Are problems looming for FATCA and the 'reciprocal' IGA?

• Author: Hatten-Boyd, Laurie
• Position: Foreign Account Tax Compliance Act, intergovernmental agreements

The Treasury Department may soon experience relationship problems with certain countries that have entered into intergovernmental agreements (IGAs) under the Foreign Account Tax Compliance Act (FATCA).

FATCA, signed into law on March 18,2010, as part of the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147, is sweeping legislation intended to combat offshore tax evasion by certain U.S. persons with offshore bank accounts and investments. Specifically, FATCA incorporates a new reporting regime into the Internal Revenue Code that is designed to achieve this stated intent by imposing a penal withholding tax on certain foreign entities (and, in particular, foreign financial institutions) that refuse to disclose the identities of these U.S. persons. The statute, while providing general information about the new withholding and reporting rules, deferred much of the administration and implementation of the new regime to Treasury and the IRS.

In the early days of the regime's development, Treasury announced that, as an alternative to the FATCA regime set forth in the statute and regulations, it would be entering into IGAs with certain interested countries. According to Treasury, the IGA alternative was a means to "efficiently and effectively" establish a common intergovernmental approach to combating tax evasion while "minimizing burdens on financial institutions" (Dep't of Treasury Press Release, "U.S. Engaging With More Than 50 Jurisdictions to Curtail Offshore Tax Evasion" (11/8/12)).

The proliferation of IGAs was actually a turning point in ensuring FATCA's success because a financial institution in an IGA jurisdiction that does not comply with the terms of the IGA would actually be in violation of local law. Given this, many financial institutions that may have been seeking alternatives to U.S. investments as a mechanism to avoid the U.S. FATCA reporting requirements are forced to comply with the FATCA IGA requirements or, as indicated, risk violating their own country's law.

As of February 2016, Treasury had entered into an IGA (or announced that it has agreed to the terms of an IGA "in substance") with over 100 countries. There are two general Model IGAs: Model 1 and Model 2. Financial institutions operating in a Model 1 jurisdiction are required to register, but not execute a Foreign Financial Institution Agreement, with the IRS. These financial institutions must report their U.S. accounts directly to local regulators who...