Passed as part of the Hiring Incentives to Restore Employment Act (HIRE), FATCA creates a new reporting and taxing regime for foreign financial institutions with
accountholders. FATCA adds a new Chapter 4 to the Internal Revenue Code,
essentially requiring foreign financial institutions to identify their
customers who are U.S. persons or U.S.-owned foreign entities and then report
to the IRS on all payments to, or activity in the accounts of, those persons.
The Act broadly defines foreign financial institution to comprise not only
foreign banks but also any foreign entity engaged primarily in the business of
investing or trading in securities, partnership interests, commodities or any
derivative interests therein. According to the Joint Committee on Taxation,
investment vehicles such as hedge funds and private equity funds will fall
within this definition. Firms meeting the definition must enter into agreements
with the IRS and report information annually in order to avoid a new U.S.
The response letter noted that, on February 8, 2012, Treasury and the IRS issued comprehensive proposed regulations, which addressed many of the concerns that had been expressed regarding potential administrative burdens in implementing FATCA. In finalizing the proposed regulations, Treasury and the IRS continue to engage with
U.S. and foreign financial
institutions in order to implement the statute in a way that appropriately
balances its compliance objectives with the burdens imposed.
The Treasury response letter also noted that the law in many jurisdictions would prevent foreign financial institutions from directly reporting to the IRS the information required by FATCA. Thus, under the statute, absent the cooperation of foreign governments,
U.S. financial institutions would
be required to withhold on payments to foreign financial institutions, and
FATCA would fail to achieve its objective of fighting offshore tax evasion
through increased information reporting.
The Joint Statement reflects a shared commitment with
France, Germany, Italy,
Spain, and the United Kingdom
to cooperate to address the legal conflicts that might otherwise interfere with
the implementation of FATCA. Since issuing the Joint Statement the Treasury
Department has worked closely with representatives of those countries to
develop a model intergovernmental agreement for the implementation of FATCA,
which was released on July 26.
The Model Agreement is intended to be used as the basis for concluding bilateral agreements for the implementation of FATCA on a government-to-government basis, building on a longstanding history of bilateral information exchange. The first bilateral agreement was signed with the
on September 12, 2012.
United States, noted Treasury, many
foreign governments are trying to address offshore tax evasion by their
residents and need information from other jurisdictions to support their
efforts. Existing regulations already require U.S. financial institutions to
report to the IRS certain information with respect to amounts paid to
nonresidents. Treasury reasoned that the US cannot expect foreign governments
with shared policy goals and practices regarding transparency and fairness to facilitate
the reporting of the information required under FATCA by their financial
institutions if the US is unwilling to help address tax evasion under their tax
In Treasury’s view, the most straightforward approach would be to share information, in appropriate circumstances, that pursuant to existing law already must be reported to the IRS about accounts held by their residents in the
States. Accordingly, the Model Agreement
includes a reciprocal version, which contemplates information sharing by the US with
Section 6103(k)(4) of the Internal Revenue Code authorizes the IRS to share information it collects with a foreign government, but only if the
States has in effect an income tax treaty or
tax information exchange agreement with the foreign jurisdiction. Therefore,
the Treasury Department assured the Senators that it would only enter into the
reciprocal version of the Model Agreement with jurisdictions with which the United States
has in effect such an agreement.
Moreover, among those jurisdictions, the reciprocal version will be used only with foreign governments that the Treasury Department and the IRS have determined have robust protections and practices in place to ensure that exchanged information will remain confidential and will be used solely for tax purposes. The information that the
United States would agree to
exchange under the reciprocal version of the Model Agreement differs in scope
from the information that foreign governments would agree to provide to the
In fact, noted the Treasury official, the information specified to be exchanged by the IRS under the reciprocal version of the Model Agreement is limited to the information that
U.S. financial institutions
will be required under existing regulations to report to the IRS about
nonresident accounts for 2013. While the reciprocal version of the Model Agreement
includes a policy commitment to pursue equivalent levels of reciprocal
automatic exchange in the future, no additional obligations will be imposed on U.S. financial institutions unless and until
additional laws or regulations are adopted in the United States.
Treasury and the IRS pledged to continue to work closely with businesses and foreign governments to implement FATCA in a manner that reasonably balances the administrative burdens with the compliance goals. Entering into bilateral intergovernmental agreements based on the Model Agreement will be an important part of achieving that end.
By allowing foreign financial institutions to participate in FATCA by reporting information to their own government (followed by the automatic exchange of the reported information from the foreign government to the IRS), Treasury believes that bilateral intergovernmental agreements will substantially reduce the potential burdens imposed by FATCA on financial institutions, avoid foreign legal impediments to reporting, and build on existing exchange practices and common international norms for transparency.