[authors: Sherwin P. Simmons, II, Jonathan E. Gopman, Barbara E. Ruiz-Gonzalez, and Elysa R. Merlin]
The U.S. Department of Treasury ("Treasury") recently released its second model agreement (the "Model II Agreement") for countries to implement the Foreign Account Tax Compliance Act ("FATCA"). FATCA requires foreign financial institutions ("FFIs") to either agree to satisfy specified reporting and diligence requirements for financial accounts held by U.S. taxpayers or subject themselves to a thirty (30%) percent withholding tax on certain U.S. source income received by the FFI. The Model II Agreement was outlined in joint statements with Japan and Switzerland released by Treasury in June 2012.
The Model II Agreement follows the Treasury's first model agreement (the "Model I Agreement"), which was released in July 2012. See Practice Update. Since its release, the U.S. and the United Kingdom formalized the first bilateral FATCA agreement, based on the Model I Agreement, in September 2012. See Practice Update. Although no other countries have formally signed the agreements to aid with FATCA compliance, the Treasury expects to have agreements signed with the major trading partners of the U.S. by the end of the year.
Whereas the Model I Agreement established government-to-government sharing of information satisfy the reporting and withholding requirements of FATCA, the Model II Agreement follows a business-to-government approach. Under the Model II Agreement, FFIs report directly to the IRS, as opposed to through their tax authorities.
Article 2 of the Model II Agreement sets forth the manner in which FFIs will report and exchange information with the United States government. The FATCA partner country must enable and direct all reporting FFIs to register with the IRS by January 1, 2014 and furthermore, to sign a reporting agreement, known as an FFI agreement. Article 2 also provides that U.S. Competent Authority may make group requests to the competent authority of the partner country for information requests for non-consenting account holders based on the aggregate information reported to the Internal Revenue Service ("IRS").
Article 3 describes how FATCA will apply to partner financial institutions. An FFI is not required to withhold the thirty (30%) percent tax with respect to recalcitrant account holders if the FFI otherwise complies with the provisions of the Model II agreement. Further, the Model II agreement provides for the treatment as exempt beneficial owners or deemed-compliant FFIs of retirement plans, small local institutions, and other qualified entities listed in the agreement.
The Model I Agreement provided for reciprocity between the U.S. and the partner country in terms of information sharing. The Model II Agreement, in Article 7, provides that partner countries may request reciprocal exchange of information from the U.S. The Model II Agreement also allows any FATCA partner country to implement government-to-government reporting under Model I by negotiating an agreement similar to those formalized under the Model I Agreement.