FATCA was enacted in 2010 by Congress as part of the Hiring Incentives to Restore Employment (HIRE) Act. FATCA requires FFIs to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. In order to avoid withholding under FATCA, a participating FFI will have to enter into an agreement with the IRS to: (i) identify U.S. taxpayer accounts; (ii) report information to the Internal Revenue Service regarding U.S. accounts; and (iii) withhold a 30% tax on certain U.S. connected payments made to non-participating (or non-compliant) FFIs and account holders unwilling to provide the required information.
This month the Treasury issued a release on November 8 that is in negotiating with more than 50 countries on the implementation of FATCA, which was enacted as part of the HIRE Act of 2010 with the purpose of reducing or eliminating tax evasion by U.S. taxpayers having direct and indirect ownership in non-U.S. financial accounts. Many foreign government have for some time now relayed that complying with FATCA would be burdensome and costly to its domestic financial service organizations and that what was of greater interest was developing intergovernmental agreements (IGAs).
Last Summer, the Treasury, along with its counterpart agencies in the G-5, i.e., Germany, the United Kingdom, Spain, Italy and France, released a Model IGA for implementing FATCA. FATCA requires foreign financial institutions (FFIs) to report foreign accounts owned either directly or indirectly by U.S. persons to the Internal Revenue Service . To the extent an FFI does not comply with these provisions or an account holder does not provide the appropriate documentation, FATCA imposes a 30 percent withholding tax on payments made to either the FFI or the account holder.
The Model Agreement developed by Treasury with the G-5 countries relies on an automatic exchange of information and is intended to be a long-term solution for local law restrictions that would have prevented compliance with an FFI agreement. The Model Agreement allows FFIs in each of the jurisdictions to report U.S.-owned account information directly to their local tax authority, rather than to the IRS. Under the Model Agreement, the local taxing authorities would then automatically share that information with the IRS.
There are two versions of the Model Agreement: (i) the reciprocal version. U.S. will share information currently collected on accounts held in the U.S. by residents of partner countries, and includes a policy commitment to pursue regulations and support legislation that would provide for equivalent levels of exchange by the U.S. Prior to the U.S. sharing account information held by residents of a partner country, a determination will be made to ensure that the recipient government have adequate protections and practices to ensure the confidential nature of such information and that such information is to be used only for tax purposes; and (ii) (ii) the non-reciprocal version. non-reciprocal version will be available only to jurisdictions with which the U.S. has in effect an income tax treaty or tax information exchange agreement.
Shortly thereafter the United States entered into an IGA with the United Kingdom. The Treasury was also contemplating having IGAs in place with other countries including, Canada, Denmark, Finland, France, Germany, Italy, Japan, and others before the end of this year.
The Treasury Department on November 14 released a model intergovernmental agreement for cooperation to facilitate the implementation of the Foreign Account Tax Compliance Act (FATCA). This model reflects an alternative framework to the FATCA model agreements IA (reciprocal version) and IB (non-reciprocal version) released July 26 in that it provides for direct reporting by foreign financial institutions to the IRS and would be supplemented, upon request of the U.S. competent authority, by the exchange of information on U.S. accounts that are identified as accounts of recalcitrant account holders.
Article 2 of the newly released model requires the FATCA partner country to enable its reporting FFIs to register with the IRS as an FFI and comply with all due diligence, reporting, and withholding requirements. As expected, the model agreement permits the IRS's competent authority to make group requests of the partner jurisdiction's competent authority for information exchange about recalcitrant account holders reported to the IRS on an aggregate basis.
According to article 3, non-compliant account holders will not subject the FFI to the normal withholding obligations under the FATCA regulations if the reporting FFI otherwise complies with the agreement's provisions, particularly those governing information exchange. Retirement plans, small local institutions, and other entities specified in Annex II of the agreement will be treated by the United States as exempt beneficial owners or deemed-compliant FFIs.
The Model II template provides that the United States will respond to information exchange requests submitted under a governing tax treaty. If a jurisdiction enters into a Model II agreement and later wishes to move to government-to-government reporting under Model I, the template envisions negotiation of a reciprocal agreement with the same terms and conditions as similar agreements concluded with other FATCA partners (provided the standards of confidentiality and other requirements for reciprocity are met). A Model II IGA also includes a most favored nation clause giving the signing partner country the benefit of any more favorable terms that the United States later enters into with another jurisdiction.