Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon J. B. Hockey MP)Chapter 2 - Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Tax Laws Amendment (Implementation of the FATCA Agreement) Bill 2014
2.1 This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
Overview
Background
2.2 The United States of America (US) Foreign Account Tax Compliance Act (FATCA) is a unilateral anti-tax evasion regime enacted by the US in March 2010 and is aimed at detecting US taxpayers who use accounts with offshore financial institutions to conceal income and assets from the US Internal Revenue Service (IRS). FATCA requires foreign (that is, non-US) financial institutions to periodically report details of accounts held by US taxpayers or by foreign entities controlled by US taxpayers to the IRS. Non-complying financial institutions face significant penalties, notably a 30 per cent withholding tax on US income.
2.3 Under the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income the US's taxing rights over income derived by US citizens is preserved.
The Bill
2.4 This Bill amends Schedule 1 to the Taxation Administration Act 1953 and the Income Tax Assessment Act 1997 to give effect to Australia's obligations under the treaty-status Agreement between the Government of Australia and the Government of the United States of America to Improve International Tax Compliance and to Implement FATCA (the FATCA Agreement), which was signed on 28 April 2014.
2.5 This Bill requires Reporting Australian Financial Institutions to give the Commissioner of Taxation (Commissioner) certain information about U.S. Reportable Accounts that the Australian Government is required to obtain in order for the Government to fulfil its obligations under the FATCA Agreement in respect of U.S. Reportable Accounts. Under the FATCA Agreement, the Commissioner will transmit the information regarding U.S. Reportable Accounts to the IRS. The Bill also establishes ancillary record-keeping and due diligence obligations for reporting entities as well as transitional reporting obligations in relation to payments made to Nonparticipating Financial Institutions.
Human rights implications
2.6 The Bill engages the following rights and freedoms:
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- the right to protection from arbitrary or unlawful interference with privacy under Article 17 of the International Covenant on Civil and Political Rights (ICCPR); and
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- the right to protection from discrimination under Article 2(1) of the International Convention on the Elimination of All Forms of Racial Discrimination (ICERD), Articles 2(1) and 26 of the ICCPR, and Article 2(2) of the International Covenant on Economic, Social and Cultural Rights (ICESCR).
Prohibition against unlawful or arbitrary interference with privacy
2.7 The Bill engages Article 17 of the ICCPR, as it will interfere with the privacy of individuals.
2.8 Section 396-5 requires Reporting Australian Financial Institutions to report customer information to the Commissioner and section 396-20 requires reporting entities to conduct certain due diligence procedures on their financial accounts in order to identify those account holders that are likely to be US citizens or US taxpayers. To comply with these sections, Reporting Australian Financial Institutions will be required to collect certain personal information (such as a person's name, address, U.S. Tax Identification Number, the account number, the income credited to the account and the account balance) and provide the information to the Commissioner for onward transmission to the IRS.
2.9 Article 17 of the ICCPR provides that individuals shall not be subject to unlawful or arbitrary interference with their privacy.
2.10 In relation to privacy, the United Nations Human Rights Committee has made the following points.
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- The term 'unlawful' means that no interference can take place except in cases envisaged by the law. Interference authorised by States can only take place on the basis of law, which itself must comply with the provisions, aims and objectives of the Covenant.
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- The expression 'arbitrary interference' is also relevant to the protection of the right provided for in Article 17. In the Committee's view the expression arbitrary interference can also extend to interference provided for under the law. The introduction of the concept of arbitrariness is intended to guarantee that even interference provided for by law should be in accordance with the provisions, aims and objectives of the Covenant and should be, in any event, reasonable in the particular circumstances. [1]
Discrimination on prohibited grounds
2.11 The Bill engages the right to protection from discrimination under international human rights law, on the grounds that it requires Reporting Australian Financial Institutions to report on accounts that are likely to be held by US citizens or US taxpayers based on the presence of specified US indicia in those institutions' records.
2.12 Article 2(1) of the ICERD imposes an obligation on State parties to undertake to pursue a policy of eliminating racial discrimination. The ICERD defines racial discrimination, in Article 1(1) as, 'any distinction, exclusion, restriction or preference based on race, colour, descent, or national or ethnic origin which has the purpose or effect of nullifying or impairing the recognition, enjoyment or exercise, on an equal footing, of human rights and fundamental freedoms in the political, economic, social, cultural or any other field of public life'.
2.13 Article 2(1) of the ICCPR prohibits discrimination in the exercise of rights under that treaty on a number of prohibited grounds, while Article 26 of the ICCPR is a stand-alone right which would be breached if a person did not enjoy equality before the law or equal protection of the law with others, on the basis of discrimination on a prohibited ground. Article 2(2) of the ICESCR also prohibits discrimination in the exercise of rights under that treaty.
