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FATCA Update – Final FFI Agreement Just Released by IRS



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The Internal Revenue Service has just issued Revenue Procedure 2014-10 which provides guidance to foreign financial institutions (FFIs) entering into an FFI agreement with the IRS for FATCA (Foreign Account Tax Compliance Act) purposes. The final version of the FFI agreement is set forth in meticulous detail in the Revenue Procedure. The final FFI agreement contained in the Revenue Procedure contains a number of changes to provisions of the draft FFI agreement set out in an earlier IRS Notice (Notice 2013-69 2013-46 I.R.B. 503), on October 29, 2013.

Who Should Sign the FFI Agreement?

FFIs signing the FFI agreement will be treated as “participating FFIs”. Generally, these are FFI’s located in jurisdictions that do not have an Intergovernmental Agreement (IGA) in place with the IRS or which are located in a jurisdiction having a so-called Model 2 IGA in place. The Revenue Procedure covers the “participating FFI” and FFIs and branches of FFIs that will be treated as “participating FFIs” due to their status as reporting financial institutions under an applicable Model 2 IGA.

It will be recalled that FFIs located in a Model 2 IGA jurisdiction are required to enter into an FFI Agreement and report directly to the IRS, but with aggregate disclosure of so-called “recalcitrant” account holder data, subject to exchange of information requests by the IRS. Currently only Japan, Bermuda and Switzerland have entered into Model 2 IGAs. Basically, the Model 2 IGA governments are not getting terribly involved and are leaving their financial institutions to flounder on their own with the entire FATCA process. The cost of FATCA compliance has been labelled astronomical, and so, one can understand why a foreign government might wish to have the financial institutions bear that cost, rather than have it shifted to any great degree to the government. With Model 2 IGA, the foreign government is involved with the IRS only when called upon for information requests pursuant to the agreement.

Registration and Entering into the FFI Agreement

An FFI should use Form 8957, on the FATCA registration website available to enter into the FFI agreement on behalf of one or more of its branches so that each branch can be treated as a participating FFI and receive a global intermediary identification number (GIIN). The GIIN is critical for the FFI to identify itself to withholding agents who will check status on yet another IRS data-base. Without a valid GIIN, 30% withholding will be inevitable.

Due to the local laws of the relevant jurisdiction where a branch may be located, it is possible that the branch of a participating FFI cannot satisfy all of the terms of the FFI agreement. Such a branch will be treated as a “limited branch” (a term defined in the FFI agreement). Such a limited branch will be subject to withholding as a nonparticipating FFI. A reporting Model 2 FFI may also register on the FATCA registration website on behalf of one or more of its branches to obtain a GIIN and to agree to comply with the terms of the FFI agreement, as modified by an applicable Model 2 IGA.

What About FFIs in Jurisdictions with Model 1 IGAs?

Generally, the FFI agreement described in Rev. Proc. 2014-10 will not apply to a reporting Model 1 FFI, or any branch of such an FFI. The FFI agreement described in the Revenue Procedure will generally not apply because FFIs that are covered by, and comply with, a Model 1 IGA will send information directly to their own government who will send it on to the IRS. Thus, there is generally no need for such FFI’s to enter into a direct agreement with the IRS. Such an FFI will be treated as “deemed-compliant” with FATCA, and will generally not be subject to withholding.

Of course, there are exceptions to this general rule. Signing the FFI agreement would be necessary if the reporting Model 1 FFI has registered a branch located outside of a Model 1 IGA jurisdiction so that such branch may be treated as a participating FFI or reporting Model 2 FFI.

Only a Matter of Time… Model 1 versus Model 2 IGA

As mentioned, a critical difference between the Model 1 and Model 2 IGAs is that under the Model 1 IGA a taxpayer’s specific account information is given directly to the foreign government . There is no need for the FFI to obtain the account holder’s consent for the foreign government to provide that information to the IRS under the IGA. By contrast, a Model 2 IGA requires the account holder’s consent to be obtained by the FFI beforehand, since the FFI directly reports to the IRS. Those who refuse are labelled “recalcitrant” account holders. Aggregate information with respect to such “recalcitrant” accounts will be reported to the IRS and the IRS may subsequently request specific information about the individual accounts. When that happens, the FFI would have to send specific information to its home country government which will then provide such information to the IRS. So, regardless of the type of IGA signed, specific account holder information does become known to the IRS. The only issue is one of timing.

In accordance with Circular 230 Disclosure

Virginia La Torre Jeker J.D., has been a member of the New York Bar since 1984 and is also admitted to practice before the United States Tax Court. She has 30 years of experience specializing in US and international tax planning as well as international commercial transactions. She has been based in Dubai since 2001; prior to that time she worked in Hong Kong for 15 years as a US tax consultant for international law firms, major banks (including HSBC) international accounting firms (Deloitte) and trust companies. Early in her career she worked in New York with the top-tier international law firm, Willkie Farr & Gallagher.

Virginia is regularly asked to speak at numerous conferences and seminars for various institutes and commercial organizations; publishes a vast array of scholarly works in her area of expertise, been interviewed by CNN and is regularly quoted (or has her articles featured) in local and international publications. She was recently appointed to the Professional Tax Advisory Council, American Citizens Abroad, Geneva, Switzerland. She was a guest lecturer at the University of Hong Kong, LL.M Program (Law Department) and served as an adjunct Business Law professor at the American University of Dubai and at the American University of Sharjah where she also taught the legal / ethical aspects of internet law and internet based transactions.

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