On July 26, 2012, the U.S.Treasury published two versions of a model intergovernmental agreement (Model Agreements) for implementing the regulations of the Foreign Account Tax Compliance Act (FATCA), a broad reporting and withholding regime designed to improve tax compliance of U.S. persons with financial assets offshore. FATCA generally requires foreign financial institutions (FFIs) to enter into agreements (FFI Agreements) to report certain information on assets held by U.S. taxpayers to the Internal Revenue Service (IRS). FFIs not complying with the FATCA provisions are subject to a 30% withholding tax on certain U.S. sourced payments. For more information about FATCA, please see the Baker Hostetler Whitepaper.
BACKGROUND OF THE MODEL AGREEMENTS
The Model Agreements were developed by the U.S. Treasury in conjunction with the Governments of France, Germany, Italy, Spain and the United Kingdom (EU5 Countries) and are based on the Joint Statement signed by the U.S. and the EU5 Countries regarding an intergovernmental approach to implement FATCA announced in February 2012 (Joint Statement). In the Joint Statement, the U.S. and the EU5 Countries agreed to explore a common approach to FATCA implementation in their countries to allow FFIs resident in each of those countries to report the information on assets held by U.S. taxpayers as required by FATCA directly to their local tax authorities, which, in turn, would then automatically share the information with the IRS, rather than reporting the information directly to the IRS. This common approach was driven by local legal issues (in particular, privacy and data protection law barriers), which may have prevented FFIs in those countries from reporting directly to the IRS and complying with FATCA. There may have also been a general sense among the EU5 Countries and FFIs that reporting directly to the IRS was not appropriate and that the EU5 Countries might be able to negotiate some relief for FFIs operating in those countries. Subsequently, the Governments of Japan and Switzerland negotiated with the U.S. Treasury their own Joint Statements, which are generally similar to each other, but have different terms than the EU5 Countries Model Agreements. A separate model agreement will be issued based on the Swiss Joint Statement. It is expected that countries will have a choice of entering into one of Model Agreements or the expected Swiss model agreement.
The Chart of Major Policy Options Regarding FATCA Intergovernmental Agreements below summarizes the major differences and similarities among the Model Agreements and Joint Statements.
FRAMEWORK FOR THE IMPLEMENTATION OF FATCA
The Model Agreements implement FATCA on the basis of bilateral tax treaties or tax information exchange agreements between the U.S. and the EU5 Countries, allowing FFIs to comply with FATCA by reporting the relevant foreign account information to their respective tax authorities, followed by automatic exchange of such information between the respective local tax authorities and the IRS. Both Model Agreements also address the foreign law issues that had been raised in connection with FATCA and should simplify and reduce the cost of compliance for FFIs. The Model Agreements also specify the due diligence requirements applicable to FFIs in the EU5 Countries.
RECIPROCAL VERSUS NON-RECIPROCAL VERSION
While one of the Model Agreements provides for a reciprocal reporting between the U.S. and the EU5 Countries, the second Model Agreement is non-reciprocal. The reciprocal Model Agreement will be available only to jurisdictions the U.S. has an income tax treaty or information exchange agreement and for which Treasury and the IRS have determined the government has sufficient protections to ensure the information remains confidential and is used solely for tax purposes. The reciprocal version requires the U.S. to collect and automatically exchange information with the appropriate country on accounts in U.S. financial institutions held by those countries' residents. Most of the information is already collected by the U.S. The non-reciprocal Model Agreement does not require the U.S. to provide information on U.S. accounts.
CALLING FOR A SPEEDY CONCLUSION OF BILATERAL AGREEMENTS
According to the Joint Communique released by the U.S. and the EU5 Countries in connection with the Model Agreements, the EU5 Countries are seeking to conclude bilateral agreements with the U.S. based on the Model Agreements as soon as possible. Once a bilateral agreement with the U.S. is concluded, the partner country (FATCA Partner) is required to either amend their existing regulations or pass new legislation to remove any domestic legal barriers and enable the FATCA Partners' financial institutions to comply with the provisions of the bilateral agreement.
