By Edward Tanenbaum, Esq.
Alston & Bird LLP, New York, NY
Those of us involved in the early stages of the Foreign Account Tax Compliance Act (FATCA) recall very well how the legislation was steamrolling down on a unilateral basis without any immediate serious attention being given to the pursuit of bilateral or multilateral alternatives to FATCA. In light of the UBS debacle, the reaction was somewhat understandable but, in any event, we have certainly come a long way since that time.
In early 2012, much to the surprise of the foreign community and tax practitioners alike, Treasury issued a joint statement with five European countries (France, Germany, Italy, Spain, and the United Kingdom) calling for an intergovernmental alternative approach to the implementation of FATCA. And, in July of this year, Treasury released a model intergovernmental agreement (IGA) designed to put that approach into play.
The impetus for the proposed IGA was, first, to provide a work-around to those foreign entities whose countries of residence have data protection, privacy, and other laws legally preventing foreign entities from complying with the provisions of FATCA, and, second, to see if other countries could be persuaded to join in a further commitment to tackle international tax evasion.
The model IGA published in July came in two flavors: reciprocal and non-reciprocal. In the former, the United States committed to reciprocating in the exchange of information relating to accounts held in the United States by residents of the foreign country. In the latter, no such reciprocal exchange of information would take place. These two model IGAs have been referred to as Model I agreements under which, in exchange for FATCA reporting of U.S. account holders or of foreign entities controlled by U.S. persons to the local foreign government (for subsequent automatic exchange of information with the United States), as well as certain other reporting of payments made to non-participating foreign financial institutions (FFIs), an FFI would be relieved of the requirements: to enter into an FFI agreement with the IRS; to be withheld against on withholdable payments made to it; to withhold on payments to non-participating FFIs (unless the FFI is also acting as a Qualified Intermediary which has assumed primary withholding responsibility); to withhold on accounts of "recalcitrant" account holders; to close accounts of recalcitrant account holders; and to withhold on passthru payments or gross proceeds. (A proposed Model II Agreement, agreed to in principle so far by Switzerland and Japan, provides for regular direct FFI reporting to the IRS per the present Proposed Regulations but with aggregate disclosure of general recalcitrant account holder information, subject to exchange of information requests by the United States.)
On September 14, 2012, Treasury announced that the United States and the United Kingdom had signed the first Model I IGA (a reciprocal version), with many more likely to come. The essential elements of the U.S./U.K. IGA, which represent a liberalization of the rules contained in the Proposed Regulations, include the following:
1. The U.S./U.K. IGA is a reciprocal Model I agreement pursuant to which the IRS has agreed to report to a certain extent on U.K. residents who have accounts with U.S. financial institutions, although the United States also commits itself to pursue equivalent levels of exchange with the United Kingdom;
2. The U.S./U.K. IGA covers all resident U.K. financial institutions (but not foreign branches located outside of the United Kingdom) and branches of non-U.K. financial institutions that are located in the United Kingdom;
3. FATCA-related reporting to be made by financial institutions to the U.K. government will be subject to automatic exchange of information under Art. 27 of the U.S./U.K. Income Tax Treaty;
4. The IGA covers "Financial Institutions", defined to mean Custodial Institutions (holding a substantial portion of their assets for the account of others), Depository Institutions (entities that accept deposits in the ordinary course of a banking business), Investment Entities (defined to mean entities that conduct as a business on behalf of a customer securities and money market investment tracking or portfolio management), and Specified Insurance companies (generally, insurance companies that issue or make payments with respect to cash value insurance contracts or annuity contracts);
5. For purposes of due diligence of pre-existing accounts, all accounts in existence at a financial institution as of December 31, 2013, will now be considered pre-existing;
6. The definition of U.S. Source Withholdable Payment does not include gross proceeds from the sale of U.S. securities;
7. The information regarding accounts held by U.S. persons and foreign entities controlled (a more liberal definition than provided by FATCA) by U.S. persons that the financial institution must report to the U.K. government and that must be exchanged by the U.K. government with the U.S. government is as follows:
a. Name, address, ID number, account number, account balance or value - commencing with respect to the 2013 and 2014 years;
b. In addition to (a) above, in the case of a Custodial Account, the total gross amount of interest, dividends, and other income paid to an account and, in the case of a Depository Account, the total gross amount of interest paid to the account, and in the case of all other accounts, the total gross amount paid to that account with respect to which the U.K. financial institution is the obligor or debtor - commencing with respect to the year 2015; and
c. In addition to (a) and (b) above, gross proceeds from the sale or redemption of property paid to an account with respect to which the U.K. financial institution acts as custodian, broker, nominee, or agent for the account holder -- commencing with respect to the year 2016.
