The Treasury Department released a model intergovernmental agreement Thursday for implementing the Foreign Account Tax Compliance Act, developed in consultation with France, Germany, Italy, Spain and the United Kingdom.
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The five countries had previously released a joint statement with the U.S. when the Treasury and the Internal Revenue Service unveiled their proposed regulations for FATCA back in February (see IRS and Treasury Propose New FATCA Rules). FATCA was included as part of the HIRE Act of 2010 and requires foreign financial institutions to disclose the holdings of U.S. depositors to the IRS as a way to spur tax compliance.
The law has stirred controversy abroad with complaints about potential violations of bank secrecy laws and compliance burdens for U.S.-born expatriates and dual citizens. The intergovernmental agreements, such as those signed with the five European countries, will provide tax authorities in those nations with information about the holdings of their citizens in U.S. banks as well.
Enacted by Congress in 2010, the FATCA provisions aim to target non-compliance by U.S. taxpayers using foreign accounts. The model agreement announced Thursday with France, Germany, Italy, Spain and the U.K. marks an important step in establishing a common approach to combatting tax evasion based on the automatic exchange of information.
These five countries, along with the United States, will, in close cooperation with other partner countries, the Organization for Economic Cooperation and Development, and, when appropriate, the European Commission, work toward common reporting and due diligence standards in support of a more global approach to effectively combatting tax evasion while minimizing compliance burdens.
“Today’s announcement is an important milestone in our joint efforts to combat offshore tax evasion and make our tax systems more efficient and fair,” said Treasury Secretary Tim Geithner in a statement. “This agreement implements FATCA in a way that is targeted and effective, while also providing a foundation for further international coordination. We appreciate that France, Germany, Italy, Spain and the United Kingdom were among the first jurisdictions to join us in this important effort and we look forward to quickly concluding bilateral agreements based on today's model.”
The model agreement follows through on the commitment reflected in the joint statement issued with the same countries in February to collaborate on developing an intergovernmental approach to implementing FATCA. The model agreement is accompanied by another joint communique with France, Germany, Italy, Spain and the United Kingdom, endorsing the agreement and calling for a speedy conclusion of bilateral agreements based on the model.
There are two versions of the model agreement—a reciprocal version and a nonreciprocal version. Both versions 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. Both versions of the model agreement also address the legal issues that had been raised in connection with FATCA, and simplify its implementation for financial institutions.
The reciprocal version of the model also provides for the United States to exchange information currently collected on accounts held in U.S. 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 United States.
This version of the model agreement will be available only to jurisdictions with whom the United States has in effect an income tax treaty or tax information exchange agreement and with respect to whom the Treasury Department and the IRS have determined that the recipient government has in place robust protections and practices to ensure that the information remains confidential and that it is used solely for tax purposes. The United States will make this determination on a case by case basis.
“This morning’s announcement that an ‘Intergovernmental Agreement to Improve Tax Compliance and to Implement FATCA’ has been reached with U.K., France, Germany, Italy and Spain was anticipated and welcomed,” commented Denise M. Hintzke, global tax leader of foreign account tax compliance at Deloitte Tax LLP. “At a high level, both the reciprocal and non-reciprocal versions should help financial institutions reach important FATCA objectives, while potentially reducing costs to comply. We expect further negotiations on the specifics of what will be required in the country attachments. Much remains to be done to meet the requirements in the tight timeline, and many details are to come, but this announcement represents a significant step forward in the global exchange of information to combat tax evasion.”
However, that global exchange of information received a setback on Thursday in Congress, the same day as the integovernmental agreement was announced. The House voted 251-165 to support an amendment to the Red Tape Reduction Act sponsored by Rep. Bill Posey, R-Fla., and Gregory Meeks, D-N.Y., to stop the IRS from implementing new regulations requiring U.S. banks to disclose the identities of foreign depositors to the IRS, which would then pass along the information to their home countries. The regulations were set to take effect in January, but under the amendment that passed on Thursday, they would be postponed until the U.S. unemployment rate declines to 6 percent.
The prospects for passage of the amendment in the Senate are uncertain. Sen. Marco Rubio, R-Fla., has been building support for introducing similar legislation in the Senate, but he told the Orlando Sentinel he prefers to go a different route for pressuring the IRS to withdraw the regulations. Lawmakers argue that the regulations discourage foreigners from depositing their money in U.S. banks. The Treasury Department counters that it is merely requiring the same information to be reported on foreign depositors that it requires from U.S. citizens, and delaying implementation of the regulations impedes the IRS's efforts to crack down on offshore tax havens.
FATCA was enacted in 2010 by Congress as part of the Hiring Incentives to Restore Employment Act. FATCA requires foreign financial institutions 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.
The Treasury Department and the IRS said they would continue to work with other governments and with businesses to implement FATCA and to achieve maximum consistency and standardization in the technical implementation of the agreed information exchange, including by providing more detailed guidance as necessary.
Updates and further information on FATCA can be found by visiting the FATCA page on www.IRS.gov.