IMPACT ON THE INTERNATIONAL COOPERATION IN EXCHANGE OF TAX INFORMATION
The Model Agreements constitute an important step in international cooperation in tax information exchange and tackling international tax evasion. In the Joint Communique, the U.S. and the EU5 Countries emphasized that they will work in close cooperation with other partner countries, the Organisation for Economic Cooperation and Development (OECD) and the EU (where appropriate) towards common reporting and due diligence standards to support a more global approach to effectively combatting tax evasion while minimizing compliance burdens. The OECD has warmly welcomed the release of the model agreements and has praised the efforts of the U.S. and the other five European countries to improve tax compliance.
It is expected that several other countries will now also take action to enter into negotiations with the U.S. about an intergovernmental agreement and that the Model Agreements and the expected Swiss Model Agreement will serve as templates.
SUMMARY OF THE CONTENT OF THE MODEL AGREEMENTS
The Model Agreements are generally based on the Proposed Regulations implementing FATCA (Proposed Regulations), which were issued by the Treasury and the IRS on February 8, 2012, but include a number of new definitions and concepts as well as crucial concessions on timescales, scope and documentation requirements. In general, only the key provisions at variance from the Proposed Regulations are described below. It appears that the U.S. Treasury, the IRS and the EU5 Countries have listened to the comments and concerns of the financial services and insurance industries on the Proposed Regulations. It remains to be seen whether any or all of these concessions will be incorporated into the Final Regulations.
Even though the task of implementing FATCA remains substantial, it now at least looks more achievable on the basis of the Model Agreements.
The definitions include some new or revised definitions compared to those in the Proposed Regulations, in particular:
- "Financial Institution": The term explicitly names Investment Entities as well as Specified Insurance Companies.
- "Investment Entity": This term introduced in the new definition of Financial Institutions seems to be broader than the similar concept included in the definition of a "Financial Institution" in the Proposed Regulations as it includes an entity that conducts as business investing, administering or managing funds or money on behalf of other persons as well as individual and collective portfolio management. At the same time, it now requires activities or operations to be performed "for or on behalf of a customer." Although the term "customer" is not defined, the definition now appears to encompass both funds and fund managers. Although it is not completely clear whether a fund investor is a customer of the fund or the fund manager. Regardless, the requirement that the entity conduct activities or operations for or on behalf of a customer may exclude entities without customers. This definition appears to clarify that an entity wholly owned by one shareholder is not an FFI (and, therefore, must be a non-financial foreign entity (NFFE)), but a more definitive statement on this would be helpful.
- "FATCA Partner Financial Institution (FPFI)": The definition of a FPFI is based on country of residence rather than an organization concept. It includes any FFI resident in the FATCA Partner jurisdiction, but not its branches located outside of the FATCA Partner, as well as any branch of a FFI not resident in the FATCA Partner jurisdiction, if such branch is located in the FATCA Partner jurisdiction. FPFIs that are resident in a country are subject to the Model Agreement of that country.
- "Financial Account": The term has been made more specific, and in particular confirms that insurance companies that do not issue cash value life insurance contracts or annuity contracts are not Specified Insurance Companies, but rather are NFFEs. Furthermore, certain pension and saving plans, to be identified in Annex II, by the U.S. and the relevant FATCA Partner are to be excluded from the definition of "Financial Account." Non-investment-linked, non-transferable immediate life annuities issued to an individual to monetize a pension or disability described in Annex II will also be excluded.
- "Controlling Person": The term replaces the definition of "Substantial U.S. Owner" in the Proposed Regulations and, instead, requires "control" of the natural person over an entity, rather than a minimum (direct or indirect) shareholding of 10%. According to the definition, the term shall be interpreted in a manner consistent with the Recommendations of the Financial Action Task Force. Thus, reporting is not required with respect to a NFFE without a Controlling Person that is a U.S. person.
- "Cash Value Insurance Contract": The definition now explicitly excludes indemnity reinsurance contracts and confirms that reinsurance premiums are thus not subject to the reporting and withholding provisions under FATCA.
- "Cash Value": The definition confirms that the following payments made under an insurance contract are excluded: Amounts payable for personal injury or sickness or indemnification of an economic loss incurred upon the occurrence of the event insured; premium refunds due to cancellation, decrease in risk or a correction; and policyholder dividends based on the underwriting experience of the contract or group involved.
- "Specified Insurance Company": This term newly introduced in the definition of Financial Institutions means any insurance company or holding company of an insurance company that issues, or is obligated to make payments with respect to, a Financial Account.
