By Alison Bennett
Dec. 10 – The push for agreements to implement the Foreign Account Tax Compliance Act continues as the U.S. government works with dozens of jurisdictions on pacts to facilitate information reporting on accounts held in foreign banks by U.S. taxpayers.
The U.S. has formally signed 12 agreements so far, with 16 agreements reached in substance and talks in advanced stages with many other countries. International tax attorneys told Bloomberg BNA in a series of interviews that the accords, known as intergovernmental agreements (IGAs), are a critical part of compliance with the 2010 statute. Banks and other financial entities hope more will be signed soon as a July 1, 2014, deadline for direct reporting approaches, they said.
Aimed at curbing tax evasion, FATCA requires U.S. financial institutions to withhold a portion of payments made to foreign financial institutions (FFIs) that don’t agree to identify and report information on U.S. account holders. IGAs, in general, allow financial institutions to report the information to their own governments, which then would share the data with the Internal Revenue Service.
Twelve Signed Agreements
The 12 jurisdictions with signed IGAs are the Cayman Islands, Costa Rica, Denmark, France, Germany, Ireland, Japan, Mexico, Norway, Spain, Switzerland and the U.K.
According to publicly available information, Bermuda, Italy and Hungary have all initialed agreements–generally the last step before an accord is formally signed–and Malta has concluded negotiations on an IGA.
The Treasury Department says in cases of other jurisdictions that have initialed agreements or are in other stages of negotiations, it is leaving it up to officials from those countries to make such developments public. Countries where foreign government representatives have said talks are progressing include Canada, Israel and the Czech Republic, while economies known for their financial industries, such as the Bahamas, the Virgin Islands and Belgium, have expressed their intent to enter into IGAs. Some other nations where talks are continuing include Sweden, Belgium, Liechtenstein, Luxembourg and the Netherlands.
“There is a lot more going on behind the scenes than is apparent. They’re working on it very hard, ” said Manal Corwin, national leader of the international tax practice at KPMG LLP and a former Treasury official who was deeply involved in FATCA work.
Corwin said as the reporting deadline approaches, banks and other financial entities are ramping up the pressure for more agreements. “Financial institutions are looking at that and telling their jurisdictions we need to get this done,” she said. “I think it has the impact of pushing this forward.”
“There is a lot more going on behind the scenes than is apparent.”
Manal Corwin, KPMG LLP
The U.S. government’s work with other countries to implement FATCA is gaining momentum and marks the growing movement toward global tax transparency, Treasury Deputy Assistant Secretary for International Tax Affairs Robert B. Stack said Nov. 19.
“FATCA has been widely recognized as a global model for combating offshore tax evasion and promoting transparency, as evidenced by the G-20 and OECD’s work on developing the common reporting standard, which draws extensively on our intergovernmental approach,” Stack said, referring to the efforts of the Group of 20 nations and the Organization for Economic Cooperation and Development. “We are pleased by this growing momentum in support of FATCA and look forward to further encouraging international cooperation.”
John Harrington, a former Treasury international tax counsel and now a partner at Dentons LLP, said while most people are pleased with the content of the IGAs that have been signed so far, “there is a strong desire to see as many IGAs as possible. It does make planning difficult with not knowing how or when an IGA is going to come out. But it’s clear that Treasury is working as hard as they can.”
Treasury unveiled the intergovernmental approach to FATCA alongside France, Germany, Italy, Spain and the U.K. in February 2012 (26 DTR GG-3, 2/9/12).
In November 2012, Treasury said it was in talks with more than 50 countries. Since then, officials have said the number of jurisdictions negotiating with Treasury has increased to more than 70.
Treasury has so far developed three models for IGAs–Model 1A, Model 1B and Model 2.
In general, Model 1 agreements require FFIs to report all FATCA-related information to their own governmental agencies, which would then report the FATCA-related information to the IRS.
Model 1A IGAs are reciprocal, requiring the U.S. to provide certain information in exchange for the data it gets from other governments.
Model 1B agreements aren’t reciprocal and the information only goes from the foreign country to the U.S. As one example, the Cayman Islands IGA is a nonreciprocal, Model 1B pact.
The Model 2 IGA requires FFIs to report information directly to the IRS. Thus far, Japan and Switzerland have entered into a Model 2 IGA, while Bermuda has initialed one.
A wide range of countries are in the midst of negotiations, with some further along than others.
According to an update obtained from the Israeli Finance Ministry, negotiations are in a “very advanced stage” moving toward the signing of a bilateral agreement on FATCA compliance. Officials and banks in Israel are gearing up for implementation.
In the Czech Republic, negotiations with the U.S. started July 27. The country’s government formulated a counterproposal taking into account specific points in Czech legislation, and negotiations on the IGA are about halfway done, a spokeswoman from the Czech Republic Finance Ministry said.
A spokeswoman for Canadian Finance Minister Jim Flaherty said the Canadian government thinks it is “close to a proposed agreement” and hopes to be able to announce additional details soon.
In New Zealand, although details of negotiations were unavailable, a spokeswoman told Bloomberg BNA that the government has recently introduced legislation to Parliament enabling the nation’s financial institutions to comply with any possible IGA.
Governments of other countries have said publicly they plan to participate in FATCA.
As some other examples, the Luxembourg government and the Maltese Inland Revenue have announced they are working on Model 1A agreements, while Jamaica and Singapore are completing Model 1 IGAs.
The Premier of the British Virgin Islands, the treasury minister for the Isle of Man, and Finland’s minister of finance all said they are still in negotiations.
Hope for Speed
Practitioners said they remain hopeful that negotiations will conclude quickly for as many jurisdictions as possible. Dominick Dell’Imperio, a partner at PricewaterhouseCoopers LLP in Washington, said it is a positive sign that the agreements being negotiated are generally fairly consistent, with annexes that are tailored to the situations of specific governments. “It gives you the consistency of certainty,” he said. Jonathan Jackel, senior counsel at Burt, Staples & Maner LLP, said many governments “seem a lot less resistant than they were at first. The trend is definitely in favor of seeing some movement.” Jackel said that “IGAs are a very important part of the process. It gives financial institutions in those countries a fair shot at complying with FATCA.”
Both Dentons’ Harrington and Candace Ewell, a principal in PwC’s Washington National Tax Services group, said it remains a concern that some jurisdictions may be covered by FATCA, but not others, in the near future. “Not having IGA coverage on multiple continents and multiple jurisdictions across the planet means there are choices to be made and decisions to be made about their compliance framework,” Ewell said. Harrington said a big question is, “What do you do if you have branches in jurisdictions that don’t qualify?”
KPMG’s Corwin said she thinks there is “significant correlation” between the effort to craft IGAs and the growing movement toward global tax transparency. “I think transparency and information exchange was accelerated and the IGAs provided an incentive for broader cooperation,” Corwin said, adding that work toward creating a uniform standard of information exchange is continuing.
Banks and other financial entities continue to be worried about the July 1 deadline for reporting and withholding. Several major financial groups recently asked for six more months to comply, on top of the six-month extension already provided by the government (224 DTR G-2, 11/20/13).
A Treasury spokeswoman said the government is working diligently to finalize all related guidance to ensure that financial institutions have time to effectively prepare and comply.
“We have been working to facilitate a smooth implementation by issuing final regulations in January and draft forms throughout the year, providing a six-month extension to the start of withholding and account due diligence requirements last July, opening the FATCA portal in August and coordinating closely with governments worldwide,” the spokeswoman said.