Mariano Giralt, Anthony Leone and Adrian Fenton
With the FATCA Model Intergovernmental Agreements in place and European countries welcoming the initiative, will FATCA provide a global framework to achieve greater tax transparency?
Over the past few years, efforts to ensure tax compliance from offshore investments have increased substantially. To that end, legislation conceived by the US has propagated the use of data information exchange agreements throughout the world in an initiative called the Foreign Account Tax Compliance Act (“FATCA”).
The US Congress enacted FATCA in 2010 to compel non-US financial institutions to share information about their US client accounts with the US tax authorities.1 FATCA generally requires foreign financial institutions (“FFIs”) to provide information regarding financial accounts held by US taxpayers and foreign entities in which US taxpayers hold a substantial ownership interest.2 Failure to comply generally results in the FFIs being subject to a 30 per cent withholding tax.3
On July 12, 2013, the Internal Revenue Service (“IRS”) released updates to the FATCA regulations. Specifically, the updates stated that the FATCA online registration portal is scheduled to open on August 19, 2013. The updates also delayed withholding on FATCA payments for six months until after June 30, 2014 – originally FATCA withholding was scheduled to generally begin on January 1, 2014.
The IRS additionally enumerated specific provisions regarding the US Treasury’s treatment of intergovernmental agreements (“IGAs”).4 First, those IGAs that have already been signed by the US and the FATCA partner country are deemed to be “in effect.” Second, a FATCA partner country that is in active negotiations with the US will also be treated as having an IGA “in effect.” IGAs deemed to be “in effect” will be listed on the US Treasury’s website.5
FFIs in countries treated as having an IGA “in effect” will be permitted to register with the IRS as a deemed compliant FFI or participating FFI. This affords FFIs in those countries that are on the precipice of enacting an agreement to be availed to certain IGA benefits that would otherwise not be available. A country may be removed from the list if that country fails to perform the steps necessary to bring the IGA into force within a reasonable time period. If a country is removed from the list, FFIs that are residents of that particular country will no longer be entitled to the status that would be provided under the IGA, and must update their status on the FATCA registration website accordingly.
II. Intergovernmental Agreements
Pursuant to FATCA, FFIs are required to provide information about their US clients to the US tax authorities. In many cases, such disclosure would violate domestic law. FFIs choosing to abide by domestic law requirements instead of FATCA would be subject to a 30 per cent withholding tax.6 In the face of this dichotomous tension, the US Treasury has noted in released guidance that IGAs were developed to overcome the legal impediments associated with FATCA.7
Two versions of IGAs, commonly referred to as Model 1 and Model 2, are now available.8 Model 1 addresses FATCA compliance through partner country reporting and information exchange under double taxation conventions or tax information exchange agreements.9 Model 1 has a reciprocal (Model 1A) and non-reciprocal (Model 1B) version. Model 2 requires local law changes to allow direct reporting to the US IRS followed by Competent Authority requests for further information.10 The contrast between the two versions lies mainly in the reporting of information, accomplished through the FATCA partner country’s tax authority as in Model 1, or directly to the IRS as in Model 2.11
To supplement individual countries’ needs, Annexes I and II to the IGAs are available. Annex I outlines the due diligence requirements for reporting, while Annex II outlines FATCA exempt reporting entities. The US Treasury has issued a number of updates to the IGAs in efforts to reconcile the complexities inherent in reciprocating sensitive information between countries.12
Countries that have already signed IGAs include Japan, Germany, Spain, Norway, Switzerland, Ireland, Mexico, Denmark, and the United Kingdom. The US Treasury has released a statement noting that over 50 countries are currently negotiating IGAs with the US.13
A. Model 1 IGA updates
The first Model 1 IGA was released on 26 July 2012 by the US Treasury. The IGA was developed cooperatively with France, Germany, Italy, Spain and the United Kingdom.14
On May 9, 2013, the Reciprocal Model 1A IGA was changed to reflect information security concerns. Before the revision, the IGA was deemed to be in full effect once both the US and the FATCA partner country ratified the agreement. However, post revision, the US is no longer required to exchange information pursuant to a ratified Reciprocal Model 1A IGA if the US is not satisfied that the FATCA partner country has implemented the appropriate safeguards and infrastructure to ensure the information received remains confidential and will be used solely for tax purposes.15
Furthermore, a ratified Reciprocal Model 1A IGA will terminate on September 30, 2015, if either country is unsatisfied with the other’s data privacy protection procedures. A written acknowledgement evidences each party’s satisfaction with data privacy protection procedures.16
Model 1 IGAs retain the benefit of discretion for the FATCA partner country.
