FATCA Highlights Volume 6

FATCA Highlights Client Alert: Model 2 IGA Released A Cross Between the Proposed Regulations and Model 1 IGA

Released November 2012 Volume 6

By Ellen Zimiles, Richard Kando, Jeffrey Locke and Salvatore LaScala

G L O B A L I N V E S T I G A T I O N S & C O M P L I A N C E

1 | FATCA HIGHLIGHTS | VOLUME 6

I . INTRODUCTIONOn 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. The main differences can be seen in (a) FATCA report-ing requirements, which attempt to address local law restrictions, and (b) potential withholding concern-ing recalcitrant account holders.2 The due diligence requirements, the foundation of FATCA compliance, are very similar to the Model 1 IGA, and where they differ the Model 2 IGA is similar to the signed IGA between the United States and the United Kingdom (“UK Signed IGA”).3 Thus far, only Switzerland and Ja-pan have stated that they plan on using the Model 2 IGA, which would require a financial institution locat-ed in a country that utilizes the Model 2 IGA for their agreement with the United States (a “Model 2 FFI”) to register with the Internal Revenue Service (“IRS”).4

I I . KEY CHANGES IN THE MODEL 2 IGA

In general, a Model 2 FFI will be required to “register with the IRS by January 1, 2014 and comply with the requirements of an FFI Agreement, including with re-spect to due diligence, reporting, and withholding.”5 The key differences between the Model 2 IGA and the Model 1 IGA are to whom the financial institution re-ports and the addition of withholding in select scenari-os for recalcitrant account holders.6

A. Due DiligenceThe due diligence requirements for the Model 2 IGA are similar to the Model 1 IGA requirements. A Model 2 FFI will be required to search for U.S. indicia in pre-existing individual accounts and for new individual accounts a self-certification is required. For entity accounts, the Model 2 FFI will be required to properly classify the entity and for certain entities, the Model 2 FFI will be required to determine the Controlling Person of the entity.7 Additionally, for both pre-existing and new accounts identified as U.S. accounts the Model 2 FFI will have to request consent to report certain information.

B. ReportingThe Model 2 IGA requires Model 2 FFIs to report directly to the IRS. To not violate local privacy laws, the Model 2 FFI must request from each ac-count holder of a U.S. account the account hold-er’s U.S. TIN and his consent to report the account information to the U.S. While requesting consent from the account holder for pre-existing accounts, the Model 2 FFI must also inform the account holder that:

1. Aggregate information about the account will be reported to the IRS;

2. Information about the account may give rise to a request by the IRS for specific information about the account;

3. The account information will be transmitted to the country’s tax administration and

4. The country’s tax administration may exchange this information with the IRS.8

1 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 ControllingPersonsisdefinedas“naturalpersonswhoexercisecontroloveranentity.Inthecaseofatrust,suchtermsmeansthesettlor,thetrustees,theprotector(ifany),thebeneficiariesorclassofbeneficiaries,andanyothernaturalperson 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.


Thus, the Model 2 IGA also necessitates the Model 2 FFI apply pressure on the account holder to consent by stating that even if the account holder does not consent, the IRS can still obtain account information on the account holder from the home country’s tax authority.

C. WithholdingA Model 2 FFI will not be required to withhold from a recalcitrant account holder if the Model 2 FFI complies with the reporting requirements out-lined in the Model 2 IGA and the local tax author-ity turns over the account information to the IRS upon request. On the other hand, if these condi-tions are not met, the Model 2 FFI will be required to withhold. For instance, if the account holder does not consent to reporting, and, as required, the Model 2 FFI passes the information to its tax administrator, but the tax administrator does not give the account holder information to the IRS, the Model 2 FFI will have to withhold on the recal-citrant account holder.

