Conformity and discrepancies between Fatca regulations and the IGAs explained by Alfi

Susanne Weismüller, legal adviser at the Association of the Luxembourg Fund Industry (Alfi) has looked into what discrepancies may exist between Fatca regulations and the Intergovernmental Agreements required to make the US legislation reality.

Six months later than announced by the US Treasury Department and the IRS , the final regulations on the Foreign Account Tax Compliance Act (Fatca) were released at the end of January 2013, to provide further guidance on the implementation of rules effectively preventing tax evasion by US citizens.

The delay was caused by the numerous comments received from stakeholders in response to the proposed regulations. Moreover, the US authorities collaborated with foreign governments to develop two alternative model intergovernmental agreements.(IGAs) The latter should help to overcome legal impediments in cases where foreign law would prevent foreign financial institutions (FFIs) from reporting directly to the IRS the information required by the Fatca statutory provisions and the regulations.

Interaction of final regulations with intergovernmental agreements

The final regulations align not only the timeline to the provisions of Announcement 2012-42, and thus to what has been negotiated bilaterally with foreign governments, they also provide substantive changes to minimise the burden of Fatca. However, the application of these rules finally depends on their interaction with given intergovernmental agreements (IGA).

Jurisdictions signing the Model 1 IGA agree to adopt specified rules to identify and report information about US accounts. FFIs domiciled in these jurisdictions will therefore have to comply with local laws implemented to identify and report US accounts in accordance with the terms of the Model 1 IGA, and they do not need to apply the final regulations for the purposes of complying with, and avoiding, withholding under Fatca.

However, the final regulations provide that in certain cases, as prescribed in the Model 1 IGA, the local laws may allow the resident FFI to elect to apply the provisions of the regulations instead of the rules otherwise prescribed in the Model 1 IGA. The UK-US IGA offers this choice e.g. with respect to the obligation to review, identify or report accounts as US reportable accounts.

On the other hand, FFIs covered by the Model 2 IGA will be required to implement Fatca in the manner prescribed by the final regulations, except to the extent expressly modified by the respective agreement. The final regulations accommodate such variations. For example, a registered deemed-compliant FFI is defined as an FFI that meets the procedural requirements described in the final regulations, and that either is described in the same, or is treated as a registered deemed-compliant FFI under a Model 2 IGA.

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