Taxpayers with foreign accounts will want to take note of an agreement recently developed by the U.S. and several other countries, including France, Germany and the U.K. The "model intergovernmental agreement" is intended to implement FATCA, or the Foreign Account Tax Compliance Act. FATCA requires foreign financial institutions to report to the IRS information on accounts or insurance or annuity contracts with values above set amounts, and that are held by U.S taxpayers, or by foreign entities in which U.S taxpayers hold a substantial ownership interest.
The goal of FATCA, which was signed into law in 2010, is to reduce the risk that U.S. taxpayers use accounts outside the U.S. to evade taxes. The recent agreement "marks an important step in establishing a common approach to combating tax evasion based on the automatic exchange of information," the Treasury says.
For foreign financial institutions, FATCA has presented serious administrative and legal challenges. Among other requirements, it asks them to identify U.S. accounts, and then report to the IRS the account holder's name, address and taxpayer identification number, the account number and balance, and in some cases, gross receipts and withdrawals from the account. "FATCA significantly increases the amount of data that must be captured and analyzed, the types of payments that could be subject to U.S. withholding tax, and the number of entities that could be liable for U.S. tax on such payments," a report by PwC states. Indeed, as the intergovernmental agreement itself states, "FATCA has raised a number of issues, including that FATCA Partner financial institutions may not be able to comply with certain aspects of FATCA due to domestic legal impediments."
Two versions of the agreement were released: reciprocal and non-reciprocal. Both establish a framework within which financial institutions can report account information to their own tax authorities, which then will be automatically exchanged under existing bilateral tax treaties or tax information exchange agreements. They also call for the development of a common reporting and exchange model.
The reciprocal version of the model, as its title suggests, also provides for the United States to exchange the information it currently collects on accounts held in U.S. financial institutions by residents of partner countries. It states the U.S.' commitment to improve transparency and enhance the exchange relationship with its partner countries, by pursuing regulations and supporting legislation that would achieve equivalent levels of reciprocal automatic exchange. This version will be available to some countries with which the U.S. has an income tax treaty or tax information exchange agreement.
At the same time, the countries of France, Germany, Italy, Spain, the U.K. and the U.S. released a communiqué, which endorses the model agreement and calls for bilateral agreements based on the model. It reads, in part, "France, Germany, Italy, Spain, the United Kingdom and the United States will, in close cooperation with other partner countries, the OECD and where appropriate the EU, work towards common reporting and due diligence standards to support a move to a more global system to most effectively combat tax evasion while minimizing compliance burdens."