The U.S. Treasury Department said it reached agreements with both Switzerland and Japan to cooperate on a framework for sharing financial information on bank accounts under the Foreign Account Tax Compliance Act.

FATCA, which was included as part of the HIRE Act of 2010, requires foreign financial institutions to report on the bank accounts and assets of U.S. taxpayers or face stiff penalties. Foreign banks, expatriate groups and dual citizens have raised alarms about the requirements, and the IRS and Treasury Department have elected to phase in the requirements over the next few years. In addition, the U.S. has announced a deal in a previous joint statement with five European countries, including the United Kingdom, France, Germany, Italy and Spain, to share information with them on their taxpayers who have holdings in U.S. banks (see IRS and Treasury Propose New FATCA Rules).

The statement with Switzerland represents a breakthrough as the U.S. Justice Department and the IRS have pursued several Swiss banks, such as UBS and Credit Suisse, that encouraged U.S. citizens to open secret bank accounts. The statement with Japan expands the agreements beyond Europe to Asia.

The joint statements with Switzerland and Japan express a mutual intent by the U.S., Switzerland and Japan to pursue a framework for intergovernmental cooperation to facilitate the implementation of FATCA and improve international tax compliance based on the bilateral tax treaty between the United States and Switzerland. The two statements differ from the earlier one with the U.K. , France, Germany, Italy and Spain, using a different framework for cooperation to facilitate FATCA implementation by supplementing direct reporting under FATCA by Swiss and Japanese financial institutions with exchange of information on request pursuant to the bilateral income tax treaties with Switzerland and Japan. 

“FATCA is an important part of the U.S. government’s effort to improve tax compliance,” said Acting Assistant Secretary for Tax Policy Emily S. McMahon in a statement. “The intergovernmental framework announced today provides a second model for implementing FATCA in a way that addresses domestic legal impediments and reduces burdens on financial institutions. We welcome Switzerland’s willingness to strengthen and improve their cooperation with the United States in combating international tax evasion.”

The framework contemplated in the joint statement issued Thursday represents a second model for an intergovernmental approach to improving tax compliance and implementing FATCA (Model II). Model II establishes a framework of direct reporting by foreign financial institutions to the IRS, supplemented by information exchanged between the Swiss government and the United States government upon request.

The previous joint statement with France, Germany, Italy, Spain and the United Kingdom expressed mutual intent to pursue a government-to-government framework for implementing FATCA. The model contemplated in this prior joint statement (known as Model I) differs from the model announced Thursday in that it contemplates reporting by foreign financial institutions, or FFIs, to  their respective governments, followed by the automatic exchange of this information with the United States. The Treasury, in consultation with the jurisdictions participating in the joint statement issued in February, has been developing a model agreement that will serve as the basis for bilateral agreements with countries interested in adopting the intergovernmental framework contemplated in Model I and aims to publish this model soon.

Both intergovernmental models for implementing FATCA represent an important step toward addressing legal impediments to financial institutions’ ability to comply with the regulations, the Treasury Department noted.

The frameworks contemplated in the joint statements will serve as alternative models for the United States’ work with other countries, as Treasury officials continue to engage in discussions with foreign governments about the effective and efficient implementation of FATCA by their financial institutions.  

Dr. Tony Wicks, director of AML Solutions at NICE Actimize, a provider of financial crime, risk and compliance software, noted that the Swiss agreement represents a dramatic change in behavior for Switzerland.

“The Swiss Department of Finance has said that it should reach a resolution on outstanding tax issues with the US by the end of the year,” he said. “This, coupled with the announcement of an IGA (inter-governmental agreement) on FATCA would demonstrate that the walls of banking secrecy are starting to crumble. Banking secrecy has been Switzerland's life-blood. It's a fundamental change that will mean that some Swiss institutions will need to re-consider their business models and compete on an even keel with international counterparts. Switzerland was the kingpin, and with this change, we'll see other countries fall in place with IGAs. If not, banks in those countries will be disadvantaged in terms of implementing FATCA.

“The change underlines the fact that tax transparency is of primary concern to all governments and that FATCA is here to stay,” Wicks added. “There will be quite a bit of vacation working this summer as institutions try to get programs on track to meet the 2013 deadlines, especially pending the release of final regulation from the IRS.”

Why the different reporting approach for Switzerland? “It looks like Swiss banks will report details of accounts directly to the IRS, rather than through their local government, the FATCA partner arrangement defined in the regulation,” said Wicks “This has benefits. It means that they will have certainty associated with reporting requirements once the final regulation is released rather than having to wait for local government agreement and clarifications. Institutions need certainty to get on with their FATCA programs. System change takes time, and deadlines in 2013 are not that far away."

As for the agreement in Japan, Wicks sees signs that the Asia Pacific region is already taking FATCA seriously. “Tied to recent updates of anti-money laundering regulations in Hong Kong and Japan, institutions are looking to meet FATCA regulation efficiently as part of wider programs,” he said.”The agreement itself reflects the strong political ties between the U.S. and Japan and will work as a lever to bring the rest of the APAC region into line with FATCA. Japan, Singapore and Hong Kong, as dominant economies in the region, have all been involved in the IRS lobbying process on FATCA. If Singapore enters an agreement, then it's probably game-over in terms of other jurisdictions.”

FATCA was enacted in 2010 by Congress as part of the Hiring Incentives to Restore Employment Act. FATCA requires FFIs to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. In order to avoid withholding under FATCA, a participating FFI will have to enter into an agreement with the IRS to identify U.S. accounts, report certain information to the IRS regarding U.S. accounts, and withhold a 30 percent tax on certain U.S.-connected payments to non-participating FFIs and account holders who are unwilling to provide the required information. 

Registration will take place through an online system that will become available by Jan. 1, 2013. FFIs that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to U.S. investments.

The Treasury and the IRS said they would continue to work closely with businesses and foreign governments to implement FATCA effectively. Updates and further information on FATCA can be found by visiting the FATCA page on www.IRS.gov.