Dayle O. Blair, CONTRIBUTOR
What are the inter-governmental agreements under FATCA?
THE FOREIGN Account Tax Compliance Act (FATCA) is an important development in the United States' (US) efforts to improve tax compliance, with the Internal Revenue Services (IRS) focusing on foreign financial assets and offshore accounts in order to catch tax dodgers and tax cheats.
At the announcement of FATCA, most foreign financial institutions (FFIs) were nervous, because it appeared that financial institutions would have to breach privacy laws by providing the IRS with what would be considered confidential customer information. The US government has sought to dispel those fears by signing what are called inter-governmental agreements (IGAs).
What are IGAs?
Under FATCA, countries have a choice of two IGA approaches, namely Model 1 and Model 2. Model 1 requires FFIs to report FATCA information directly to an authority within the country such as a revenue authority or the central bank, and that authority will report the FATCA information directly to the IRS.
This model is preferred by the FFIs, and is the model that most countries are expected to sign. Model 2 uses an approach that involves FATCA information sharing; where the FFIs gather information on their customers and report it directly to the IRS.
How the US government will achieve its IGA objectives
The United States government will collaborate with other governments to develop two model IGAs for the effective implementation of FATCA.
Both the Model 1 and Model 2 IGAs will be implemented without affecting double-taxation treaties, such as the one that was signed between Jamaica and the United States in 1983, or tax information-exchange agreements with the United States.
IGAs with partner jurisdictions are expected to facilitate the effective and efficient implementation of FATCA by removing domestic legal impediments to compliance and burdens on FFIs located in partner jurisdictions.
Model 1 IGAs
The partner jurisdiction agrees to report to the IRS specified information about the US accounts maintained by all relevant FFIs located in the jurisdiction.
FFIs identify US accounts pursuant to due diligence rules contained in guidelines provided.
FFIs report specified information about their US accounts to the partner jurisdiction.
The partner jurisdiction, in turn, reports such information to the IRS on an automatic basis.
The exchange of information under a Model 1 IGA may be on a reciprocal or nonreciprocal basis.
Model 2 IGAs
The partner jurisdiction agrees to direct all relevant FFIs located in the jurisdiction to report specified information about their US accounts directly to the IRS.
FFIs identify US accounts pursuant to due diligence rules contained in the guidelines provided.
FFIs report specified information about their US accounts to the IRS.
FFIs also report to the IRS aggregate information with respect to holders of pre-existing accounts who do not consent to have their account information reported, on the basis of which the IRS may make a 'group request' to the partner jurisdiction for more specific information.
What happens to the information by IGAs?
In an effort to minimise the reporting pressure, the US and some countries like the UK, France, Spain, Germany, Japan and Italy are required to share information on US citizens. This sets up an international tax network, with the US also reciprocating by forwarding information to the network on those citizens' financial assets held in US financial institutions.
Taxpayers in any country who join the network can cross-compare information submitted on tax returns and other government documents. This is to verify that everyone is paying the correct amount of tax in their country.
Countries like Jamaica will be expected to sign on to one of the model agreements, and because it's supposed to be mutually beneficially to the countries in the network, Jamaica could expect some benefits by the US reciprocating by providing financially relevant information that the US government can get from US financial institutions that the Jamaican Government may find very useful.
FATCA is one of the most far-reaching tax laws that were ever envisioned by any government. Its effects are deadly and will surely reduce tax evasions by not just Americans, but citizens of other nations. This is so, given the massive international tax networks which will allow countries to share relevant tax information on their citizens with each other.
Dayle O. Blair is an attorney-at-law, certified public accountant and a certified international tax adviser. He can be reached for comments at firstname.lastname@example.org, email@example.com or 876-906-1016 or 876-625-9680.