- "U.S. Source Withholdable Payment": This term excludes gross proceeds from sales or exchanges of financial assets that may produce U.S. source interest or dividends. Thus, such gross proceeds are not subject to FATCA withholding under the Model Agreement.
Registration for FATCA
Any FPFI governed by the Model Agreement will not be required to enter into an FFI Agreement with the IRS. Rather, they will be required to follow the registration requirements to be determined by the relevant FATCA Partner. An FPFI will be treated as FATCA compliant as long as it meets the reporting and other ongoing responsibilities.
Obligations to Obtain an Automatic Exchange of Information
The Model Agreement provides that the FATCA Partner must obtain certain specified information with respect to all U.S. Reportable Accounts of the FPFIs and must report such information annually to the IRS. The information to be obtained and reported generally includes the same information required to be reported by FFIs under the Proposed Regulations:
- The name, address and U.S. taxpayers identification number (TIN) of each Specified U.S. Person that is an account holder of a non-U.S. entity. With respect to Preexisting Accounts, the FPFI may provide the date of birth of the Specified U.S. Person instead of the U.S. TIN, if the U.S. TIN is not in the records of the FPFI;
- The account number or functional equivalent;
- The name and identifying number of the reporting FPFI;
- The account balance or value at year end (including in the case of Cash Value Insurance Contract or Annuity Contract, the cash value or surrender value);
- In case of any custodial account, the total gross amount of interest, dividends, other income and total gross proceeds from the sale or redemption of property during the calendar year;
- In case of any depository account the total amount of interest paid or credited to the account during the calendar year;
- In case of any other account with respect to which the FPFI is the obligor or debtor the total gross amount paid or credited during the calendar year, including the aggregate amount of any redemption payments made during the calendar year or any other relevant reporting period.
The Model Agreement also sets forth the time and manner for the exchange of information, including specific provisions for the information to be exchanged for the years 2013, 2014, 2015 and 2016 and subsequent years. Information exchange should be made "automatically," without the necessity of a request. For 2013 and 2014, the information to be provided by FATCA Partners is limited to that described in one through four above; for 2015, all information is required except for total gross proceeds described in five above. In general, information is to be exchanged within nine months after calendar year end. With respect to the first information to be exchanged (for the year 2013), the Model Agreements shift the reporting deadline from September 30, 2014, to September 30, 2015, thus giving the FATCA Partner and its FPFIs more time to get ready for FATCA. The reciprocal Model Agreement requires the U.S. to obtain and exchange all of required information for 2013 and subsequent years. The specific procedures for the automatic exchange of information and to implement other parts of the Model Agreements are to be determined by mutual agreement of the Competent Authorities.
FPFIs complying with the registration and reporting obligations set forth in the Model Agreements, including aggregate reporting of payments made in 2015 and 2016 to each Nonparticipating Financial Institution (NPFI), are generally not required to withhold 30% tax under FATCA. However, an FPFI which is acting as qualified intermediary, foreign partnership or foreign trust and has elected to assume primary withholding responsibility must withhold 30% tax on any U.S. Source Withholdable Payment to a NPFI. Any other FPFI that makes a payment of, or acts as an intermediary with respect to a U.S. Source Withholdable Payment to any NPFI must provide to the immediate payor of the U.S. Source Withholdable Payment the information required for withholding and reporting to occur with respect to such payments. This provision is intended to ensure that some other withholding agent in the chain -- possibly the U.S. withholding agent -- will make this withholding, and thus shifts the compliance burden. As noted above, a U.S. Source Withholdable Payment does not include a payment of gross proceeds. The Model Agreements do not require withholding on gross proceeds or passthru payments.
The Model Agreements also provide some relief with respect to recalcitrant account holders, specified retirement plans and FPFIs with a related entity or branch that is a NPFI:
- In contrast to the Proposed Regulations, a FPFI is not required to withhold 30% tax under FATCA with respect to an account held by a recalcitrant account holder and is not required to close such account if the relevant information described above is reported with respect to such account. Reporting is not required if the account is not identified as a "U.S. Reportable Account" after application of the due diligence procedures.
- Passthru payments are not subject to withholding and the countries agreed to work together to find burden-reducing alternatives to passthru payment and gross proceeds withholding.
