Treasury releases FATCA model intergovernmental agreement.

• Author: Yu, David
• Position: Foreign Account Tax Compliance Act of 2009 (Draft

On July 26, the Treasury Department released its long-awaited model intergovernmental agreement to improve tax compliance and to implement the Foreign Account Tax Compliance Act (FATCA). The model agreement was developed through consultation with France, Germany, Italy, Spain, and the United Kingdom, and with the cooperation of other partner countries, the Organisation for Economic Co-operation and Development, and the European Commission. These nations and international organizations are working toward establishing common reporting and due-diligence standards that advance a more worldwide approach to fighting tax evasion. The system would be based on an automatic intergovernmental exchange of information that would reduce the burdens of compliance requirements.

Two versions of the model agreement were released--a reciprocal one and a nonreciprocal one. The two versions are similar, and both establish a framework for reporting by financial institutions of certain financial account information to their respective authorities, followed by automatic exchange of such information under existing bilateral tax treaties or tax information exchange agreements (TIEAs). The two versions resolve legal issues raised in connection with FATCA and simplify its implementation for financial institutions.

The reciprocal version provides for the United States to exchange information with partner countries currently collected on accounts held in U.S. financial institutions by residents of partner countries. It includes a policy commitment to pursue regulations and support legislation that would provide for equivalent levels of exchange by the United States. This version is available only to jurisdictions with which the United States has an income tax treaty or a TIEA, or to jurisdictions that have established robust protections and practices to ensure the information remains confidential and is used for tax purposes only. Treasury and the IRS will review and make determinations on a case-by-case basis.

Background

FATCA was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010, P.L. 111-147. FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest. An FFI must enter into a special agreement with the IRS by June 30, 2013. The HIRE Act added a new chapter 4 to the Internal Revenue Code (Secs. 1471 through 1474), which establishes rules for withholdable payments to FFIs and for withholdable payments to other foreign entities made after Dec. 31, 2012. The rules provide for withholding taxes on specified foreign accounts owned by U.S. persons or by U.S.-owned foreign entities. These provisions do not apply to any obligation outstanding on March 18, 2012, or to the gross proceeds from any disposition of such an obligation (HIRE Act Sec. 501(d)).

Under Sec. 1471(a), the withholding agent must deduct and withhold a tax equal to 30% of any withholdable payment to an FFI that does not meet certain requirements. Sec. 1473(1) defines "withholdable payment" as:

1. U.S.-source fixed or determinable...