1. The United Kingdom
The UK signed an IGA with the US on September 14, 2012. It was the first IGA signed with the US and has become the basis model for most countries to follow. The UK IGA is a reciprocal agreement, where the UK and US will reciprocate information about their citizens’ investments in foreign countries.
The UK HM Revenue and Customs (“HMRC”), in its guidance notes released on May 31, 2013, stated that should US authorities subsequently amend the underlying FATCA regulations to introduce broader exemptions, HMRC will have discretion whether or not to incorporate the changes into its own regulations and guidance.17 Subsequent to the issued guidance, Annex II was updated in June 2013 to include additional non-reporting entities as a result of broader exemptions achieved under other later agreed IGAs.
Pursuant to the UK IGA, withholding tax will not be imposed on UK Financial Institutions (“FIs”), nor will UK FIs be required to remit the 30 per cent withholding tax associated with FATCA, provided that the UK FIs comply with the reporting obligations associated with US account holders.18 Those UK FIs in compliance will be considered a reporting UK financial institution (“RUKFI”).19 A RUKFI does not include a non-UK domiciled branch or a UK branch of a non-UK resident FI.
The Irish IGA was signed with the US on December 21, 2012. Ireland’s Finance Act 2013 (published February 13, 2013 and enacted into law March 27, 2013) introduced provisions for local law implementation of its IGA with the US The Act grants the Minister of Finance the power to enact into Irish law regulations regarding the registration and reporting requirements of Irish FIs. The draft Irish IGA regulations and guidance issued on May 31, 2013 include provisions for foreign subsidiaries or branches of an Irish FI to be governed by agreements in the foreign territories where they are domiciled.20 Final regulations and guidance are expected by the end of June 2013.
Spain and the US signed an IGA on May 15, 2013. The Spanish IGA is also similar to the UK IGA in that it is a reciprocal agreement. Additionally, Annex I has been updated to include a 90-day allowance period for a Reporting Spanish FI to document a pre-existing account holder that no longer meets a de minimis documentation threshold at the end of a prior calendar year.
Germany and the US signed an IGA May 31, 2013. Pursuant to the signed reciprocal IGA, it is anticipated that a Competent Authority Agreement will soon follow.21The German IGA, in a similar fashion to the UK agreement, has a specific list of exempt entities and accounts. Included in Annex II are German Investment Funds, which are considered non-reporting deemed compliant FFIs and therefore do not have to complete FATCA due diligence regarding their investors. Instead, this matter will be completed by the custodian banks where investors of the German Investment Funds have their accounts.22
Denmark signed Model 1A IGA on November 15, 2012. The IGA is similar to that of the one the US signed with the UK Annex II to the IGA lists exempt beneficial owners, including the Danish government, the Central Bank and certain pension funds.23
B. Model 2 IGA
Pursuant to negotiations with Japan and Switzerland, the US Treasury released an IGA version, called Model 2, on November 14, 2012.24 The Model 2 IGA requires FFIs to register and report FATCA information directly to the IRS.25
Switzerland and the US signed the Model 2 agreement on February 14, 2013. Switzerland, the first country to sign a Model 2 agreement with the US, is currently in the process of amending its own laws by allowing Swiss FIs to report investor information to the US tax authorities.
On June 7, 2013, Switzerland and the US signed a Memorandum of Understanding (“MoU”). The MoU summarised the obligations of Swiss FIs under the IGA. The MoU also provides Swiss FIs some flexibility to apply the definitions in the US regulations in lieu of those in the IGA agreement, so long as the purpose of the agreement is not frustrated.26
In conjunction with implementing the IGA, a bill (separate legislation from the MoU) adopted by the Swiss Federal Council would authorise Swiss banks to cooperate with the US authorities in disclosing FATCA information.27
The bill however, has been stayed. Swiss parliament’s lower house rejected debate of the bill on June 5, 2013. On June 19, 2013 the lower house again rejected debating the bill, even after the upper house had confirmed support for the legislation earlier that day.
The bill is currently set for reintroduction in July 2013. As of the date of publication the Swiss government has not yet made a final decision on the disclosure of US accounts by Swiss FIs.
