Model II IGA Released
The U.S. Treasury published the Model II Intergovernmental Agreement (IGA) to facilitate the implementation of FATCA. Like Model I that was issued earlier this year, the Model II IGA is intended to provide an alternative regime to the FATCA regulations should a country choose to enter into it. In both models, the cornerstone to participation is existence of an information exchange arrangement under a TIEA or treaty between countries.
As was announced in the February 8, 2012 Joint Statement issued by the governments of the United States, France, Germany, Italy, Spain, and the United Kingdom, the FATCA rules impose information reporting requirements on foreign financial institutions (FFIs) where local law imposes legal restrictions on reporting, withholding, and account closure requirements. The Joint Statement 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 the Model I IGA were released on July 26, 2012, establishing a framework for reporting by financial institutions of certain financial account information to their respective tax authorities, followed by automatic exchange of such information under existing bilateral tax treaties or tax information exchange agreements. Both versions of the Model I IGA, the reciprocal and the nonreciprocal version, establish a framework for reporting by financial institutions of certain financial account information to their respective tax authorities, followed by automatic exchange of such information under existing bilateral tax treaties or tax information exchange agreements depending on the version chosen.
Similar to the first model, the second model IGA relies on existing bilateral tax treaties or tax information exchange agreements. Model II, as described in an Announcement in June 2012, was developed with the governments of Japan and Switzerland allowing for direct reporting by FFIs to the IRS. As was the case in Model I, notable differences were found from the requirements provided in the proposed regulations:
- Financial Institution – As first modified by Model I, the definition of Financial Institution (FI) has been modified from the broad third category in the regulations to include any entity that is primarily engaged in the business of investing, reinvesting, or trading in securities, commodities, partnership interests, etc. to now include an "Investment Entity." As defined, that includes "any entity that conducts as a business (or is managed by an entity that conducts as a business)" trading, portfolio management, or investing, administering, or managing funds "for or on behalf of a customer."Given this definition, it appears that fund managers, as well as the funds they manage, are considered FIs.
- U.S. Account – an account shall be treated as a U.S. account only if identified as such after application of the due diligence procedures defined in Annex 1 of the Model.
- Non-Consenting U.S. Account – defined as a preexisting account with respect to which the reporting FATCA Partner Financial Institution has determined that:
- It is a U.S. account in accordance with the due diligence procedures in Annex I,
- The laws of the FATCA Partner prohibit the reporting required under an FFI Agreement absent consent of the Account Holder,
- the Reporting FATCA Partner Financial Institution has sought, but was unable to obtain, the required consent to report or the Account Holder's U.S. TIN; and
- the Reporting FATCA Partner Financial Institution has reported, or was required to report, aggregate account information to the IRS as prescribed under the FATCA regulations
- Account holder – included in the definition is a person - other than the financial institution - holding a financial account for the benefit or account of another person as agent, custodian, nominee, signatory, investment advisor, or intermediary, is not treated as holding the account for purposes of this Agreement, and such other person is treated as holding the account.
- NFFE: defined in Model II as a non-U.S. entity that is not an FFI as defined in FATCA regulations. It also includes any non-U.S. entity that is organized under the laws of the FATCA Partner or another Partner jurisdiction and that is not a financial institution.
- Passive NFFE: in addition to any NFFE that is not an active NFFE or a withholding foreign partnership or withholding foreign trust.
Foreign Partner Directive for Model II
Model II states that the FATCA Partner will direct and enable its financial institutions to register with the IRS by January 1, 2014 and to comply with requirements of an FFI agreement with respect to due diligence for new and preexisting accounts, withholding and reporting.
Pursuant to the treaty between the U.S. and the FATCA partner, the IRS may make group requests to the FATCA partner Competent Authority for all information about non-consenting US accounts and foreign reportable amounts paid to Non-participating FFIs under Article 2 of the Model II Agreement.
The language is vague as to whether a partner FI will be required to enter into an FFI Agreement on not. Looking back to the June 2012 press releases, for Japan the language states that "The Japanese authorities would agree to direct and enable financial institutions in Japan, not otherwise exempt or deemed compliant pursuant to the Framework, to register with the IRS and confirm their intention to comply with official guidance issued by the FSA that is consistent with the obligations of participating FFIs under FATCA" whereas the release for Switzerland states that the government of "Switzerland would agree to direct all Swiss financial institutions, not otherwise exempt or deemed compliant pursuant to the Cooperation Agreement, to conclude an FFI Agreement with the U.S. Internal Revenue Service."
