November 14, 2012: U.S. Treasury Announces Second Model IGA for Cooperation to Facilitate the Implementation of FATCA
Foreign Account Tax Compliance Act (FATCA)
While the definitions are substantially similar to those in the Model I IGA, the Model II IGA relies on the Proposed FATCA Regulations in many instances
On November 14, 2012, the Treasury released the second Model Intergovernmental Agreement (IGA) for Cooperation to Facilitate the Implementation of FATCA (Model II IGA). While the definitions are substantially similar to those in the Model I IGA, the Model II IGA relies on the Proposed FATCA Regulations in many instances and addresses compliance in a different manner. Below is an analysis of the substantive changes presented by section.
Articles 1 & 2
Unlike the Model 1 IGA, the Model II IGA relies heavily on the existing rules and terminology in the FATCA regulations. In fact, under the Model II IGA, terms not specifically defined within the document will have “the meaning set forth in relevant U.S. Treasury Regulations but does not include any account, product or arrangement identified as excluded from the definition of Financial Account in Annex II.” Moreover, the Model II IGA requires foreign financial institutions (FFIs) within the FATCA Partner country to register with the IRS as a participating (Reporting) FFI by January 1, 2014 and comply with the FFI agreement.
For pre-existing individual accounts, the Model II IGA requires Reporting FFIs to obtain a U.S. taxpayer identification number (TIN) for the account holder and consent to report account information. Reporting FFIs must notify account holders in writing that if a U.S. TIN and consent are not provided that it will report aggregate information about the account to the IRS, that this information may cause the IRS to request specific information from the partner country, that the account information will be transmitted to the partner countries tax administration, and that the partner country tax administration may exchange this information with the IRS. Finally, for pre-existing U.S. accounts, the FFI must report the required aggregate information annually to the IRS on any non-consenting accounts in the time and manner required by an FFI Agreement and relevant U.S. Treasury Regulations.
For pre-existing nonparticipating financial institutions clients that exist as of December 31, 2013, the Model II IGA requires Reporting FFIs to request consent to report from such clients with respect to calendar years 2015 and 2016, provide the same notification as those required to be given to U.S. account holders as outlined above, and with respect to calendar years 2015 and 2016, report to the IRS the number of non-consenting Nonparticipating Financial Institutions to which Foreign Reportable Amounts were paid during the year and the aggregate value of all such payments no later than March 15 of the year following the year to which the information relates.
For new accounts identified as U.S., Reporting FFIs must obtain, from each Account Holder, consent to report consistent with the requirements of an FFI Agreement as a condition of account opening. Additionally, for new accounts or obligations entered into with nonparticipating FFIs after January 1, 2014, the Reporting FFI must obtain consent to report that is consistent with the requirements of an FFI Agreement as a condition of opening the account, or entering into the obligation.
Request for Information by U.S. Competent Authority
The Model II IGA outlines a request process in which the U.S. Competent Authority can request that the foreign Competent Authority in the foreign country report information regarding non-consenting and nonparticipating account holders in the same manner it would have received the information had consent been obtained. The Article gives the foreign Competent Authority six months to fulfill the request for information.
Withholding and Account Closure
If the Reporting FFI and foreign Competent Authority comply with Article 2 of the Model II IGA, the Reporting FFI will not be required to withhold on or close recalcitrant accounts. However, if the Foreign Competent Authority does not comply with an information request, withholding will be required six months after the information request was made and end when the information request has been fulfilled.
In contrast from the Model I IGA, the Model II IGA reduces the period in which a Reporting FFI is deemed a nonparticipating FFI for significant non-compliance from 18 months to 12 months. This article also states that the U.S. Competent Authority and the Foreign Competent Authority shall enter into an agreement to establish the information request procedures in Article 2 for non-consenting and nonparticipating accounts, and establish the rules and procedures for consultation on significant non-compliance.
Favored Nations Clause
Article 6 of the Model II IGA adds a favored nation clause similar the those found in the UK and Denmark signed IGAs (based on the Model I IGA) which provides that a foreign country can benefit from more favorable terms if such terms are afforded to another FATCA Partner Country. Under the clause, the United States will notify the foreign country of any such more favorable terms and shall apply those terms automatically under the agreement as if they were specified in this agreement. The terms will be effective as of the effective date of the agreement, unless the foreign country declines the application.
Due Diligence Obligations
Generally, Annex I is substantially similar to the version contained in the Model I IGA. However, in identifying U.S. Reportable Accounts and accounts held by Nonparticipating Financial Institutions, the balance or value of an account will be determined as of the last day of the calendar year. The Model II IGA does not allow for an “appropriate reporting period” in lieu of the last day of the calendar year, as the Model I IGA permitted.
Non-Reporting Institutions and Products
The Model II IGA retains the same framework of categories for non-reporting Financial Institutions and products, but provides specific guidance on what institutions are treated as Exempt Beneficial Owners and Deemed-Compliant Financial Institutions as well as what accounts and products are treated as Exempt Products. They are as follows:
- Exempt Beneficial Owners
- Governmental Entities
- Central Banks
- Retirement Funds
- Deemed-Compliant Financial Institutions
- Small Financial Institutions with Local Client Base
- Certain Collective Investment Vehicles
- Exempt Products
- Certain Retirement Accounts or Products
- Certain Other Tax-Favored Accounts or Products
Full article with detailed Model I IGA vs. Model II IGA comparison and U.S. Department of the Treasury’s announced second model Intergovernmental Agreement are available for download. For more information please contact a FATCA Leader or click here.