Treasury Pursues Frameworks with Japan and Switzerland for Effective FATCA Compliance

The Department of the Treasury has jointly issued statements with Japan and Switzerland expressing mutual intent to pursue a framework for intergovernmental cooperation to facilitate the implementation of the Foreign Account Tax Compliance Act (FATCA) and improve international tax compliance based on the existing bilateral tax treaties between the U.S. and Japan and Switzerland.

The statements offer a framework for cooperation to facilitate FATCA implementation by supplementing direct reporting under FATCA by Japanese and Swiss financial institutions with exchange of information on request pursuant to the bilateral income tax treaty with Japan and Switzerland. 

FATCA was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) 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. 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. Foreign financial institutions 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.

FATCA is an important part of the U.S. government’s effort to improve tax compliance. The intergovernmental framework announced provides a second model for implementing FATCA in a way that addresses domestic legal impediments and reduces burdens on financial institutions, said Acting Assistant Secretary for Tax Policy Emily S. McMahon.

The framework contemplated in the joint statements 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 Internal Revenue Service , supplemented by information exchanged between the Japanese and Swiss governments and the United States government upon request.

Previously, the Treasury Department jointly issued a statement with France, Germany, Italy, Spain and the United Kingdom expressing mutual intent to pursue a government-to-government framework for implementing FATCA.  The model contemplated in the prior joint statement (Model I)  differs from the model just announced in that it contemplates reporting by foreign financial institutions (FFIs) to  their respective governments, followed by the automatic exchange of this information with the United States.  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 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.