Presumably when a government concludes a Model II IGA, it will state what a Partner FI will be required to do with respect to entering an FFI Agreement.
Suspension of withholding requirements
The U.S. will not require FATCA withholding or closure for recalcitrant accounts. If the FATCA Partner Competent Authority does not exchange information requested by the IRS within 6 months of the receipt of the request, the Reporting FATCA Partner FI shall be required to treat the account as held by a recalcitrant account holder as defined in the regulations and to withhold tax where required by the regulations.
The requirements of Model II rely on self-certifications to further document new accounts held by individuals and to cure instances of U.S. indicia for preexisting accounts. For new accounts, a FATCA Partner FI must obtain a self-certification from the account holder upon account opening to determine whether the account holder is a U.S. resident for tax purposes (the definition of which includes a US citizen), even if the account holder is also a tax resident of another country. Like Model I, the Partner FI must confirm the "reasonableness" of the self-certification based on the information it obtains under AML and KYC. Model II does not provide details regarding how this determination is to be made nor does it provide information regarding what a Partner FI should do if it cannot confirm such reasonableness.
Similar to Model I IGA, Model II contemplates that the agreeing FATCA Partner will define the list of entities, plans and products that should be considered exempt beneficial owners, deemed compliant FFIs or exempt products under FATCA.
Annex II defines a deemed compliant category for small financial institutions with a local client base. To qualify a FATCA partner institution must:
- be licensed and regulated under the laws of the FATCA partner,
- have no place of business outside the FATCA partner,
- not solicit account holders outside the FATCA partner,
- be required to withhold or information report on residents of FATCA partner,
- have at least 98 percent of accounts by value must be held by residents of FATCA partner,
- not maintain accounts for any specified US person that is not a resident of FATCA partner or for a non-participating FFI or a passive NFFE with controlling US persons,
- implement policies and procedures to monitor whether it provides such accounts and report or close any such accounts,
- review its preexisting accounts to identify any such accounts and report or close any such accounts identified,
- have each related entity be incorporated in FATCA partner and meet these requirements, and
- not have policies or practices that discriminate against opening or maintaining accounts for US individuals who are residents of FATCA Partner.
Annex II also provides a registered deemed compliant category for certain collective investment vehicles. An investment entity that is a collective investment vehicle regulated under the laws of FATCA Partner is deemed compliant if all of the interests in the collective investment vehicle are held through one or more financial institutions that are not non-participating FFIs.
A collective investment vehicle will not fail to qualify solely because it has issued physical shares in bearer form, provided that it does not issue any physical bearer shares after December 31, 2011, it performs due diligence under Annex I and reports if required when the shares are presented for redemption or payment. In addition, it must have policies and procedures in place to redeem such shares as soon as possible and in any event before January 1, 2017.
Modification of limited FFI rule
Similar to Model I, the Model II IGA permits a FATCA Partner FI's related entity or branch to operate as a limited FFI indefinitely as long as:
- Each such entity or branch is identified as a separate NPFFI
- Each NPFFI reports identifies and reports U.S. accounts to the extent permitted
- No NPFFI specifically solicits U.S. accounts that are held by nonresidents or NPFFIs that are not established in the country where the limited FFI is located
- The FATCA Partner FI does not use the limited FFI in its group to circumvent the obligations under its Agreement.
Consistent with the Model I and FATCA regulation timelines delayed by Announcement 2012-42, Model II adopts all of the same effective dates. That is, Partner Country FIs must register by January 1, 2014 and begin to comply with new account procedures on that date. In addition, enhanced review procedures for preexisting high value accounts must be completed by December 31, 2014 and due diligence reviews for lower value accounts must be completed by December 31, 2015.
Partner countries will be directed to enter and comply with an FFI Agreement, which presumably will reflect the due diligence, withholding and reporting rules under the regulations. The interplay between the regulations and Annex I remains unclear at present. For instance, withholding on gross proceeds may become a possibility in 2017.
A collective investment vehicle will not fail to qualify for deemed compliant status under Annex II solely because it has issued physical bearer shares provided that, among other conditions, it redeems those bearer shares before January 1, 2017. It may be difficult to meet that requirement, since the presentation of the bearer shares is not an event within the control of the collective investment vehicle. Also, because many other entities have issued bearer shares, it may be that the issues faced by collective investment vehicles that have issued bearer shares are also faced by those other entities.
For your reference
The Model II IGA can be accessed by clicking FATCA-Model-2-Agreement-to-Implement-11-14-2012.pdf (386 KB)
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