Focus on regulation – Lawyers voice ongoing concerns over FATCA agreements

Model agreements between America and certain foreign governments over information sharing for foreign financial assets and accounts raise “questions and concerns”, according to lawyers Withers.

Drafts were released in mid-August for model agreements in regards to the Foreign Account Tax Compliance Act, between Washington and governments of Germany, Spain, France, Italy and the UK.

FATCA provides for 30% withholding on various US source payments such as dividends, interest and certain gross proceeds if certain compliance requirements are not met.

FATCA has been highly contentious in Europe, though evoked less dissent in America, where authorities hope it will help raise more tax and control tax evasion.

Lawyers at Withers say the drafts “contain a number of provisions that are likely to be favourably received, [but] they also raise a number of questions and concerns”.

Under one version of the model agreements, certain of the countries will enact laws forcing local financial institutions to collect and report information regarding their account holders to domestic tax agencies, which will then send this information to the US.

As a quid pro quo America’s tax agency would collect and report information about accounts held with financial institutions in the US by tax residents of the foreign State.

Some protections are expected in regards to the information exchanged.
Another model of the agreements suggests the financial institutions outside the US would transmit relevant information to American tax agents, but the equivalent agents in the foreign land would not receive corresponding information from the US.

Withers notes “concern” over rules relating to trusts with a connection to the US. Here, a new concept of ‘controlling persons’ – natural persons who exercise control over an entity – has been introduced.

This would help determine whether an entity, including a trust, should be categorized as having US owners.

For trusts, the category of controlling persons includes settlors, trustees, protectors, and beneficiaries or classes of beneficiary.

“Although the Model Agreements allow [financial institutions] to instead rely on the proposed regulations when identifying their US accountholders, many may choose to apply the ‘controlling person’ test. This might well result in more trusts being categorized as having US owners than would have been the case under the procedures outlined in the proposed FATCA regulations,” Withers says.

Withers notes it is still unsure how far countries will agree to such accords, which will often be dependent on whether there is two-way flow of information.

“It has been noted, for example, that there may be opposition in Germany to entering into such an agreement with the US unless there is reciprocity.

“The situation is further complicated by legislation currently pending in the US Congress that would, if enacted, likely hinder efforts by the IRS and Treasury to effectively implement the reporting by US financial institutions necessary to provide such reciprocal information to other governments.”

Withers also notes that under the model agreements, if an institution’s database has enough data to “perform a search for the required indicia of the US status of accountholders”, then the institution need not review paper records when implementing “the enhanced review procedures” for account balances exceeding $1m.


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