the objective. It is disproportionate.”
That was June 2012. Less than three months later, HMRC signs the first agreement with the U.S. Call it a special relationship, call it whatever you want, but the HMRC jumped the gun, and the commission then had a problem, because all of a sudden, the banks in London could take on U.S. clients, while banks in Paris, Luxembourg, and Berlin couldn’t. The commission, because of the U.K.’s betrayal in a way, had to say, “We need to change policy. Level the playing field. Everyone goes out to sign FATCAs.”
But the commission also said in internal documents, “This is what they call government-to-government solutions, which are going to be a temporary solution because we need to find a solution between the EU and the U.S.” What happened after that is that the French finance minister who signed the second IGA became a commissioner at the EU, and he said, “Guys, bury it all.”
For the HMRC, it was a high-stake battle, because really a lot of the problems that you see worldwide were initiated by HMRC themselves. This is public because all of our research is public. If you google “Michigan, FATCA, and correspondence,” you have about 200 letters written to EU institutions to the U.K.’s data protection commissioner, even to the OECD’s secretary general, and therefore it’s public. Usually, in court, you go, you have your disclosure. We’ve been putting this stuff in public with a view to create transparency both ways. HMRC, therefore, were really concerned they might have lost the battle, so they said, “Let’s bury this claim with a procedural battle.” That’s what they did.
Robert Goulder: They did that by, well, I think it’s a form of gaslighting, but they’re saying that Jenny and/or her funders have engaged in some kind of abuse of process, which you use the term “Disneyesque” to describe how they’re conjuring up a fictitious evil villain where there really is none. Can you elaborate on that? What’s going on with this abuse of process?
Filippo Noseda: That’s Comedy Central really. I mean, it’s so depressing but it’s really Comedy Central, because when Jenny wrote a letter to HMRC saying, “Please do not send my data to the U.S.,” HMRC said, “Sorry, can’t do. We’ve got this agreement. We’ll send the data.” Jenny said, “OK. I have a public decision and therefore going to.” In the U.K., we say “to judicial review a public decision.” HMRC, at that point, said, “No, no, no. You need to do a different route. You need to bring a private claim under the GDPR. Your attempt to judicial review our decision to send it is an abuse of process.” OK, fine. If that’s what you want, that’s what we’ll do. The reason HMRC was asking Jenny to go down the data protection route is because the U.K. data protection commission has been highly ineffectual when it comes to FATCA.
The HMRC said, “Go down that route. Hasta la vista. See you in a million years.” We went down rigorously because we’ve been everything — we’ve been rigorous with Jenny’s claim, and we got somewhere.
When we came to court, HMRC said: “No, no, no. Abuse of process.”
Jenny’s lawyers: “Hold on a second, again?”
HMRC: “Yeah, yeah, yeah. You’ve done a data protection claim.”
Jenny’s lawyers: “Yes, you told us to do so.”
HMRC: “No. But actually, you should have taken a judicial review.”
Jenny’s lawyers: “Hold on a second, it doesn’t make any sense.”
HMRC: “Yes, because actually, the decision that you really are trying to attack is not our decision to transfer Jenny’s data to the U.S. You are trying effectively to overrule the whole FATCA idea. FATCA became law in the U.K. in 2016. As luck would have it, you need a judicial review within three months. Three months from 2016 — you are too late. You are effectively masking a target judicial review with a private claim, and that’s abuse of process.”
That’s where HMRC became really nasty. I shouldn’t get upset because litigation is nasty, but HMRC owes a duty also to its citizens of transparency. When HMRC has been, in a way, the cause of the problems of hundreds or thousands of citizens in the U.K. who cannot open bank accounts. They should have approached Jenny’s case differently, but they decided to go the nasty route.
And so they said, “Look, in order to prove that Jenny really wants to bring down FATCA, it’s all about her intentions.” Jenny’s intentions have been public because she had to give interviews; we created crowdfunding. This is where the “Disneyesque” part comes. HMRC said, “Not only Jenny’s intentions are relevant, but also the intentions of her funder.” HMRC, at that point, was aware that there was an anonymous benefactor who decided to enable Jenny to bring her claim before the court. Because in the U.K., unless you have a million pounds, you cannot go to court. HMRC said to the judge, “We want to know the intentions of the funder. Therefore, in order to get to the intention of the funder, we want to get the identity of the funder.” The funder said, “No,” because it’s about privacy. Now, the judge backed HMRC’s approach, which is fine. We cannot always win claims.
But what is something intellectually dishonest here is that there were at least 852 funders — 851 people who donated £10, £20, £30 through CrowdJustice. Actually, their comments are there for everyone to see, and one undisclosed funder who puts up a lot of money. But if you are fighting a claim, does it matter if I put up £100,000 or £10? If it’s about intentions, then certainly, the judge should have ordered the disclosure of the identity of every funder. She decided not to do so. She worked for HMRC, but I think is a detail in the past. But they created this idea that Jenny was the pawn of some kind of dark forces; they even suggested in court there might be some sovereign state that’s not a friend of the U.S. that is funding Jenny, and therefore we need to find out their intention.
The funder dug the heels in, and said, “We are not going to give up our identity.” The judge therefore issued what we call an “unless order”: “Unless you disclose, I’m going to struck off the claim.” The funder said, “Sorry, no can do,” and therefore the claim was struck out before we could go to a proper hearing. We already had evidence from U.S. professors about the data protection aspects of FATCA. The IRS and HMRC have also had experts. The two had already agreed a statement. It was quite clear that if we had had a proper fight, HMRC would’ve been in trouble, so they decided to go down this route to create this “Disneyesque” thing of evil against good: “We are the good and they are the evil.” By doing that, they buried effectively all of that culpability in whatever they’ve done over the years to create and facilitate this monstrous regime.
Robert Goulder: Well, that’s all quite depressing, Filippo. We do have to wrap up, but I want to end on a positive note. Here’s the idea I want to pitch to you. You may have lost this battle, but is it possible you’re winning the war?
Filippo Noseda: Yes, because I think that after the judgment came out, I was properly depressed because I thought this is the system fighting against Jenny and against everyone who is in Jenny’s position. I think that this was a battle that had to be fought. I think that the way HMRC decided to fight back, i.e. to hide the substance and to effectively put up a procedural fight, is an indication and a clear evidence that FATCA not only doesn’t work, but is rotten to the core.
Then, we went to the Court of Appeal, we lost, but the day the Court of Appeal judgment came out, the French Senate sent a unanimous letter to French President Emmanuel Macron to say, “Please take up FATCA with your counterpart.” Then Macron, more recently, sent a letter to the chair of the Association of Americans Abroad to say that, “FATCA created a total mobilization of the state behind you, but they’re not really doing anything.”
It’s quite clear that there is a lot of evidence out there. Governments are aware that it doesn’t work, that it doesn’t serve any purpose, but for whatever political reason, they decide to fight people like Jenny. I do hope that we will learn lessons and that someone else will pick up the baton and pursue the fight elsewhere. We are here.
Robert Goulder: We can only hope that the struggle continues. There you have it. The article is called “The FATCA Wars: Technical Knockout. Game, Set, Rematch?” You can read it in Tax Notes. The author is Filippo Noseda. Thank you so much for joining us, sir.
Filippo Noseda: Thank you very much for having me, Bob.
Read the full article here