Because FATCA would require disclosure about the non-US bank accounts of US persons and because many national privacy laws in Latin America specifically prevent such disclosure, many non-US financial institutions in the region are between a rock and a hard place. Fortunately, relief may be at hand in the form of intergovernmental agreements, which the IRS may enter into as an alternative to FATCA compliance.
Comply or suffer withholding
The US Foreign Account Tax Compliance Act, commonly referred to as FATCA, is designed to tackle offshore tax abuse by US taxpayers. When FATCA takes effect in January 2013, foreign financial institutions (FFI) will be required to identify and disclose the direct and indirect owners of accounts that are classified as US accounts under these rules. Institutions that do not comply face severe consequences: the institution will have to bear 30 percent withholding tax on certain US-sourced income and on the gross proceeds from the disposal of certain investments, regardless of whether there is any gain.
In February 2012, the governments of the US, France, Germany, Italy, Spain, and the United Kingdom issued a joint statement acknowledging that the FATCA rules impose information reporting requirements on foreign financial institutions (FFI) where local law imposes legal restrictions on reporting, withholding, and account closure requirements. The countries announced an alternative intergovernmental approach to FATCA implementation that would address the legal impediments to compliance, simplify practical implementation, and reduce FFI costs.
Two versions of a Model Intergovernmental Agreement (IGA), released in July 2012, establish a framework for reporting by financial institutions of certain financial account information to their own country’s tax authorities, followed by automatic exchange of such information between that country and the US under existing bilateral tax treaties or tax information exchange agreements (TIEA).
Two Model IGAs
The features of two versions of the Model IGA are as follows:
Reciprocal version: This version allows the US to exchange information currently collected on accounts held in US financial institutions by residents of partner countries, and includes a policy commitment to pursue regulations and support legislation that would provide for equivalent levels of exchange by the US. This version will be available only to jurisdictions with whom the US has in effect an income tax treaty or TIEA, where the Treasury Department and the Internal Revenue Service (IRS) have determined, on a case-by-case basis, that the recipient government has in place robust protections and practices to ensure the information remains confidential and used only for tax purposes.
Nonreciprocal version: This version does not provide for the US to exchange information currently collected on accounts held in US financial institutions by residents of partner countries.
Current Model IGAs depend on treaties and TIEAs
Under both versions of the Model IGA, the automatic exchange of information happens under existing bilateral tax treaties or TIEAs. This implies that neither version is usable by countries, like Brazil, Argentina and many others in the region, that do not have tax treaties or TIEAs with the US.
New models coming for non-treaty/TIEA countries?
US officials have indicated that similar opportunities will be developed to extend such cooperation to non-treaty/TIEA countries. At the time of writing, it is not yet known how such cooperation would be achieved. In the coming months, the IRS is expected to enter IGAs with other countries, and financial institutions in most Iberoamerican countries will need to wait and see whether such new agreements set a precedent for resolving conflicts between FATCA and domestic law.
Even without alternative IGAs for non-treaty/TIEA countries, the US government’s willingness to enter into an IGA could be a sign that it may be taking a less hard line in this regard. Only time will tell if the final FATCA regulations, will be less onerous than the proposed regulations, or if the IGA will be the better approach.
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