Are Problems Looming for FATCA and the “Reciprocal” IGA?

By Laurie Hatten Boyd, J.D., LL.M., Seattle

Editor: Mary Van Leuven, J.D., LL.M.

The Treasury Department may soon experience relationship problems with certain countries that have entered into intergovernmental agreements (IGAs) under the Foreign Account Tax Compliance Act (FATCA).

FATCA, signed into law on March 18, 2010, as part of the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147, is sweeping legislation intended to combat offshore tax evasion by certain U.S. persons with offshore bank accounts and investments. Specifically, FATCA incorporates a new reporting regime into the Internal Revenue Code that is designed to achieve this stated intent by imposing a penal withholding tax on certain foreign entities (and, in particular, foreign financial institutions) that refuse to disclose the identities of these U.S. persons. The statute, while providing general information about the new withholding and reporting rules, deferred much of the administration and implementation of the new regime to Treasury and the IRS.

In the early days of the regime's development, Treasury announced that, as an alternative to the FATCA regime set forth in the statute and regulations, it would be entering into IGAs with certain interested countries. According to Treasury, the IGA alternative was a means to "efficiently and effectively" establish a common intergovernmental approach to combating tax evasion while "minimizing burdens on financial institutions"(Dep't ofTreasury Press Release, "U.S. Engaging With More Than 50 Jurisdictions to Curtail Offshore Tax Evasion" (11/8/12)).

The proliferation of IGAs was actually a turning point in ensuring FATCA's success because a financial institution in an IGA jurisdiction that does not comply with the terms of the IGA would actually be in violation of local law. Given this, many financial institutions that may have been seeking alternatives to U.S. investments as a mechanism to avoid the U.S. FATCA reporting requirements are forced to comply with the FATCA IGA requirements or, as indicated, risk violating their own country's law.

As of February 2016, Treasury had entered into an IGA (or announced that it has agreed to the terms of an IGA "in substance") with over 100 countries. There are two general Model IGAs: Model 1 and Model 2. Financial institutions operating in a Model 1 jurisdiction are required to register, but not execute a Foreign Financial Institution Agreement, with the IRS. These financial institutions must report their U.S. accounts directly to local regulators who, under the terms of the IGA, will then exchange that information with the IRS.

Financial institutions operating in a Model 2 jurisdiction are instructed under that IGA to follow the terms of the Foreign Financial Institution Agreement, as modified for a Reporting Model 2 Foreign Financial Institution, and report their U.S. accounts directly to the IRS. A significant feature of this FATCA alternative is that any country entering into an IGA must ensure that it has no existing laws that would prevent a financial institution resident in the country from complying with the terms of the IGA, including obtaining tax information for reporting purposes.

In addition, a country entering into a Model 1 IGA is required to implement local law setting forth specific requirements for financial account identification and associated due diligence. Finally, it is important to note that the countries entering into Model 1 IGAs must also bear the cost of developing and maintaining the infrastructure needed to receive the U.S. account information from their financial institutions and exchange that information with the United States annually.

A vital component of the IGA for many countries is the ability to, once approved, enter into an agreement that calls for reciprocity of information exchange. For example, in Article 3(3)(b) of the Model 1 IGA (With Reciprocity), the United States agrees to exchange the information that it currently collects from U.S. financial institutions maintaining nonresident alien (NRA) accounts. In addition, because the IGA tasks foreign financial institutions with more onerous due-diligence and reporting requirements (e.g., the requirement to identify certain U.S. owners of passive entities and to report detailed account information), the United States explicitly agrees, in Article 6(1), to enhance the information it would exchange by "pursuing the adoption of regulations and advocating and supporting relevant legislation to achieve" equivalent levels of information exchange.

To that end, President Barack Obama's budget proposal has addressed this commitment for each of the past four years, i.e., in its budget proposals for fiscal years 2014-2017. Interestingly, while the 2014 budget proposal did address the need for expanded domestic information reporting, it would have required a U.S. financial institution to report additional information about its NRA accounts (e.g., account balances) but appeared to limit the FATCA "look through" requirement to U.S. entities only. Thus, for example, it appeared that a U.S. financial institution maintaining an account for a non-U.S. corporation would have continued to report at the corporate level, and the information exchanged for that account, if any, would be with the country in which the corporation was organized. Conversely, if the account holder were a U.S. corporation, the proposal would have required the U.S. financial institution to look through the entity for any non-U.S. persons holding "substantial" interests and report on that underlying owner level.

The Obama administration's subsequent three budget proposals, including the fiscal year 2017 proposal released in February, have included expanded (and identical) language that would require U.S. financial institutions to report similar information as it relates to their non-U.S. accounts in an effort to "facilitate the intergovernmental cooperation contemplated in the intergovernmental agreements." Specifically, the later proposals call for the same types of information that foreign financial institutions are required to report under FATCA (e.g., account balances, all income paid (as opposed to just U.S.-source income), gross proceeds, and, significantly, the requirement to look through certain passive entities (not just U.S. entities) with substantial non-U.S. owners).

To date, no legislative action has been taken on these expanded reporting proposals, and it is unknown what impact, if any, continued inaction will have on the future of the FATCA IGAs. The language that causes this uncertainty is found in Article 10(3) of the Model 1 IGA (With Reciprocity). Therein, the United States and the contracting country agree that, prior to Dec. 31, 2016, they will consult in good faith to amend the agreement as necessary to reflect progress on the commitment set forth in the reciprocity provision of the agreement. Given this (and the fact that 2016 is already well underway), countries that have entered into a reciprocal IGA and that have not been receiving reciprocal information relating to their residents' accounts in the United States may react harshly to the fact that Congress has not yet acted on (or scheduled or announced upcoming action on) legislation requiring U.S. financial institutions to obtain and report like information. This reaction may be especially likely given the United States' decision to not participate in the expansive global information exchange regime, the Common Reporting Standard (CRS).

The CRS was developed in response to the Group of 20 request and approved by the Organisation for Economic Co-operation and Development Council on July 15, 2014. In general, it requires jurisdictions to obtain information from their financial institutions and automatically exchange that information with other participating jurisdictions annually. The regime is modeled after the FATCA Model 1 IGA as that agreement relates to financial account information to be exchanged, the financial institutions required to report, the types of accounts and taxpayers covered, as well as the associated due-diligence procedures. It is intended to provide participating countries with information relating to the globally held financial assets of their tax residents. Currently, nearly 100 countries have committed to participate in this global information reporting regime.

Without law changes in the United States that increase reporting by U.S. financial institutions for non-U.S. owned accounts, or the United States participating in CRS, foreign countries that have entered into reciprocal IGAs will not receive the same type of account information that they have committed to, and are, providing the United States. As indicated above, the direct impact on the IGAs, and FATCA in general, remains to be seen. At a minimum, however, the United States should anticipate some strained conversations with many of its IGA counterparties in the near future.


Mary Van Leuven is a director, Washington National Tax, at KPMG LLP in Washington.

For additional information about these items, contact Ms. Van Leuven at 202-533-4750 or

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

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG LLP. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. ©2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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