The U.S. Department of Treasury announced on Friday, November 29 that the Cayman Islands and Costa Rica have signed Intergovernmental Agreements ("IGAs"). The IGAs were signed in a continuing effort by the U.S. Department of Treasury to implement the Foreign Account Tax Compliance Act ("FATCA"). With these two IGAs, the United States has now entered into 12 IGAs with various countries including Switzerland, the United Kingdom, France, Germany and Japan.

FATCA was enacted in 2010, and the IRS published long-anticipated final and comprehensive regulations in January 2013 addressing the implementation of FATCA's reporting and withholding requirements. The regulations offer clarity and guidance to foreign financial institutions ("FFIs") and non-foreign financial entities ("NFFEs") as they implement account opening procedures and identify information that must be reported to the IRS.

The IGAs seek to facilitate effective and efficient compliance by allowing foreign entities to report information through their country's revenue agency or directly to the IRS while adhering to foreign privacy and other laws. As such, there are now three ways FFIs and NFFEs can comply with FATCA:

  • Strict adherence to the final regulations. Subject to certain exceptions, all foreign financial institutions in countries that have not executed an IGA must enter into an FFI Agreement (e.g., an agreement with the IRS to disclose U.S. account holder information) to avoid withholding. Issues are resolved in accordance with the final regulations.
  • Model 1 IGA. Foreign countries executing model 1 IGAs with the United States collect the relevant data from the FFIs and NFFEs and then share that information with the IRS. Most of the IGAs entered into by the U.S. Department of Treasury are model 1 IGAs (10 of the 12 executed to date).
  • Model 2 IGA. FFIs and NFFEs resident in foreign countries executing model 2 IGAs must report directly to the IRS. The primary difference between the Model 2 IGA and strict adherence to the final regulations is that the Model 2 IGA, and not the Treasury Regulations, sets forth the general guidance for compliance and resolving issues. For example, Section 2 of the Model 2 IGA (and not the Treasury Regulations) generally requires foreign financial institutions to comply with the requirements of an FFI agreement.

Both the Cayman Islands and Costa Rica entered into Model 1 Agreements, which means that financial institutions in the Cayman Islands and Costa Rica must report information about U.S. account holders to their respective taxing authorities. The respective taxing authorities will then convey the information to the IRS. Of note, though, is that Costa Rica signed a Model 1A IGA (e.g., a reciprocal agreement), meaning that the U.S. will report tax information about Costa Rican citizens living in the U.S. to the Costa Rican taxing authorities. The Cayman Islands signed a Model 1B IGA which has no reciprocal requirements.