8. Generally, the information must be exchanged by the U.K. government within nine months after the relevant calendar year, except that, with respect to 2013, the information may be exchanged by September 30, 2015.
9. In exchange for timely reporting and exchange of the information, the U.K. financial institution will not be subject to §1471 withholding, provided that the financial institution:
a. timely identifies and reports U.S. accounts to the U.K. government;
b. for 2015 and 2016, reports to the U.K. government the name of each non-participating financial institution to which it has made payments (and the amount thereof);
c. complies with the relevant registration requirements;
d. withholds 30% on U.S. Source Withholdable Payments (which does not include gross proceeds) if the financial institution is a Qualified Intermediary that has agreed to assume primary withholding responsibility;
e. in the case of all other U.K. financial institutions not described in (d), if the U.K. financial institution makes a payment to a non-participating financial institution, or acts as an intermediary with respect to such payment, it provides the immediate payor of such income with the information required for withholding and reporting to occur with respect to such payment.
10. A U.K. financial institution need not withhold with respect to accounts held by recalcitrant account holders or to close the accounts, provided that the U.K. financial institution provides the required information with respect to such accounts.
11. A U.K. financial institution is not required to withhold on gross proceeds or passthru payments, although the United States and the United Kingdom have agreed to develop alternative approaches to achieve the policy objectives.
12. With respect to related entities or branches of a U.K. financial institution that operate in jurisdictions that prevent them from becoming a participating or deemed-compliant foreign financial institution, the status of the U.K. financial institution as a deemed-compliant foreign financial institution may continue indefinitely, provided that: (1) the U.K. financial institution treats such related entities and branches as non-participating financial institutions with respect to reporting and withholding requirements of the IGA (and each of those related entities holds itself out as such to withholding agents); (2) the related entity or branch identifies U.S. accounts and reports under FATCA to the extent it is legally permitted in its country to do so; and (3) the related entity or branch does not solicit U.S. accounts held by persons that are not resident in the jurisdiction where the related party or branch is located or accounts held by non-participating financial institutions that are not established in the jurisdiction of the related entity or branch and provided that the related entity or branch is not used by the U.K. financial institution to circumvent obligations under FATCA or the IGA.
13. The U.S./U.K. IGA has a "most favored nation" clause pursuant to which the United Kingdom is to be granted the benefit of any more favorable terms under an IGA.
14. Annex I provides the detailed due diligence procedures for identifying and reporting on U.S. reportable accounts and on payments to non-participating financial institutions with respect to both pre-existing and new individual and entity accounts.
15. Annex II, which is the more interesting and heavily negotiated annex, contains a list of exempt beneficial owners (e.g., U.K. and international governmental entities and certain retirement funds); deemed-compliant financial institutions (e.g., not-for-profit entities and financial institutions with a local client base meeting certain requirements); and exempt products (e.g., certain retirement accounts or products), all of which are effectively exempt from FATCA.
As a general proposition, the U.S./U.K. IGA tracks fairly closely the reciprocal Model I IGA released in July of this year. The IRS has indicated that it is its goal to keep IGAs fairly standard and to not customize them on a country-by-country basis, except for the specifics contained in Annex II. This makes eminent sense as it will help prevent global financial institutions from having to deal with different rules of different country IGAs.
However, the IRS has acknowledged the difficulties that financial institutions will face if they are in one or more IGA countries but also operate in jurisdictions that are not governed by IGAs. The IRS is exploring ways of dealing with this situation, which means that, without more, a financial institution would potentially be governed by both IGAs and by the soon-to-be finalized regulations. It is possible that the IRS will reflect a number of IGA principles in the upcoming regulations but there surely will be differences.
As of this writing, the final regulations are expected to be released sometime in November, to be followed by a proposed FFI agreement. In the meantime, we should see any number of newly signed IGAs, something that must be acknowledged (in a positive way) to be a far cry from where we were a year ago in the FATCA timeline. Things will now be moving quickly at this point, although IGA implementing legislation in the various countries will take some time. For example, the U.K. government has released a "Consultation Document" (Sept. 18, 2012) requesting U.K. businesses and advisors to comment on the terms of the U.S./U.K. IGA, subsequent to which enabling legislation will be introduced sometime in 2013. Because the IGAs are executive agreements from Treasury's perspective, it is Treasury's position that they do not require ratification by the Senate.
This commentary also will appear in the November 2012 issue of the Tax Management International Journal. For more information, in the Tax Management Portfolios, see Tello, 915 T.M., Payments Directed Outside the United States - Withholding and Reporting Provisions Under Chapters 3 and 4, and in Tax Practice Series, see ¶7170, U.S. International Withholding and Reporting Requirements.
Copyright©2012 by The Bureau of National Affairs, Inc.