Treasury Releases FATCA Model Intergovernmental Agreement

By David Yu, CPA, Irvine, Calif.

Editor: Mark G. Cook, CPA, MBA

Foreign Income & Taxpayers

On July 26, the Treasury Department released its long-awaited model intergovernmental agreement to improve tax compliance and to implement the Foreign Account Tax Compliance Act (FATCA). The model agreement was developed through consultation with France, Germany, Italy, Spain, and the United Kingdom, and with the cooperation of other partner countries, the Organisation for Economic Co-operation and Development, and the European Commission. These nations and international organizations are working toward establishing common reporting and due-diligence standards that advance a more worldwide approach to fighting tax evasion. The system would be based on an automatic intergovernmental exchange of information that would reduce the burdens of compliance requirements.

Two versions of the model agreement were released—a reciprocal one and a nonreciprocal one. The two versions are similar, and both establish a framework for reporting by financial institutions of certain financial account information to their respective authorities, followed by automatic exchange of such information under existing bilateral tax treaties or tax information exchange agreements (TIEAs). The two versions resolve legal issues raised in connection with FATCA and simplify its implementation for financial institutions.

The reciprocal version provides for the United States to exchange information with partner countries currently collected on accounts held in U.S. financial institutions by residents of partner countries. It includes a policy commitment to pursue regulations and support legislation that would provide for equivalent levels of exchange by the United States. This version is available only to jurisdictions with which the United States has an income tax treaty or a TIEA, or to jurisdictions that have established robust protections and practices to ensure the information remains confidential and is used for tax purposes only. Treasury and the IRS will review and make determinations on a case-by-case basis.


FATCA was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010, P.L. 111-147. FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest. An FFI must enter into a special agreement with the IRS by June 30, 2013. The HIRE Act added a new chapter 4 to the Internal Revenue Code (Secs. 1471 through 1474), which establishes rules for withholdable payments to FFIs and for withholdable payments to other foreign entities made after Dec. 31, 2012. The rules provide for withholding taxes on specified foreign accounts owned by U.S. persons or by U.S.-owned foreign entities. These provisions do not apply to any obligation outstanding on March 18, 2012, or to the gross proceeds from any disposition of such an obligation (HIRE Act Sec. 501(d)).

Under Sec. 1471(a), the withholding agent must deduct and withhold a tax equal to 30% of any withholdable payment to an FFI that does not meet certain requirements. Sec. 1473(1) defines “withholdable payment” as:

  1. U.S.-source fixed or determinable annual or periodical income (described in Regs. Sec. 1.1441-2(b)(1) or 1.1441-2(c));
  2. Gross proceeds from the sale or other disposition of property that can produce interest or dividends from sources within the United States (that have not previously been subject to nonresident withholding under Sec. 871(b)(1) or 882(a)(1)); or
  3. Interest paid by foreign branches of domestic financial institutions (Sec. 861(a)(1)(B) would not apply).

The 30% withholding requirement can be avoided if an FFI enters into a Sec. 1471(b) agreement with the IRS and satisfies its requirements (or any of several alternatives).

Under Sec. 1471(b), a participating FFI must also withhold 30% of any passthrough payment that is made by the institution to a “recalcitrant” account holder or another FFI that does not meet the requirements of that subsection (nonparticipating FFI). A passthrough payment includes any withholdable payment or other payment to the extent attributable to a withholdable payment. A recalcitrant account holder is one who fails to comply with a request for any of the following items by the participating FFI:

  1. Documentation or information required for determining whether the account is a U.S. account;
  2. A valid Form W-9, Request for Taxpayer Identification Number or Certification, or correct name, address, and tax identification number (TIN) combination; or
  3. A valid and effective waiver of a foreign law that would prevent reporting.

