by Jeffrey Cronin, Convey
The U.S. Department of Treasury expanded its list of FATCA partners last week to include Denmark and Mexico, providing yet another signal that the forthcoming requirements around the Foreign Account Tax Compliance Act are right around the corner.
In the past few months, the Treasury Department has made significant progress towards making FATCA a reality—a mission that seemed to be losing ground with the delays in implementation and final requirements. However, in recent months the Department released two model Intergovernmental Agreements, finalized its first Intergovernmental Agreement, released new Form W-8 versions to account for FATCA and is expected to release final regulations by the end of the year.
FATCA, which was included as part of the HIRE Act of 2012, is part of a major U.S. effort to improve international tax compliance. The legislation requires U.S. taxpayers and foreign financial institutions holding specified financial assets overseas to report those assets to the IRS if they exceed certain thresholds. Some of the requirements under FATCA are quite complex and controversial, so to help encourage foreign banks to implement these parts of the law, the U.S. is negotiating agreements with foreign governments to provide information on their citizens to the appropriate tax authorities.
The Treasury Department has released two different model intergovernmental agreements thus far. Broadly, under the Model I IGA, foreign financial institutions do not have to enter into an agreement with the US government, rather FFIs will be governed by local law and the required reporting is done through their own government. This IGA comes in two different versions: reciprocal and non-reciprocal. In the reciprocal version, the US reciprocates the exchange of information regarding accounts held in the US by residents of the foreign country. This information exchange does not take place in the non-reciprocal version. In contrast, the Model II IGA requires foreign financial institutions to both enter into agreements with, and report directly to the IRS.
Despite the delays, the Treasury is showing it still means business when it comes to FATCA, announcing that it is in discussions with over 50 countries to enter Intergovernmental Agreements to implement this law. So far, only the United Kingdom, Denmark and Mexico have officially finalized and signed agreements, but many more countries will soon follow suit.
By the end of 2012, the Treasury hopes to finalize agreements with France, Germany, Italy, Spain, Japan, Switzerland, Canada, Finland, Guernsey, Ireland, Isle of Man, Jersey, the Netherlands and Norway, all countries in which they have had extensive talks with on the topic.
The US announced it is also actively discussing Intergovernmental Agreements with Argentina, Australia, Belgium, the Cayman Islands, Cyprus, Estonia, Hungary, Israel, Korea, Liechtenstein, Malaysia, Malta, New Zealand, the Slovak Republic, Singapore and Sweden, but agreements are not expected to be finalized until 2013. Additionally, the department is working on alternative options for fifteen other countries further down the road.
So, despite all the backlash and hostility around FATCA, the requirements are here to stay. The increasing number of countries entering agreements shows other governments are open to changes in their tax information reporting and are recognizing the need to address this issue on a global level.