- Certain FATCA Partner FFIs, including certain retirement plans, are to be specified in Annex II as either deemed-compliant FFIs or beneficial owners, and certain categories of accounts and products in FATCA Partner will be specifically treated in Annex II as non-financial accounts;
A related entity or branch of an FPFIs that is an NPFI operating in a jurisdiction that prevents such related entities from becoming a participating or deemed compliant FFI shall not cause the FPFI to be non-compliant if all of the following conditions are met:
- the FPFI treats the related entity or branch as a separate NPFI for purposes of the reporting and withholding obligations under the Model Agreement and the related entity or branch identifies itself as a NPFI to withholding agents;
- the related entity or branch identifies its U.S. accounts and reports the information with respect to those accounts under FATCA to the IRS to the extent legally permitted;
- the related entity or branch does not specifically solicit U.S. accounts held by persons that are not resident in the related entities or branch's jurisdiction or accounts of NPFI not located in that jurisdiction; and
- the related entity or branch is not used by the FPFI or any other related entity to circumvent the obligations under the Model Agreement or under FATCA.
Collaboration on Compliance and Enforcement
The Model Agreements provide for specific procedures for collaboration on minor and administrative errors by FPFIs and on addressing their significant non-compliance with their obligations. The FATCA Partner in which the FPFI is located is to apply its domestic law to address significant non-compliance reported by the other country. In the case of significant non-compliance not resolved within 18 months, the IRS will treat the FPFI as a INPFI.
Account Identification (Due Diligence) Procedures
Annex I to the Model Agreements set forth the due diligence processes for identifying and reporting on U.S. Reportable Accounts and on payments to certain NPFIs. It provides four separate due diligence processes for Preexisting Individual Accounts, New Individual Accounts, Preexisting Entity Accounts and New Entity Accounts, each set forth in detail. Overall, the requirements of those four identification procedures are very similar to the identification procedures provided for in the Proposed Regulations. However, there are several key looseners:
Key dates for completion of due diligence on accounts are extended, including:
- Review of Preexisting Individual Accounts that are Lower Value Accounts must be completed by December 31, 2015 instead by June 30, 2015 as set forth in the Proposed Regulations;
- Enhanced review of Preexisting Individual Accounts that are High Value Accounts must be completed by December 31, 2014, instead by June 30, 2014, as set forth in the Proposed Regulations;
- Certification from a responsible officer of an FPFI is not required;
Certain indicia of U.S.ownership of accounts are clarified, and documentation for rebuttal of each indicia is specified, for example:
- Instead of a "U.S. place of birth," there must be a "unambiguous indication of a U.S. place of birth," which may be rebutted by self-certification provided by the account holder or a non-U.S. passport;
- Instead of a U.S. mailing address, there must be a current U.S. mailing or residence address (including a U.S. post office box or U.S. "in-care-of" address), which may be rebutted by self-certification by the account holder or a non-U.S. passport.
Reliance may be placed on certain other documents and processes, including, for example:
- For purposes of determining the account holder of Preexisting Individual Accounts, the FPFI can rely on previously collected documentation like self-certification, a copy of a non-U.S. passport or other government-issued identification or a copy of the individual's Certificate of Loss of Nationality of the United States;
- For purposes of determining the account holder of a Preexisting Entity Account or whether a Non-U.S. Entity is a Financial Institution, the FPFI can rely on the information maintained for regulatory or customer relationship purposes, including information collected pursuant to AML/KYC procedures;
- For purposes of determining whether an account held by an NFFE is a U.S. Reportable Account, the FPFI can rely on information collected and maintained pursuant to AML/KYC procedures; and
- For purposes of determining the status of the holder of New Entity Accounts, the FPFI can rely on information that is publicly available or in possession of the FPFI.
As currently drafted, the Model Agreements differ from the Proposed Regulations in numerous ways, including in how the Model Agreements operate and in the definitional language. Final Regulations have not yet been announced but may need to be better reconciled with these intergovernmental agreements. In addition, there are numerous interpretive issues presented by the Model Agreements in their current form but no interpretive guidance. In spite of these issues, it is likely that many more countries will desire to enter into some type of intergovernmental agreement with the United States to reduce the burden of FATCA.
CHART OF MAJOR POLICY OPTIONS REGARDING FATCA INTERGOVERNMENTAL AGREEMENTS
The following chart displays the major differences and similarities among the Model Agreements and Joint Statements.