Background: What is FATCA?
The Foreign Account Tax Compliance Act (“FATCA”) was introduced in the US as part of the Hiring Incentives to Restore Employment (Hire) Act enacted 18 March 2010 to improve tax compliance and reduce overseas tax evasion by US persons. It requires Foreign Financial Institutions (“FFIs”) to report information on accounts held by US persons and certain US controlled foreign entities. FFIs as defined include Banks, Investment Funds, Custodians and Insurance Companies among others.
The Final FATCA Regulations issued 17 January 2013 require FFIs to enter into an agreement with the IRS by 1 January 2014 to report on all accounts held by US persons. This involves direct reporting by the FFI to the IRS. Failure to comply with the FATCA Regulations will result in a 30% withholding tax penalty on all US source withholdable payments (as defined) made to those who are not compliant beginning 1 January 2014.
Alternative approach via an IGA
IGAs are agreements between the US and other countries that provide an alternative way to comply with the FATCA Regulations. IGAs help to reduce the burden of FATCA reporting requirements and address potential legal and data protection impediments of FATCA implementation under the Final Regulations. Failure to comply with the IGA may still result in a 30% withholding tax penalty, however only in very limited circumstances.
A Model I IGA was released on 26 July 2012 and requires FFIs to report information on accounts held by US persons and US controlled foreign entities directly to the local tax authorities in their own jurisdiction, with the local tax authority then reporting to the IRS. To date, the US Treasury Department has signed Model I IGAs with Denmark, Ireland, Mexico, Norway, Spain and the UK, and has initialled IGAs with Germany and Italy with many more expected to follow suit in the coming months.
A Model II IGA was released on 14 November 2012 and requires FFIs to enter into an FFI agreement and report information directly to the IRS. To date, the US Treasury Department has signed a Model II IGA with Switzerland.
Evolution of Ireland’s IGA
The IGA between Ireland and the US was signed on 21 December 2012. Ireland’s IGA is broadly similar to the UK IGA signed in September 2012. Notably, all IGA’s contain a “favoured nation” clause permitting the country to avail of any more favourable terms included in IGA’s subsequently negotiated by other countries with the US. Ireland’s IGA will not cover foreign subsidiaries or branches of an Irish FFI, as they will be governed by arrangements in the foreign territory where they are based.
Ireland’s Finance Act 2013
The Act introduced a provision to import Ireland’s Intergovernmental Agreement (“IGA”) that was signed on 21 December 2012 with the United States into Irish domestic tax law. The Act also gives the Revenue Commissioners the power to make regulations, including (i) the requirement for financial institutions to register in circumstances specified in the regulations; (ii) the completion of a return by a registered financial institution of information on accounts held, managed, or administered by that financial institution and (iii) the completion of a return by a registered financial institution of information on payments made to a non-participating financial institution. Draft Regulations and Guidance Notes are expected to be issued at a later date. These provisions set the framework for how Ireland complies with its obligations under FATCA.
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