III. European “FATCA” initiative
On May 14, 2013, 17 European Union (“EU”) member states released a joint Directive stating their intentions to commence an initiative similar to FATCA, in an effort to reciprocate offshore investment information.28 The EU Member States engaged in the effort to stop tax evasion are: Belgium, the Czech Republic, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.29
On June 17, 2013, G8 leaders presented a report concluding that the FATCA Model 1 IGA was a logical basis from which to build a standardised model for the OECD’s automatic information exchange initiative.30
IV. What you can do
In preparation for FATCA, the authors suggest that organisations, in conjunction with their tax advisors, take the following steps to ensure FATCA compliance.
Analyse their legal entities to determine the FATCA classification of their investment structure and legal entities. Determine which structures are exempt under FATCA, or if any structure might be in scope for FATCA compliance.
Finalise their entities’ classification under FATCA or relevant IGA.
Determine whether these entities are required to register on the FATCA website, and if they are required to obtain a GIIN number.
Analyse and determine whether these entities are required to have a FATCA responsible officer, whether it is an IRS responsible officer, or a person as defined by a relevant IGA.
Closely monitor and lobby the IGA development in those countries in which the organisations have investment structures. If it is in a country that has not yet signed an IGA, they must work with their local regulators to ensure guidance or legislation clarifies its FATCA status.
Review their providers (custodian, administrator and transfer agent), especially those providers that are non-US financial institutions, and understand their compliance with FATCA.
V. Updates to original publication
The IRS opened the FATCA registration portal on August 19, 2013 as scheduled. Any information entered into the portal, even if it is submitted as final by the user, will not be regarded as a final submission by the IRS until January 1, 2014. As such, GIINs will not be issued until 2014.
On August 29, 2013 the US Department of Justice and the Swiss government signed an agreement to allow Swiss banks the opportunity to avoid criminal investigation by participating in a compliance programme. Those banks that choose to comply with the programme will disclose US account holders’ information to the US and could face a penalty. The penalty is initially set at 20 per cent of the total dollar amount of all hidden US customer accounts held by the bank on August 1, 2008, but may increase to 30 or 50 per cent depending on how active each particular bank was in aiding its US clients in hiding money from the US government. The programme is not available to the 14 Swiss banks that are already under investigation by the US.
1 US Treasury TD9610, Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities, Section I.
20 Guidance Notes on the Implementation of FATCA in Ireland, May 3, 2013, Chapter 3.
21 Agreement between the Federal Republic of Germany and the United States to Improve International Tax Compliance and with respect to the United States Information and Reporting Provisions Commonly Known as the Foreign Account Tax Compliance Act, May 31, 2013, Article 3, Paragraph 6.
This article was originally published in Bloomberg BNA’s Tax Planning International, July 2013.
Anthony Leone is an Associate in Global Transactions Services for BNY Mellon. Currently his main focus is on FATCA, cross-border income payments, and withholding taxation analysis for financial institutions. Prior to joining BNY Mellon, Anthony was a Tax Associate for a large accounting firm in Canada where he focused on US federal income tax, cross-border mergers, acquisitions, dispositions, financings, and hybrid structures. Anthony received both a Bachelor of Science and Juris Doctor from the University at Buffalo.
Adrian Fenton is a Managing Director and the US Tax Services Director for BNY Mellon's client service delivery function within its Investment Services division. He is responsible for addressing technical global tax matters with a particular emphasis on the US, as well as evaluating the tax related services provided to clients. Adrian joined BNY Mellon in 2010 following a 22 year career with a regional banking organisation where he served for over 10 years as its principal tax officer. Adrian has spoken at many financial services tax conferences and was previously a member of the American Bankers' Association tax committee.
Mariano Giralt is a Managing Director and Head of EMEA Tax Services for BNY Mellon’s Asset Servicing business. He is responsible for providing tax strategy and development, tax market intelligence and acts as a primary contact for clients’ tax requests. Prior to this, Mariano was Executive Director of Global Tax Services at JP Morgan. He holds a Masters in Finance at the London School of Economics; a Masters in Laws Tax at Georgetown University, Washington DC; and a Degree in Research in International Taxation from the University of Barcelona. Mariano is a frequent speaker at leading industry conferences, and has written numerous thought leadership articles and white papers.
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