Resistance grows to Fatca among key practitioners, customers and countries

The US IRS recently proposed modifications to the standard Intergovernmental Agreement required for Fatca implementation, but the response to this and other measures around the US legislation remains highly polarised.

March 18, 2010 is a day that may live in infamy should the US Foreign Account Tax Compliance Act (Fatca) fail to deliver benefits against the huge potential costs facing so-called FFIs – foreign financial institutions, including European banks and other financial companies who may have US clients on their books.

On that date, US law makers passed the Hiring Incentives to Restore Employment (HIRE) Act, on to which they tacked the Fatca idea that assets held abroad by US persons should not be able to escape taxation.

Under the original proposals, Fatca is meant to take effect from 1 January 2013. FFIs are expected to sign off on final ‘Agreements’ with the US IRS and Treasury, as well as obtain Fatca reporting forms by the end of 2012.

A big obstacle

However, a big obstacle remains barring implementation of Fatca: agreement and cooperation with foreign governments.

If the US government wants access to assets from foreign jurisdictions it has to get the agreement of governments of those jurisdictions. This has lead to the development of Intergovernmental Agreements, or IGAs. However, the success or failure of IGAs has taken on added importance after the IRS was forced to announce in mid-November that it had developed a Model 2 IGA.

At the time, its own website listed just two successfully concluded bilateral agreements involving the UK and Denmark, although it previously said in early November that it was pursuing agreements with “50” jurisdictions globally in order to make Fatca workable.

As of mid-November, governments of a just a few jurisdictions such as the UK, Denmark and Guernsey had indicated they would sign the IGA in its original format. But there were still no signs that, for example, the likes of France, Germany Switzerland or Japan were set to move beyond agreeing a framework for discussions on IGAs to actually signing the relevant Agreements.

Meanwhile the threatened implementation of Fatca continues to gather responses from across the financial industry, and from those clients who ultimately may be directly affected.

The European fund industry view

The European Fund and Asset Management Association (Efama) said earlier this autumn it supported the idea of IGAs, but it would only work if there was universal adoption, so as not to leave Europe a patchwork of signatory and non-signatory countries.

Efama also noted that, given the 1 January 2013 deadline, there was little time for industry practitioners to prepare for Fatca implementation, and no time at all if governments did not sign the agreement before the end of 2012. Failure of governments across Europe to agree a consistent approach to IGAs would also create problems, so Efama has argued for a standardised approach.

Most controversially, perhaps, it argued for changes to domestic law if necessary to ensure the implementation of the IGA.

“We would urge that, in first preference, early progress be made in the use of Annex II to the IGA or of Competent Authority Agreements to avoid the need for this. Where unavoidable, such domestic law changes need to be given favourable consideration,” Efama said.

Arguing for European governments to change their laws to suit the US is difficult. Germany, for example, is just one jurisdiction facing elections in the coming year, and it is not clear how any IGA signed today would play out in election debates.

Meanwhile, in the UK, the Investment Management Association (IMA) echoed the Efama stance. It said it supported ongoing consultation on US-UK IGA being conducted by UK tax authority HM Revenue & Customs.

Julie Patterson, IMA director of authorised funds and tax, said: “The government’s commitment and engagement has been commendable. The UK is well on track to implement Fatca on time.”

“That is not to say we are out of the woods. There remain practical considerations and further work to ensure the final rules are workable.”

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