2.14 Although the ICCPR does not contain a definition of discrimination, the United Nations Human Rights Committee has defined discrimination in similar terms to Article 1(1) of the ICERD. [2]
2.15 As noted above, discrimination under the ICERD and ICCPR comprises differential treatment (a distinction, exclusion or restriction) on the basis of a prohibited ground, which nullifies or impairs the enjoyment of human rights.
2.16 In relation to this Bill, the relevant issue is whether differentiation on the basis of US citizenship or nationality constitutes discrimination on prohibited grounds.
2.17 Article 1(2) of the ICERD provides that, 'This Convention shall not apply to distinctions, exclusions, restrictions or preferences made by a State Party to this Convention between citizens and non-citizens.'
2.18 Therefore, on its face, a distinction between citizens and non-citizens would not amount to discrimination for the purposes of the ICERD.
2.19 However, in its General Recommendation No. 30, the Committee on the Elimination of Racial Discrimination (ICERD Committee) stated its view that, 'differential treatment based on citizenship or immigration status will constitute discrimination if the criteria for such differentiation, judged in the light of the objectives and purposes of the Convention, are not applied pursuant to a legitimate aim, and are not proportional to the achievement of this aim'. [3]
2.20 In other words, differential treatment would not amount to discrimination under international human rights law if the different treatment meets the proportionate test for legitimate differential treatment.
Compatibility with human rights
Legitimate objective
2.21 This Bill's engagement with the right to privacy and the right to protection from discrimination is in the furtherance of a legitimate objective.
2.22 The principal objective of this Bill is to improve international tax compliance and to implement the US's FATCA rules in Australia.
2.23 Australia is a long-standing supporter of international cooperation to prevent tax evasion, and the Australian Taxation Office (ATO) currently provides taxpayer information - on an automatic basis - to more than 40 of Australia's tax treaty partners, including the US.
2.24 This Bill establishes a more effective bilateral framework to address international tax evasion. As a result, the Bill reinforces Australia's support for international tax transparency and cooperation between revenue authorities to help prevent tax evasion and improve global tax compliance. This is consistent with ongoing international efforts, supported by the G20, to improve tax system integrity.
2.25 As noted in paragraph 1.10, the US has entered into intergovernmental agreements for the implementation of FATCA, based on a common model, with a number of jurisdictions. The intergovernmental approach to FATCA has focussed international attention on automatic exchange of information for tax purposes.
2.26 On 6 May 2014, the Organisation for Economic Co-operation and Development (OECD) adopted the Standard for Automatic Exchange of Financial Account Information (also referred to as the Common Reporting Standard (CRS)), and called on jurisdictions to implement the standard without delay. The G20 endorsed the CRS in February 2014 and called for its early adoption by those jurisdictions that are able to do so. [4] The CRS draws extensively from the intergovernmental approach to FATCA.
2.27 This Bill enhances the integrity of the Australian tax system by improving existing reciprocal tax information-sharing arrangements between Australia and the US.
2.28 Article 25 (Exchange of Information) of the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income enables the ATO to provide bulk taxpayer data to the IRS, and the IRS to reciprocate by providing corresponding data to the ATO.
2.29 The Bill builds on these arrangements by expanding the range, and improving the relevance, of financial account information currently exchanged. Any improvements in the scope and quality of information available to the ATO enhances its administration of Australia's taxation laws.
2.30 Improving tax compliance and enhancing the integrity of the Australian tax system are legitimate objectives of this Bill.
Reasonable and necessary
2.31 The Bill's engagement of the right to privacy and engagement of the right to protection from discrimination constitutes a reasonable and necessary measure in pursuit of the Bill's legitimate objective.
2.32 In order to be reasonable and necessary, a sufficient connection must be established between the terms of the FATCA Agreement in improving tax compliance and the engagement of the rights to privacy and protection from discrimination. The key terms of the FATCA Agreement are considered below.
Collection of personal information
2.33 The FATCA Agreement contemplates the collection of certain personal information, such as a person's name, address, U.S. Tax Identification Number, the account number, the income credited to the account and the account balance. These categories of information would assist in facilitating tax compliance as such information would enable Australia and the US to enhance their existing domestic data-matching programs to verify income reported by their respective taxpayers.
Due diligence requirements
2.34 The due diligence provisions of the FATCA Agreement require the identification and/or self-certification of account holders who are US citizens or taxpayers. This condition is connected to the collection of personal information. That is, the identification of such accounts ensures that the Australian Government is able to perform its obligations under the FATCA Agreement, for the purpose of facilitating the objective of international tax compliance.
Closure of accounts
2.35 Certain Non-Reporting Australian Financial Institutions may be required to close the accounts of US citizens or US taxpayers who are not Australian residents. The purpose of this requirement is to ensure that US citizens or taxpayers do not use these institutions for the purpose of avoiding being reported to the IRS.
