FATCA Intergovernmental Agreements: What You Need to Know

The Foreign Account Tax Compliance Act (FATCA) is a U.S. federal law designed to prevent tax evasion by U.S. taxpayers who hold assets offshore. To enforce this law, the U.S. Treasury Department requires foreign financial institutions (FFIs) to report information on U.S. account holders to the Internal Revenue Service (IRS). However, many countries have data privacy laws that prohibit this type of reporting. To address this issue, the U.S. has entered into intergovernmental agreements (IGAs) with partner countries to facilitate FATCA compliance.

There are two types of IGAs: Model 1 and Model 2. Model 1 IGAs require FFIs to report information on U.S. account holders to their own government, which in turn will share the information with the IRS. Model 2 IGAs require FFIs to report information directly to the IRS. The U.S. has signed Model 1 IGAs with over 110 countries and Model 2 IGAs with a handful of countries, including Switzerland, Japan, and Bermuda.

The benefits of IGAs are two-fold. First, they improve compliance with FATCA by addressing privacy concerns. Second, they reduce the burden on FFIs by providing a standardized approach to reporting requirements across multiple jurisdictions. However, IGAs also come with their own challenges and limitations.

One challenge is ensuring consistency in data reporting across different jurisdictions. Each partner country has its own rules and interpretations of FATCA, which can lead to inconsistent reporting. The U.S. has attempted to address this issue by providing guidance to partner countries on FATCA compliance and by creating a FATCA registration portal for FFIs.

Another challenge is the cost of compliance for FFIs. Compliance with FATCA and IGAs requires significant resources, including technology and staff training. Additionally, some FFIs face penalties for non-compliance. To mitigate this risk, many FFIs have chosen to close accounts belonging to U.S. citizens, which can lead to unintended consequences such as limiting access to financial services.

In conclusion, FATCA IGAs play a crucial role in enforcing FATCA compliance and reducing the burden on FFIs. However, challenges remain in ensuring consistency in data reporting and reducing the cost of compliance. As FATCA continues to evolve, it is important for institutions and individuals to stay informed of changes and requirements.