D. Other Notable Changes: Annex II1. Local Deemed-Compliant Financial Institu-

tions Cannot Discriminate Against Specified U.S. Persons

The Model 2 IGA specifically states that fi-nancial institutions that want to meet certain exceptions to the requirements of FATCA compliance (“Deemed-Compliant Financial Institutions”) “must not have policies or prac-tices that discriminate against opening or maintaining accounts for individuals who are Specified U.S. Persons and who are residents of [FATCA Partner]”9

2. Select Collective Investment Vehicles Are Deemed-Compliant

Certain investment entities that are collective investment vehicles can be Deemed Com-pliant Financial Institutions and subject to less stringent rules concerning FATCA compliance. Collective investment vehicles can be considered Deemed Compliant Financial Institutions if they are regulated under the laws of the FATCA Partner Country, and “if all of the interests in the collective investment vehicle (including debt interests in excess of $50,000) are held by or through one or more Financial Institutions that are non Nonpartici-pating Financial Institutions.”10

Below is a high-level summary of some of the key similarities and differences between the Model 1 IGA and the Model 2 IGA.

9 Model 2 IGA, Annex II, Section II.A.1.j.10 Model 2 IGA, Annex II, Section II.B.1.

SUMMARY OF KEY SIMILARITIES & DIFFERENCES BETWEEN THE MODEL 1 IGA AND THE MODEL 2 IGAFFI CHALLENGE MODEL 1 IGA MODEL 2 IGA

Due

Di

ligen

ce

New Account On-boarding – Individual Accounts Self-Certification Self-certification &

Consent When Necessary

New Account On-boarding – Entity Accounts Proper Classification Proper Classification &


Pre-existing Account Analysis – Individual Accounts Search for U.S. Indicia Search for U.S. Indicia &


Pre-existing Account Analysis – Entity Accounts Proper Classification Proper Classification &


Repo

rting

&

With

hold

ing Reporting of U.S. Accounts To Home Government To IRS

Withholding to Non-participating FFIs Required Required

Withholding to Recalcitrant Account Holders N/A Required in Select Circumstances


© 2012 Navigant Consulting, Inc. All rights reserved. 00001024 NavigantConsultingisnotacertifiedpublicaccountingfirmanddoesnotprovideaudit,attest,orpublicaccountingservices. See www.navigant.com/licensing for a complete listing of private investigator licenses.

CONTACTS »

Ellen Zimiles Managing Director Head, Global Investigations & Compliance +1.212.554.2602 [email protected]

Richard Kando Director, FATCA Task Force Leader, Global Investigations & Compliance +1.212.554.2698 [email protected]

Jeffrey Locke Director, FATCA Task Force Leader, Global Investigations & Compliance +1.212.554.2694 [email protected]

Salvatore LaScala Managing Director Global Investigations & Compliance +1.212.554.2611 [email protected]

Dr. Ray Nulty Managing Director Financial Services +44 (0) 788 750 3854/ +353 (0) 87 0541416 [email protected]

David Brown Director, Business Development Global Investigations & Compliance +1.416.777.2438 [email protected]

I I I .WHAT THIS MEANS FOR MODEL 2 FFIS

The publication of the Model 2 IGA allows financial in-stitutions in Japan, Switzerland and elsewhere to start planning their compliance programs as the first steps to FATCA compliance are the due diligence require-ments that have now been confirmed to be similar to due diligence requirements in the Model 1 IGA. Moreover, the deadlines for the due diligence re-quirements are now the same for both Model Agree-ments and non-IGA countries.11

To be FATCA compliant, all foreign financial institu-tions have to update their on-boarding systems and procedures by January 1, 2014. There are now two deadlines for the pre-existing account analysis for financial institutions located in Model 1 and Model 2 IGA countries: (1) analysis of all individual accounts with an aggregate balance or value in excess of $1 million (High Value Accounts) must be completed by December 31, 2014 and (2) analysis of all remaining in scope accounts must be completed by December 31, 2015.

IV.CONCLUSIONFATCA compliance is fast approaching. The U.S. Gov-ernment has been releasing a flurry of information over the past few months and it appears there will be no more deadline extensions. Non U.S. financial institutions should start the planning process now as the Model 2 IGA shows the IRS has been consistent in keeping due diligence procedures the same for both Model IGAs. Only time will tell if the same due dili-gence procedures will apply to financial institutions in non-IGA countries.

11 See IRS Announcement 2012-42 available at http://www.irs.gov/pub/irs-drop/A-12-42.pdf.

FATCA Highlights Volume 6

Documents

Transcript of FATCA Highlights Volume 6