FATCA 'versus' IGAs

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By Edward Tanenbaum

Alston & Bird LLP, New York, NY

A FATCA issue that has recently bubbled up relates to the differing approach to FATCA compliance by the U.S. Treasury and the governments of some countries, notably, the United Kingdom and Canada, with respect to the self-certification requirements for new individual account openings under an Intergovernmental Agreement (IGA). Both sides appear to make good arguments for their respective positions but, until resolution of the issue is obtained, foreign financial institutions (who are in the middle) will suffer.

Annex I of the IGA between the United Kingdom and the United States sets forth the due diligence obligations of U.K. financial institutions with respect to financial accounts. Section III(B), relating to the specific due diligence requirements for the establishment of new individual accounts, provides that, upon an account opening, the Reporting U.K. Financial Institution must obtain a self-certification that enables the financial institution to determine whether the account holder is resident in the United States for tax purposes (and, for this purpose, U.S. citizens are included whether or not resident in the United States). Section III(C) further provides that if the self-certification establishes that the account holder is resident in the United States, the reporting financial institution must treat the account as a U.S. reportable account.

Annex I of the U.S.–Canada IGA similarly provides in Section (B)(1) that a Canadian financial institution must obtain a self-certification sufficient to enable the financial institution to determine whether the account holder is resident in the United States for tax purposes and, if so, Section (B)(4) provides that the account must be treated as a U.S. reportable account.

Sounds good so far. Now, what happens if the self-certification is ambiguous or is simply not provided? That's where it gets interesting.

The U.K. Guidance implementing FATCA, and, in particular, the due diligence procedure for the establishment of new individual accounts, provides in Section 4.10 that if the U.K. financial institution is unable, for whatever reason, to obtain the self-certification, the account should then be treated as a reportable account from the date that the account is opened.

The Canadian Guidance implementing FATCA is similar. It provides in Section 9.15 that if the self-certification is not provided by the account holder, the account is to be treated as a reportable account. The Canadian Guidance, however, goes further and emphatically states in Section 9.16 that the IGA in no way requires or encourages a Canadian financial institution to refuse to open an account or otherwise deny service.

Against that backdrop, the IRS, in its Frequently Asked Questions (FAQs), recently added Question 10 to the section dealing with General Compliance. The question posed is whether, if a Reporting Model 1 FFI or a Reporting Model 2 FFI, in applying the due diligence procedures in Section III(B) of Annex 1 of the IGA, cannot obtain the self-certification upon the opening of new individual accounts, can the financial institution, nevertheless, open the account and treat it as a U.S. reportable account? The IRS responds "no," stating that, pursuant to Section III(B) of Annex 1 of the IGA, the financial institution must obtain the self-certification at account opening, failing which the financial institution cannot open the account.

The IRS is of the view that the language of the IGA/Annex is clear, i.e., the financial institution must obtain the certification, with the implication being that the account must be closed if the financial institution cannot obtain it. However, the IGA Annex, admittedly, is not that clear and it does not provide any indication of what the consequence is if the self-certification cannot be obtained. The IRS maintains that it does not make sense to allow the account to be opened and to then have the financial institution report on the account when it's quite possible that the account is not U.S.-owned. It would simply encourage incorrect reporting. The IRS is seemingly also saying that the provisions of FATCA would be frustrated if, in connection with the establishment of new accounts (not pre-existing accounts), the financial institution is not held to a higher standard when the account is first being opened.

On the other hand, the United Kingdom and Canada apparently take the position that the IGA is a binding legally enforceable agreement and that each country has the right to interpret its provisions, especially if there is a degree of ambiguity as to what should happen if the self-certification, as in this case, is not obtained. One can also imagine that the thinking on the part of the United Kingdom and Canada is simply that if FATCA is supposed to act as a disclosure/reporting statute (and less as a revenue collection statute, at least in theory), then why should the account be closed. After all, if it becomes a reportable account, isn't the financial institution complying with the essence of FATCA, i.e., disclosure? How can that be viewed as incorrect and why should a financial institution be required to close the account if it is willing to disclose all of the relevant information to the U.S. government?

Needless to say, this difference of opinion can create havoc for financial institutions who need clarity as to the procedures. For example, banks operating in multiple jurisdictions will need certainty and will want a consistent set of rules. Some tax practitioners have pointed out the competitive advantages/disadvantages of having some banks in some jurisdictions applying different concepts.

More importantly, this is a broader issue than just individual new account self-certification. For example, the FATCA regulations define FFIs to include certain holding companies and treasury centers, categories that (to most people) are clearly not included in the IGAs. Guidance issued by a number of foreign countries in the implementation of their IGAs confirm this to be the case. On the other hand, the U.K. guidance at one time incorporated both holding companies and treasury centers into the definition of an FFI, although it has now backed off of that in a recent pronouncement.  The IRS has danced around this particular issue.

Thus, there are a number of issues on which governments have differing interpretations of IGA provisions and interested parties have encouraged the Treasury and foreign governments to come together and deal with them. The alternative will be an unworkable and inconsistently applied FATCA statute.

This commentary also will appear in the August 2015 issue of the  Tax Management International Journal. For more information, in the Tax Management Portfolios, see Nauheim, Cousin, Ewell, Limerick, Lakritz, and Lee, 6565 T.M., FATCA — Information Reporting and Withholding Under Chapter 4,  and in Tax Practice Series, see ¶7160, U.S. Income Tax Treaties, ¶7170, U.S. International Withholding and Reporting and FATCA.

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