The US Treasury has published a second Model Intergovernmental Agreement (Model 2) for cooperation to facilitate the implementation of the Foreign Account Tax Compliance Act(FATCA). Model 2 supplements direct reporting under FATCA by foreign financial institutions (FFIs) by adding the exchange of information between the respective governments on request.
FATCA was enacted in March 2010 and is intended to ensure that the US tax authorities obtain information on financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest, with FFIs. Failure by an FFI to disclose information would result in a requirement to withhold 30% tax on US-source income.
FFIs across the world have all expressed concern about the legislation, particularly the changes to their systems it will entail, and the penalties that will ensue in case of non-compliance.
This led the US Treasury to announce in February of an agreement with France, Germany, Italy, Spain and the UK to pursue government-to-government frameworks for implementing FATCA. This agreement (Model 1) offered a model for tax information sharing between governments on a reciprocal basis, based on existing bilateral tax treaties, and allowing FFIs to report the necessary information to their respective governments rather than to the Internal Revenue Service (IRS).
Model 2 supplements direct reporting under FATCA by FFIs by adding the exchange of information between the respective governments, but only on request. In that way, it addresses domestic legal impediments and reduces burdens on financial institutions, while still strengthening and improving the inter-governmental cooperation.
Under the agreement, a government will issue a directive to its resident FFIs to direct and enable them to register with the IRS by 1 January 2014, and then comply with the requirements of an FFI agreement, including its due diligence, reporting and withholding tax terms, with respect to pre-existing accounts identified as being held by US taxpayers. FFIs must also request from each such account holder his or her US tax code number and consent to report, and report annually to the IRS.
If the required information and consent is not provided by existing account holders, the FFI will be able to provide aggregate information on all such accounts to its government's tax authority, which is then authorised to transmit the data to the IRS. However, with respect to new accounts identified as belonging to a US taxpayer, the FFI would have to obtain from each account holder the consent to report his or her details consistent with the requirements of an FFI agreement, as a condition of account opening.