On Feb. 15, 2012, the IRS published proposed regulations for Secs. 1471 through 1474 (REG-121647-10). The final regulations are projected to be released in late 2012. These regulations should clarify the definitions in the Code, make it easier to comply with the FATCA rules, expand the types of FFIs deemed to be in FATCA compliance without needing to enter into an agreement with the IRS, and phase in FATCA reporting and withholding obligations over an extended transition period.

Account Information

The introductory section of the model agreement states several reasons for the agreement and why it was a necessary step in implementing the FATCA regime, including:

  1. Financial institutions might not otherwise be able to comply with FATCA due to domestic legal impediments;
  2. The partner nations and organizations must commit to work together over the long haul to achieve FATCA’s common reporting and due-diligence standards for financial institutions;
  3. Reporting obligations under FATCA must be coordinated with other U.S. tax reporting obligations of the FFIs to avoid duplicative reporting; and
  4. An intergovernmental approach to FATCA implementation addresses legal impediments and reduces burdens for FFIs.

Under Article 2 of the model agreement, the parties will exchange information with respect to reportable accounts, including:

  1. The name, address, and TIN of the account holder;
  2. The account number (or functional equivalent);
  3. The name and identifying number of the reporting financial institution;
  4. The account balance or value; and
  5. The gross amount of interest, dividends, and/or other income paid or credited on a depository account.

Special rules apply to custodial accounts and depository accounts.

Under Article 3 of the agreement, these requirements are to be phased in from 2013 to 2016, and all information exchanged will be subject to the confidentiality, limitation-of-use, and other protections provided for in the relevant tax convention or TIEA.

Under Article 4 of the model agreement, reporting FATCA partner financial institutions (RFPFIs) will be treated as complying with, and not subject to withholding under, Sec. 1471 if the FATCA partner complies with Articles 2 and 3 of the model agreement, and the RFPFI:

  1. Identifies U.S. reportable accounts and reports annually to the FATCA partner;
  2. Reports annually to the FATCA partner the name of, and aggregate amount of payments made in 2015 and 2016 to, each nonparticipating financial institution;
  3. Complies with the registration requirements;
  4. Withholds 30% of any U.S.-source withholdable payment to any nonparticipating financial institution, if the RFPFI is: (1) acting as a qualified intermediary for Sec. 1441 purposes with primary withholding responsibility; (2) a foreign partnership that has elected to act as a withholding foreign partnership for Secs. 1441 and 1471 purposes; or (3) a foreign trust that has elected to act as a withholding foreign trust for Secs. 1441 and 1471 purposes; and
  5. In the case of an RFPFI that is not described in the previous paragraph and that makes a payment of, or acts as an intermediary with respect to, a U.S.-source withholdable payment to any nonparticipating financial institution, the RFPFI provides to any immediate payor of such payment the information required for withholding and reporting.

Also under Article 4 of the agreement, the United States will not require an RFPFI to withhold tax under Sec. 1471 or 1472 with respect to an account held by a recalcitrant account holder, or to close such account, if the U.S. competent authority receives the information set out in Article 2 with respect to the account. Also, the United States will treat FATCA partner retirement plans that meet certain requirements as deemed-compliant FFIs or exempt beneficial owners for purposes of Sec. 1471. Lastly, there are special rules regarding related entities that are nonparticipating financial institutions.

Reporting Thresholds and Implementation

Annex I of the agreement details due-diligence obligations for identifying and reporting on U.S. reportable accounts and on payments to certain nonparticipating financial institutions. The procedures applicable to different accounts depend on the dollar balance or value of an account as of the last day of the calendar year (or other appropriate reporting period). For preexisting individual accounts, unless the RFPFI elects otherwise, the following are not required to be reviewed, identified, or reported as U.S. reportable accounts:

  1. Accounts that do not exceed $50,000 in balance or value as of Dec. 31, 2013;
  2. Cash-value insurance contracts and annuity contracts with a balance or value of $250,000 or less as of Dec. 31, 2013; and
  3. Any depository account with a balance or value of $50,000 or less.

