US Treasury Department announces countries engaging in FATCA intergovernmental agreement discussions

International Tax Compliance Alert

By:

The US Treasury Department has announced it is engaging in discussion with more than 50 countries to develop an intergovernmental approach to the implementation of the Foreign Account Tax Compliance Act (FATCA).

The Announcement, issued November 8, is the latest of a series of US Treasury Department pronouncements reflecting an increasing focus on implementing FATCA bilaterally through agreements with other countries rather than unilaterally through US law.

This approach addresses policy concerns expressed by other countries, which have affirmed that combatting tax evasion and increasing international tax transparency is not merely a US issue but a concern shared by all countries, whether developed or developing, and is more appropriately dealt with bilaterally or multilaterally.

Background

The bilateral implementation of FATCA is intended to avoid local law conflicts that may arise if a foreign financial institution complies with FATCA, a US-centric law, as well as to reduce administrative burdens and costs.  Also, as a quid pro quo to foreign countries agreeing to enter into an intergovernmental agreement (IGA), the US government agrees to reciprocate and exchange information that it has with respect to residents of the other country.

The US has two forms of IGAs:

  • Model I.  Under this version, the FATCA Partner jurisdiction would enact legislation requiring all financial institutions resident in that jurisdiction (including branches of nonresident entities) to report the FATCA-required information to the FATCA Partner’s tax authorities, who, in turn, would then exchange the information with the US under the existing framework provided by an existing double taxation or tax information exchange agreement.  This version may be either reciprocal or non-reciprocal.  The recently signed UK-US IGA is the representative model of a Model I reciprocal IGA.  Note that a Model I non-reciprocal version would be used, for example, with a country that does not impose income taxes or a country that does not have a robust system in place for protecting the confidentiality of taxpayer information.
  • Model II. This version is an intergovernmental cooperation agreement that waives local bank secrecy laws and requires all FATCA Partner financial institutions to enter into an “FFI agreement” with the IRS to meet the FATCA-required obligations. This version further requires the FATCA Partner jurisdiction, upon request under a double tax treaty or a tax information exchange agreement, to provide the US with specific information with respect to recalcitrant account holders. The Model II approach was first announced by the US Treasury Department in joint statements with the governments of Japan and Switzerland. An actual Model II IGA was published by the US Treasury Department on November 14, 2012.

The US Treasury Department has recognized that there will be a need for differences between IGAs among countries – as indicated by the two models. However, the US Treasury Department has announced that there will not be additional IGA versions and that the model IGAs will not be customized (except for an Annex to the IGAs, identifying entities and products that pose a low risk of US tax evasion). Model I would require substantial commitment of resources by the foreign government in terms of collecting and administering the collection of US account information as well as the automatic exchange of such information to the IRS, while Model II recognizes that not all countries perceive the need to substitute government-to-government automatic exchange of information reporting for direct reporting by their financial institutions to the IRS.

Countries in IGA Discussions

The Announcement grouped jurisdictions that are considering an IGA into three categories:

  • Jurisdictions with which the US Treasury Department is in the process of finalizing an IGA and anticipates concluding negotiations by year end
  • Jurisdictions with which the US Treasury Department is actively engaged in a dialogue to conclude an IGA, several of which are anticipated to be concluded by year end
  • Jurisdictions with which the US Treasury Department is working to explore options for an IGA

A list of jurisdictions that are included within each category is provided below.  The US Treasury Department also announced that it has plans to participate in a meeting hosted by the Qatar Central Bank in early December to provide information about FATCA and the IGAs to invited senior government official and financial institutions in the Gulf Cooperation Council.


Jurisdictions with which Treasury is in the process of finalizing an IGA

Jurisdictions with which Treasury is actively engaged in a dialogue toward concluding an IGA

Jurisdictions with which Treasury is working to explore options for an IGA

France

Argentina

Bermuda

Germany

Australia

Brazil

Italy

Belgium

British Virgin Islands

Spain

Cayman Islands

Chile

Japan

Cyprus

Czech Republic

Switzerland

Estonia

Gibraltar

Canada

Hungary

India

Denmark

Israel

Lebanon

Finland

Korea

Luxembourg

Guernsey

Liechtenstein

Romania

Ireland

Malaysia

Russia

Isle of Man

Malta

Seychelles

Jersey

New Zealand

Sint Maarten

Mexico

Slovak Republic

Slovenia

The Netherlands

Singapore

South Africa

Norway

Sweden

Comments

It is interesting to note that not all major financial centers or major US trading partners were listed in the Announcement. However, the fact that a country is not currently considering an IGA does not mean that it may not decide to enter into IGA discussions in the future.

The countries participating in IGA discussions reflect that IGA discussions are taking place not only with jurisdictions with which the US has entered into bilateral income tax treaties or tax information agreements, but also with jurisdictions with which the US has no such relationship (Note, in this regard, an IGA is an executive agreement that does not require the advice and consent of the Senate). This underscores the US policy that an IGA can be entered into with a country that is a bilateral tax treaty partner; a country that has a tax information agreement; a multilateral tax treaty partner (such as a treaty signatory of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters); or a country that has not entered into any treaty or exchange of information relationship with the US.

With respect to IGA timelines, it has been reported that the US Treasury Department plans to work with FATCA Partner jurisdictions to allow financial institutions in a jurisdiction with a signed IGA to rely on the IGA for purposes of complying with FATCA so as to avoid multiple implementation efforts, first under the US Treasury Regulations and then under the IGA. These arrangements apparently would be limited to jurisdictions that have signed IGAs and that give the US a clear picture of how a FATCA Partner jurisdiction intends to implement FATCA within the FATCA implementation timelines However, it is not entirely clear how this approach would coordinate with local law in the FATCA Partner jurisdiction.

Concerns have also been expressed by global financial institutions regarding divergence in FATCA rules, both among IGAs and between IGA countries and non-IGA counties. With respect to IGAs, there is concern that FATCA compliance obligations may differ among IGA countries due to local law. Similarly, financial institutions with operations in IGA and non-IGA countries have expressed concerns about differences in rules contained in IGAs and the US Treasury Regulations. A convergence of rules would be optimum to minimize administrative burdens and costs; whether this is achievable or not will have to await the issuance of additional FATCA guidance.

As a final comment, the list of countries interested in discussing IGAs foreshadows that in the not too distant future bilateral or multilateral agreements providing for automatic exchange of taxpayer information may become the norm and not the exception.

For more information about FATCA compliance, please contact Witold Jurewicz.