2.36 Under the FATCA Agreement, certain Non-Reporting Australian Financial Institutions must not have policies or practices that discriminate against opening or maintaining financial accounts for US citizens or US taxpayers, who are residents of Australia. That is, Australian resident US citizens are not precluded from holding accounts in Australia.
Proportionate means of achieving a legitimate objective
2.37 The Bill's engagement of the right to privacy and the right to protection from discrimination is a proportionate means of achieving the Bill's legitimate objective.
2.38 To meet the proportionality criteria, it is necessary that the differential treatment be weighed against the objective which that treatment is seeking to achieve. In conducting this weighing exercise, it is necessary to take into account the importance of the objective. [5]
2.39 The objective of facilitating tax compliance is sufficiently important to justify the Bill's engagement with privacy and the differential treatment on the basis of a prohibited ground. Moreover, the terms of the FATCA Agreement are the least intrusive, and would be effective in facilitating tax compliance.
2.40 The key terms of the FATCA Agreement, in the context of whether the interference constitutes a proportionate measure, are considered below.
Collection of personal information
2.41 The type of personal information required by the FATCA Agreement (a person's name, address, U.S. Tax Identification Number, the account number, the income credited to the account and the account balance) is relatively narrow for determining a person's potential tax obligations.
2.42 Further, this requirement only applies to U.S. Reportable Accounts, being accounts that exceed certain minimum thresholds. For example, the FATCA Agreement provides that accounts containing a balance less than USD 50,000 as at 30 June 2014 are not required to be reviewed, identified or reported as U.S. Reportable Accounts.
2.43 Given that the information required is relatively limited and such information must only be provided in respect of accounts with a relatively high threshold balance, this requirement is likely to amount to a proportionate means of facilitating tax compliance.
Due diligence requirements
2.44 In order for a Reporting Australian Financial Institution to provide the information contemplated by the FATCA Agreement, there has to be a mechanism to identify the relevant accounts. Conducting an electronic search of existing records, or seeking self-certification from clients is arguably the simplest means for a financial institution to identify whether it has accounts potentially held by US taxpayers.
2.45 The FATCA Agreement provides that a finding of US indicia by a Reporting Australian Financial Institution does not require the institution to treat an account as a U.S. Reportable Account if certain conditions apply (see Section II.4.(b) of Annex I).
2.46 Lastly, the obligation not to examine accounts that do not exceed USD 50,000, further supports the argument that the scope of the due diligence requirement is proportional to the Bill's legitimate objective.
Closure of accounts
2.47 As already discussed, under the FATCA Agreement, certain Non-Reporting Australian Financial Institutions are required to close the accounts of US citizens or US taxpayers who are not Australian residents. The FATCA Agreement provides Non-Reporting Australian Financial Institutions with an option to report on these accounts, as if the Non-Reporting Australian Financial Institutions were a Reporting Australian Financial Institution. In light of this, it is considered that the requirement to close accounts is a proportional means of ensuring that the Australian Government is able to collect the necessary information in respect of US citizens or US taxpayers, to facilitate tax compliance.
Safeguards
Protection of taxpayer privacy
2.48 These information exchanges are subject to strict treaty confidentiality rules which are consistent with Australia's domestic tax secrecy rules, and other safeguards contained in Article 25 of the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income. That is, any information provided by the Commissioner can only be used by the US for the purposes permitted by the treaty. In general, this means the information can only be used for tax administration purposes and may only be disclosed to persons (including courts and administrative bodies) concerned with the assessment, collection, administration or enforcement of, or with litigation with respect to, the taxes covered by the treaty.
2.49 The disclosure of taxpayer information by the Commissioner is allowed by section 355-50 of Schedule 1 to the Tax Administration Act 1953, which provides an exception to the general prohibition on the disclosure of taxpayer information by ATO officers.
Remedies available if privacy right is infringed
2.50 Under Australia's privacy law, a person can make a complaint about the handling of their personal information by Australian government agencies and private sector organisations covered by the Privacy Act 1988.
2.51 Also, the Office of the Australian Information Commissioner is responsible for the enforcement of Australia's privacy law, and the Information Commissioner has the power to investigate instances of non-compliance by agencies and organisations and to prescribe remedies to redress non-compliance. Depending on the particular complaint, some possible resolutions could include compensation for financial or non-financial loss, or change to the respondent's practices. [6]
Conclusion
2.52 This Bill is consistent with Article 17 of the ICCPR on the basis that its engagement of the right to privacy will neither be unlawful (including by virtue of the amendments to Australia's taxation legislation set out in the Bill) nor arbitrary. To this extent, the Bill complies with the provisions, aims and objectives of the ICCPR.
2.53 This Bill meets the test for legitimate differential treatment, and does not contravene international human rights law protections against discrimination on the basis of a person's national origin, nationality or citizenship.
2.54 In light of the above, this Bill is compatible with human rights because to the extent that it may limit human rights, these limitations are reasonable, necessary and proportionate.