FATCA Highlights Volume 6
 

FATCA Highlights Volume 6

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On November 14, 2012, the United States govern¬ment published the Model 2 intergovernmental agreement (“Model 2 IGA”) to implement the Foreign Account Tax Compliance Act (“FATCA”).1 The Model ...

On November 14, 2012, the United States govern¬ment published the Model 2 intergovernmental agreement (“Model 2 IGA”) to implement the Foreign Account Tax Compliance Act (“FATCA”).1 The Model 2 IGA is based, in large part, on the Model 1 intergov¬ernmental agreement (“Model 1 IGA”) released on July 26, 2012, but there are important differences.

For more insight on FATCA, visit http://www.navigant.com/insights/hot-topics/fatca-compliance/.

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FATCA Highlights Volume 6 FATCA Highlights Volume 6 Document Transcript

  • G L O B A L I N V E S T I G AT I O N S & C O M P L I A N C EFATCA HighlightsClient Alert: Model 2 IGA ReleasedA Cross Between the Proposed Regulations and Model 1 IGAReleased November 2012Volume 6By Ellen Zimiles, Richard Kando, Jeffrey Locke and Salvatore LaScala
  • I. IN T RO D U C T I O N A. Due Diligence On November 14, 2012, the United States govern- The due diligence requirements for the Model 2 ment published the Model 2 intergovernmental IGA are similar to the Model 1 IGA requirements. agreement (“Model 2 IGA”) to implement the Foreign A Model 2 FFI will be required to search for U.S. Account Tax Compliance Act (“FATCA”).1 The Model indicia in pre-existing individual accounts and 2 IGA is based, in large part, on the Model 1 intergov- for new individual accounts a self-certification is ernmental agreement (“Model 1 IGA”) released on required. For entity accounts, the Model 2 FFI will July 26, 2012, but there are important differences. The be required to properly classify the entity and for main differences can be seen in (a) FATCA report- certain entities, the Model 2 FFI will be required ing requirements, which attempt to address local law to determine the Controlling Person of the restrictions, and (b) potential withholding concern- entity.7 Additionally, for both pre-existing and ing recalcitrant account holders.2 The due diligence new accounts identified as U.S. accounts the requirements, the foundation of FATCA compliance, Model 2 FFI will have to request consent to report are very similar to the Model 1 IGA, and where they certain information. differ the Model 2 IGA is similar to the signed IGA B. Reporting between the United States and the United Kingdom The Model 2 IGA requires Model 2 FFIs to report (“UK Signed IGA”).3 Thus far, only Switzerland and Ja- directly to the IRS. To not violate local privacy pan have stated that they plan on using the Model 2 laws, the Model 2 FFI must request from each ac- IGA, which would require a financial institution locat- count holder of a U.S. account the account hold- ed in a country that utilizes the Model 2 IGA for their er’s U.S. TIN and his consent to report the account agreement with the United States (a “Model 2 FFI”) to information to the U.S. While requesting consent register with the Internal Revenue Service (“IRS”).4 from the account holder for pre-existing accounts, the Model 2 FFI must also inform the accountII. K EY CH AN G E S I N T HE holder that: MO D EL 2 I G A 1. Aggregate information about the In general, a Model 2 FFI will be required to “register account will be reported to the IRS; with the IRS by January 1, 2014 and comply with the requirements of an FFI Agreement, including with re- 2. Information about the account may give spect to due diligence, reporting, and withholding.”5 rise to a request by the IRS for specific The key differences between the Model 2 IGA and the information about the account; Model 1 IGA are to whom the financial institution re- 3. The account information will be ports and the addition of withholding in select scenari- transmitted to the country’s tax os for recalcitrant account holders.6 administration and 4. The country’s tax administration may exchange this information with the IRS.81 See Agreement between the Government of the United States and [FATCA Partner] for Cooperation to Facilitate