The Treasury Department said Wednesday the U.S. has signed intergovernmental agreements with both Canada and Hungary to implement the Foreign Account Tax Compliance Act, or FATCA, in an effort to discourage offshore tax evasion.
FATCA was included as part of the HIRE Act of 2010 and requires foreign financial institutions to report on the holdings of U.S. citizens or else face stiff penalties. The law has provoked controversy abroad with foreign governments and banks, as well as U.S.-born expatriates and dual citizens, who have been finding it difficult to open accounts and do business at many banks. The Republican National Committee recently voted to call for the repeal of FATCA and plans to make it a campaign issue this year (see RNC to Vote on Resolution to Repeal FATCA).
In an effort to alleviate the concerns of foreign governments about their own bank secrecy laws, the Treasury Department has been negotiating a series of intergovernmental agreements under which it also agrees to share information about their citizens and residents who have accounts at U.S. banks.
The latest agreements were signed this week with the governments of Canada and Hungary. Agreements with Italy and Mauritius to exchange tax information were also recently assigned since December, the Treasury announced. So far, the U.S. has signed 22 intergovernmental agreements and has 12 agreements in substance to date.
“FATCA implementation is critical to combatting international tax evasion and promoting transparency,” said Deputy Assistant Secretary for International Tax Affairs Robert B. Stack in a statement. “The agreements announced today clearly demonstrate the considerable international support behind FATCA and we are proud to lead the global charge on this pressing issue.”
Governments have two options for complying with FATCA. They can either permit their foireign financial institutions to enter into agreements with the IRS or they can themselves enter into one of two alternative Model IGAs with the U.S.
Under a Model 1 agreement, FFIs report the relevant information to their respective governments, which then relay that information to the IRS. In contrast, a Model 2 agreement allows FFIs to provide relevant information to the IRS themselves, with government-to-government cooperation serving to facilitate reporting when necessary to overcome specific legal impediments.
Each of the countries in the Thursday's announcement—Canada, Hungary, Italy, and Mauritius—signed reciprocal Model 1 agreements. This means that the U.S. will also provide tax information to these governments regarding individuals and entities from their jurisdictions with accounts in the United States.
The Treasury and the IRS said they would continue to work to finalize all related FATCA guidance so that FFIs and withholding agents have time to prepare and comply when withholding goes into effect on July 1, 2014. Updates and further information on FATCA can be found by visiting the Treasury Department's FATCA page here.