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In an essay published recently in this magazine, pro- fessor Allison Christians questioned the binding legal force of bilateral intergovernmental agreements (IGAs) relating to the Foreign Account Tax Compliance Act and entered into by the U.S. government. (Prior coverage: ‘‘The Dubious Legal Pedigree of IGAs (and Why It Matters),’’ Tax Notes Int’l, Feb. 11, 2013, p. 565.) Yet IGAs have a strong case for binding status as valid congressional-executive agreements or treaty- based agreements. And regardless of their status as international agreements, IGAs should bind the U.S. government as administrative guidance.

FATCA aims to ensure that U.S. holders of ac- counts at foreign financial institutions (FFIs) do not escape the notice of the U.S. government. The statute anticipates that FFIs will automatically provide infor- mation about U.S. account holders under direct agree- ments with the U.S. government. Otherwise, FATCA imposes an onerous 30 percent withholding tax under section 1471(a). Under the statute, the withholding tax would apply to certain U.S.-source income, such as in- terest and dividends, and also to gross proceeds from the sale of securities that would produce certain U.S.- source investment income. Moreover, it could apply to all accounts at an FFI, whether or not held by a U.S. Person.[1]

The IGAs address the potential problem of lack of enforceability presented by FATCA.[2]They have at least three important components that contribute to relief from FATCA’s withholding tax. First, they allow the rerouting of information about non-U.S. accounts.Rather than requiring direct reporting from FFIs to the U.S. government, the IGA framework permits a non-U.S. government with jurisdiction over an FFI to col- lect and forward information about U.S. accounts at the FFI to the U.S. government. For example, in the U.K.-U.S. IGA, the U.K. agrees to collect and auto- matically forward to the U.S. certain information about “each U.S. Reportable Account of each Reporting United Kingdom Financial Institution.” Each reportingU.K. financial institution is “not subject to withholding under Section 1471(a),” even with respect to recalci- trant account holders.The U.S. is also obliged to provide information, in- cluding, for example, about U.K. taxpayers with ac- counts at U.S. institutions. However, its ability to do so is constrained by its lack of access to such information, partly because of the qualified intermediary rules. It goes too far to label any of the IGAs “reciprocal” as yet, even though IGA recitals state that the U.S. “is committed” to “pursuing equivalent levels of ex- change.”Second, the IGAs clarify and in some ways soften the due diligence requirements that apply to determine whether an account is a reportable U.S. account. For example, the U.K.-U.S. IGA permits an electronic records screen for most preexisting accounts whose value does not exceed $1 million. It also exempts cer- tain preexisting insurance and annuity contracts from review and provides methods to evaluate accounts held by entities.

Third, the IGAs create explicit exceptions for some types of exempt entities, financial institutions, or ac- counts. These include not only U.K. government units and nongovernmental organizations but also some

U.K. retirement funds and local banks. The IGA also exempts some retirement accounts and other savings vehicles aimed at or limited to U.K. taxpayers.
Christians points out that the IGAs are not treaties endorsed by Senate advice and consent. She also ar- gues that they are not congressional-executive agree- ments pre-authorized by statute and are not treaty- based agreements that interpret existing treaty positions. She expresses concern that if IGAs are merely “sole executive agreements,” they may lack the force of law, and suggests that this may cause problems for taxpayers with non-U.S. accounts who rely on the IGAs to reduce or eliminate otherwise applicable FATCA withholding liability. Might such taxpayers, including non-U.S. persons, discover that the IGAs are invalid and that they face the 30 percent withholding tax after all?

Congressional-Executive Agreements 

The grant of congressional-executive authority to Treasury in section 274(h)(6)(C)(i) to negotiate tax in- formation exchange agreements does not explicitly cover the FATCA IGAs. As Christians writes, the sec- tion 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 inter- pretation. Even if the statute is not clear, case law sug- gests that courts would enforce FATCA IGAs as valid information exchange agreements.

In Barquero v. United States, 18 F.3d 1311 (5th Cir.1994), the court refused to quash a summons issued by the U.S. in response to a request by Mexico seeking information about a Mexican citizen pursuant to the Mexico-U.S. TIEA. The court held that section 274(h)(6)(C)(i) supported the government’s negotiation of a TIEA with Mexico and found the agreement ‘‘constitutional and valid,’’ even though Mexico is not among the Caribbean Basin countries specifically listed in section 274.

The court 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. In addition, the court found ‘‘implicit approval’’ for entry into the TIEA in the enactment of section 927(e)(3), which limited the application of now-defunct foreign sales corporation preferential status to corporations organized in countries that had negotiated TIEAs with the U.S. Section 927(e)(3) explicitly gave effect to TIEAs with countries not listed in section 274 for purposes of eligibility for FSC status.A WTO challenge to the FSC regime as an illegal export subsidy led to the regime’s repeal in 2000.

Partly because of the clear WTO reason for the repeal of section 927 together with other FSC provisions, it need not be interpreted as a congressional retreat from the endorsement of Treasury’s negotiations of TIEAs. Indeed, the U.S. has over the last several years entered into a significant number of TIEAs that follow the OECD’s information-on-request model. These are gen- erally treated as valid agreements despite the lack of Senate advice and consent.[3]

Treaty-Based Agreements

Christians also challenges the position of the U.S. that exchange of information articles in existing trea- ties support the negotiation of the FATCA IGAs. IGAs refer to this basis for negotiation in their recitals. But Christians argues that treaty information provisions do not support the exchange of information contemplated by FATCA, because FATCA imposes a withholding tax (absent compliance with additional information requirements) in violation of the treaties’ restrictions on U.S. taxation of interest, dividends, and capital gains paid to treaty residents.