the Implementation of FATCA (14 November 2012) (the “Model 2 IGA”). The Model 2 IGA is available at http://www.treasury. gov/resource-center/tax-policy/treaties/Documents/FATCA-Model-2-Agreement-to-Implement-11-14-2012.pdf.2 A recalcitrant account holder is an account holder who fails to comply with requests by the participating FFI for documentation or information required or fails to provide a valid Form W-9 upon request. Prop. Treas. Reg. § .1471-5 (g).3 See Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the United States of America to Improve International Tax Compliance and Implement FATCA (12 September 2012) (the “U.K. Signed IGA”). The U.K. Signed IGA is available at http://www.hm-treasury.gov.uk/d/facta_agreement_tax_compliance_140912.pdf.4 See Press Releases issued by the United States and Japan and Switzerland, Joint Statement from the United States and Japan Regarding a Framework for Intergovernmental Cooperation to Facilitate the Implementation of FATCA and Improve International Tax Compliance available at http://www.treasury.gov/press-center/press-releases/Documents/FATCA%20Joint%20Statement%20US-Japan.pdf and Joint Statement from the United States and Switzerland Regarding a Framework for Cooperation to Facilitate the Implementation of FATCA available at http://www.treasury.gov/press-center/press-releases/Documents/FATCA%20Joint%20Statement%20US-Switzerland.pdf.5 Model 2 IGA, Article 2.16 For more information on the U.K. Signed IGA and the Model 1 IGA see Navigant’s previously published white papers relating to the U.K. Signed IGA and the Model 1 IGA entitled, First FACTA Intergovernmental Agreement Signed between the United States and the United Kingdom: Key Additions to the Model Agreement and Interpretation by the HMRC and the Model 1 IGA entitled, Saying What They Mean and Meaning What They Say, How the Model Intergovernmental Agreement Makes FATCA and AML Compliance More Consistent, respectively, (August 2012) available at www.navigant.com/fatca.7 Controlling Persons is defined as “natural persons who exercise control over an entity. In the case of a trust, such terms means the settlor, the trustees, the protector (if any), the beneficiaries or class of beneficiaries, and any other natural person exercising control over the trust, and in the case of a legal arrangement other than a trust, such term means persons in equivalent or similar positions. The term ‘Controlling Persons’ shall be interpreted in a manner consistent with the Recommendations of the Financial Action Task Force.” Model 2 IGA, Article 1 (ff).8 Model 2 IGA, Article 2.1.1 | FATCA HI G HL I G HTS | VOLUME 6
  • Thus, the Model 2 IGA also necessitates the The Model 2 IGA specifically states that fi- Model 2 FFI apply pressure on the account holder nancial institutions that want to meet certain to consent by stating that even if the account exceptions to the requirements of FATCA holder does not consent, the IRS can still obtain compliance (“Deemed-Compliant Financial account information on the account holder from Institutions”) “must not have policies or prac- the home country’s tax authority. tices that discriminate against opening or C. Withholding maintaining accounts for individuals who are Specified U.S. Persons and who are residents A Model 2 FFI will not be required to withhold of [FATCA Partner]”9 from a recalcitrant account holder if the Model 2 FFI complies with the reporting requirements out- 2. Select Collective Investment Vehicles Are lined in the Model 2 IGA and the local tax author- Deemed-Compliant ity turns over the account information to the IRS Certain investment entities that are collective upon request. On the other hand, if these condi- investment vehicles can be Deemed Com- tions are not met, the Model 2 FFI will be required pliant Financial Institutions and subject to less to withhold. For instance, if the account holder stringent rules concerning FATCA compliance. does not consent to reporting, and, as required, Collective investment vehicles can the Model 2 FFI passes the information to its tax be considered Deemed Compliant Financial administrator, but the tax administrator does not Institutions if they are regulated under the give the account holder