In its expansive efforts to curb offshore tax evasion, the U.S. Treasury Department has signed intergovernmental agreements with both the Cayman Islands and Costa Rica, as implementation of the Foreign Account Tax Compliance Act (FATCA) continues.

FATCA was born of the HIRE Act of 2010, and has recently become quite controversial in the international community, given that it is now requiring Foreign Financial Institutions (FFIs), including hedge funds, both domestically and abroad, to report on the holdings of U.S. taxpayers to the Internal Revenue Service (IRS), and is enforcing this requirement with serious penalties. The controversy stems mainly from allegations brought forth by some foreign governments and banks, that FATCA violates banking confidentiality laws, as well as complaints from U.S. expatriates and dual citizens, who must now pay taxes to the IRS, and never had to do so in the past. It is hardly surprising that, in 2013, the number of people renouncing their U.S. citizenship has skyrocketed to record figures, at 1,854 so far, in comparison with 2009, where the number of renunciations closed at 742.

As a result of the heavy opposition and concerns stemming from the implementation of FATCA, the U.S., through its Treasury Department, has both opted to negotiate bilateral or intergovernmental agreements (IGAs) with foreign governments, in accordance with existing bilateral tax treaties, as well as delaying some of FATCA’s provisions.

The creation of IGAs now gives FFIs two options: they may either enter into agreements directly with the IRS, or through one of two alternative Model IGAs signed by their home country.

All of these efforts to appease the international community and implement FATCA sustainably, are echoed with the latest two (2) IGAs signed with the governments of the Cayman Islands and Costa Rica.

The IGA signed with the Cayman Islands is a Model 1B agreement which, in FATCA terminology, means that the provision of tax information is unidirectional; FFIs in the Cayman Islands will be required to report U.S. accountholder information tax information directly and centrally to the Cayman Islands Tax Information Authority which will in turn relay that information to the IRS. Further to the IGA, the existing bilateral Tax Information Exchange Agreement (TIEA), originally signed in 2001, will be replaced with a new one.

On the other hand, the IGA signed with Costa Rica is a Model 1A agreement, which makes the exchange of tax information bidirectional, so that the United States will also collaborate with Costa Rica by providing tax information on Costa Rican individuals with accounts in the United States.