According to the information exchange provision in article 26 of the U.S. model treaty:The competent authorities of the Contracting States shall exchange such information as may be relevant for carrying out the provisions of this Convention or of the domestic laws of the Con- tracting States concerning taxes of every kind imposed by a Contracting State to the extent that the taxation thereunder is not contrary to the Convention.

FATCA aims to carry out the U.S. domestic law provisions that tax U.S. citizens and residents — for example, sections 1, 11, and 61. These core provisions are not contrary to any tax treaty. Indeed, tax treaty savings clauses ensure that the U.S. retains the right to tax its citizens. And it is clear that article 26 supports information exchange for taxes regardless of whether they are addressed by the convention.

But FATCA also provides that a non-U.S. account may be subject to withholding if an FFI fails to provide sufficient information. For example, if a treaty interest article provides that there will be no U.S. tax on U.S.-source interest paid to a treaty resident, and FATCA provides that there will be a 30 percent tax on U.S.-source interest paid to a treaty resident, is FATCA contrary to the treaty? As Christians writes, the last-in- time rule articulated in section 7852 preserves the validity of the U.S. statute, but it does not resolve this question of consistency.

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 under section 1441, which require the pro- vision of a Form W-8BEN to evidence non-U.S. status or treaty status before the application of reduced rates of withholding. Under section 1474(b) and implementing regulations, 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. Instead, both are administrative mechanisms for verifying eligibility for such reduced rates of tax. The OECD commentary to article 26 contemplates information exchange as “foreseeably relevant to secure the correct application of the provisions of the Convention.” Even if IGA counterparties run the agreements through their treaty ratification processes, as Christians points out, treaty provisions and commentary support IGA validity without this step.

Binding Administrative Guidance

IGAs should also bind the U.S. government as ad- ministrative guidance. FATC’s statutory withholding requirement is subject to several exceptions, including one that excepts “any other class of persons identified by the Secretary for purposes of this subsection as posing a low risk of tax evasion.” (Section 1471(f)(4).) To provide taxpayers, including non-U.S. persons, with corded to regulations under Mayo when notice and comment requirements are met.[4]

Chevron deference requires that “Congress has not directly addressed the precise question at issue” and that “the agency’s answer is based on a permissible construction of the statute.”[5] Because the statute specifically invites administratively created exceptions, it fulfills the first step. Regarding the second step, there is a high degree of congruence between the availability of automatic reporting from a non-U.S. treaty partner and the goal of identifying low tax-evasion risks. For ex- ample, extremely low under reporting rates for income that is reported evidences the reasonableness of the link between the substance of the IGAs and the pur- pose of the statute.

Even if it is reviewed under the less generous defer-ence standard applied to published Internal Revenue Bulletin guidance, a court should conclude that the IGAs bind the U.S. government and require the government to offer the withholding tax relief set forth in the agreements. Internal agency practice and guidance confirms that U.S. tax administrators consider them- selves bound by the terms of their own published guidance.[6] Courts have agreed. For example, the Sixth Circuit has said that published guidance such as a revenue ruling  “binds the government.”[7]

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. And U.S. regulation writers may further incorporate the IGA framework into the FATCA regs to ensure that IGAs reside under the Chevron deference umbrella. But even if they do neither, there are excellent reasons to conclude that U.S. courts would require U.S. tax administrators to fulfill the withholding tax relief commitments made in FATCA IGAs. 

(Editor: Zhang Chi)

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Susan Morse is an associate professor at UC Hastings College of the Law in San Francisco.

*The author would like to thank Allison Christians, Itai Grinberg, and Stephen Shay for their helpful com- ments on this essay.
[1]See Itai Grinberg, “The Battle Over Taxing Offshore Accounts,”60 UCLA L. Rev. 304 (2012); J. Richard Harvey, Jr. “Off-shore Accounts: Insider’s Summary of FATCA and Its Potential Future,”57 Vill. L. Rev. 471(2012).
[2]See Susan C. Morse, “Ask for Help, Uncle Sam: The Future of Global Tax Reporting,”57 Vill. L. Rev. 529 (2012).
[3]See, e.g., Charles M. Bruce, “Making Sense of the Liechtenstein-U.S. TIEA,” Tax Notes Int’l, Jan. 5, 2009, p. 12.
[4]See, e.g., Kristin E. Hickman, “Unpacking the Force of Law,”66 Vand. L. Rev. 465 (2013).
[5]Chevron Inc. v. Natural Resources Defense Council, 468 U.S. 1227 (1984).
[6]See Leandra Lederman, “The Fight Over ‘Fighting Regs’ and Judicial Deference in Tax Litigation,”92 B.U. L. Rev. 643, 664- 666 (2012) (citing a Treasury regulation providing for taxpayer reliance on revenue rulings for “substantially the same” facts and a chief counsel notice stating that “Chief Counsel attorneys may not argue contrary to final guidance” in litigation).
[7]The Limited v. Commissioner, 286 F.3d 324, 337 (2011). Even “customary deviations” from law may acquire the force of law over time and come to bind the government. See Lawrence Zelenak, “Custom and the Rule of Law in the Administration of the Income Tax,”62 Duke L. J. 829, 839-840 (2013) (citing Vescov. Commr, 39 T.C.M. (CCH) 101, 130 (1979) (holding that an exclusion extended as a matter of administrative grace must be extended to all taxpayers equally)).