information to the IRS, laws of the FATCA Partner Country, and “if all the Model 2 FFI will have to withhold on the recal- of the interests in the collective investment citrant account holder. vehicle (including debt interests in excess of D. Other Notable Changes: Annex II $50,000) are held by or through one or more 1. Local Deemed-Compliant Financial Institu- Financial Institutions that are non Nonpartici- tions Cannot Discriminate Against Specified pating Financial Institutions.”10 U.S. Persons Below is a high-level summary of some of the key similarities and differences between the Model 1 IGA and the Model 2 IGA. SUMMARY OF KEY SIMILARITIES & DIFFERENCES BETWEEN THE MODEL 1 IGA AND THE MODEL 2 IGA FFI CHALLENGE MODEL 1 IGA MODEL 2 IGA New Account On-boarding – Self-certification & Self-Certification Individual Accounts Consent When Necessary New Account On-boarding – Proper Classification & Diligence Proper Classification Entity Accounts Consent When Necessary Due Pre-existing Account Analysis – Search for U.S. Indicia & Search for U.S. Indicia Individual Accounts Consent When Necessary Pre-existing Account Analysis – Proper Classification & Proper Classification Entity Accounts Consent When Necessary Reporting of U.S. Accounts To Home Government To IRS Withholding Reporting & Withholding to Required Required Non-participating FFIs Withholding to N/A Required in Select Circumstances Recalcitrant Account Holders9 Model 2 IGA, Annex II, Section II.A.1.j.10 Model 2 IGA, Annex II, Section II.B.1.2 | FATCA HI G HL I G HTS | VOLUME 6
  • III.W H A T T H I S ME ANS F O R CONTACTS » MO D EL 2 F F I S Ellen Zimiles The publication of the Model 2 IGA allows financial in- Managing Director stitutions in Japan, Switzerland and elsewhere to start Head, Global Investigations & planning their compliance programs as the first steps Compliance to FATCA compliance are the due diligence require- +1.212.554.2602 ments that have now been confirmed to be similar ellen.zimiles@navigant.com to due diligence requirements in the Model 1 IGA. Richard Kando Moreover, the deadlines for the due diligence re- Director, FATCA Task Force Leader, quirements are now the same for both Model Agree- Global Investigations & Compliance ments and non-IGA countries.11 +1.212.554.2698 To be FATCA compliant, all foreign financial institu- richard.kando@navigant.com tions have to update their on-boarding systems and Jeffrey Locke procedures by January 1, 2014. There are now two Director, FATCA Task Force Leader, deadlines for the pre-existing account analysis for Global Investigations & Compliance financial institutions located in Model 1 and Model 2 +1.212.554.2694 IGA countries: (1) analysis of all individual accounts jeffrey.locke@navigant.com with an aggregate balance or value in excess of $1 million (High Value Accounts) must be completed by Salvatore LaScala December 31, 2014 and (2) analysis of all remaining Managing Director in scope accounts must be completed by December Global Investigations & Compliance 31, 2015. +1.212.554.2611 salvatore.lascala@navigant.comIV.C O N CLU SI O N Dr. Ray Nulty FATCA compliance is fast approaching. The U.S. Gov- Managing Director ernment has been releasing a flurry of information Financial Services over the past few months and it appears there will +44 (0) 788 750 3854/ be no more deadline extensions. Non U.S. financial +353 (0) 87 0541416 institutions should start the planning process now as ray.nulty@navigant.com the Model 2 IGA shows the IRS has been consistent in keeping due diligence procedures the same for both David Brown Model IGAs. Only time will tell if the same due dili- Director, Business Development gence procedures will apply to financial institutions in Global Investigations & Compliance non-IGA countries. +1.416.777.2438 david.brown@navigant.com11 See IRS Announcement 2012-42 available at http://www.irs.gov/pub/irs-drop/A-12-42.pdf.© 2012 Navigant Consulting, Inc. All rights reserved. 00001024Navigant Consulting is not a certified public accounting firm and does not provide audit, attest, or public accounting services.See www.navigant.com/licensing for a complete listing of private investigator licenses.3 | FATCA HI G HL I G HTS | VOLUME 6