For preexisting individual accounts that exceed the above limits as of Dec. 31, 2013, but do not exceed $1 million (lower-value accounts), the RFPFI must review electronically its searchable data for any of the following U.S. indicia:

  1. Identification of the account holder as a U.S. citizen or resident;
  2. Unambiguous indication of a U.S. place of birth;
  3. Current U.S. mailing or residence address;
  4. Current U.S. telephone number;
  5. Standing instructions to transfer funds to an account maintained in the United States;
  6. Currently effective power of attorney or signatory authority granted to a person with a U.S. address; or
  7. An “in care of” or “hold mail” address in the United States that is the sole address the RFPFI has on file for the account holder.

If any of the U.S. indicia are discovered in the electronic search, and a self-certification or other acceptable explanation is absent, then the RFPFI should treat the account as a U.S. reportable account.

For preexisting individual accounts with a balance or value that exceeds $1 million as of Dec. 31, 2013, or Dec. 31 of any subsequent year (high-value accounts), enhanced review procedures apply. First, an electronic record search is conducted as described above. If the electronic databases do not capture all this information, then the RFPFI must also review the current customer master file and certain other documents obtained by the RFPFI within the last five years to determine that information. If any of the indicia apply, then the RFPFI must treat the account as a U.S. reportable account. The enhanced review procedures must be completed by Dec. 31, 2014, for preexisting accounts that are high value as of Dec. 31, 2013. If the preexisting individual account becomes a high-value account as of the last day of a subsequent calendar year, then the enhanced review procedures must be completed within six months after the last day of the calendar year.

For new individual accounts opened on or after Jan. 1, 2014, a new depository account or cash-value insurance contract is not required to be reviewed, identified, or reported as a U.S. reportable account unless the account balance or cash value exceeds $50,000. For other new individual accounts, the RFPFI must obtain a self-certification to determine whether the account holder is resident in the U.S. for tax purposes. If the self-certification establishes that the account holder is resident in the U.S. for tax purposes, then the RFPFI must treat the account as a U.S. reportable account.

Preexisting accounts held by entities (preexisting entity accounts) with balances that do not exceed $250,000 as of Dec. 31, 2013, are not required to be reviewed, identified, or reported as U.S. reportable accounts until the account balance exceeds $1 million. Preexisting entity accounts that have an account balance or value that exceeds $250,000 as of Dec. 31, 2013, and preexisting entity accounts that initially do not exceed $250,000, but whose balance later exceeds $1 million, must be reviewed and are treated as U.S. reportable accounts only if the accounts are held by one or more entities that are specified U.S. persons, or by passive nonfinancial foreign entities (NFFEs) with one or more controlling persons who are U.S. citizens or residents. Review of preexisting entity accounts with an account balance or value that exceeds $250,000 as of Dec. 31, 2013, must be completed by Dec. 31, 2015. Review of preexisting entity accounts with a balance or value that does not exceed $250,000 as of Dec. 31, 2013, but exceeds $1 million as of Dec. 31 of a subsequent year must be completed within six months after the end of the calendar year in which the account balance exceeds $1 million.

For new entity accounts opened on or after Jan. 1, 2014, the RFPFI must determine whether the account holder is:

  1. A specified U.S. person;
  2. A FATCA partner financial institution or partner jurisdiction financial institution;
  3. A participating FFI, a deemed-compliant FFI, an exempt beneficial owner, or an excepted FFI; or
  4. An active or passive NFFE.

An RFPFI can determine the status of an entity account holder with information that is publicly available, or with a self-certification from the account holder as to its status.

These new FATCA requirements will place a significant burden on FFIs and are likely to require increased technology costs and cause FFIs to make significant changes to their processes. An evaluation of current processes should be made to determine the changes necessary to comply with these new rules.


Mark Cook is a partner at SingerLewak LLP in Irvine, Calif.

For additional information about these items, contact Mr. Cook at 949-261-8600, ext. 2143, or

Unless otherwise noted, contributors are members of or associated with SingerLewak LLP.

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