Foreign Financial Institutions are not getting the best of Christmas presents this year. Instead of getting sugar plums in their stockings, they are getting FATCA and GIIN!

By brief background, under the Foreign Account Tax Compliance Act, (FATCA), foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs) must agree to verification and due diligence procedures – meaning they must be on the look-out for customers, owners or beneficiaries evidencing any “US indicia”. They must identify and report directly to the United States Internal Revenue Service (IRS) or their own government via an intergovernmental agreement (IGA), information on US account holders/owners. They must look through their customers and counterparties’ ownership to find “substantial United States owners” (generally, more than 10 percent ownership).

The goal of FATCA is to stop United States tax evasion by requiring FFIs and NFFEs to provide information about financial accounts held by US taxpayers or foreign entities in which US taxpayers hold a substantial ownership interest. If they don’t agree to the due diligence and reporting, the institution/entity itself will suffer a 30% withholding tax on all US source payments, including sales proceeds on US stocks and securities. Simply put, the FATCA focus is on reporting by foreign financial institutions and withholding is the cost of not reporting.

To avoid FATCA’s 30 percent withholding penalty:

The FFI must enter into an agreement with the IRS whereby it agrees to provide detailed identifying reports on its US account holders, close accounts of holders who refuse to provide identifying information to the FFI, and ultimately withhold on certain ‘passthru payments’ (which is not required until 2017). These are called ”Participating FFIs”.

Alternatively, if in a country with an IGA in place, the FFI must comply with the IGA mandates and become a “reporting financial institution.” 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. Such an FFI be treated as “deemed-compliant” with FATCA, and will generally not be subject to withholding. There are two types of Model 1 Agreements – reciprocal and nonreciprocal. Model 1A agreements are “reciprocal” under which the United States government will provide similar tax information to the counterparty foreign governments regarding individuals and entities from their jurisdictions with accounts in the United States.

FFIs located in a “Model 2 IGA” jurisdiction are required to enter into an “FFI Agreement” and report directly to the IRS. They will also be considered as “Participating FFIs.” Only 3 countries have entered into a Model 2 IGA – Japan, Bermuda and Switzerland.

FFI Registration Process

Generally, FFIs located in jurisdictions that have entered into IGAs must still register with the IRS and obtain a “Global Intermediary Identification Number” (“GIIN”) to avoid FATCA withholding. The IRS online registration system has been open for registration since August 2013. Beginning on January 1, 2014, FFIs will be able to complete their registrations. As registrations are finalized and IRS-approved, FFIs will receive notices of registration acceptance and will be issued GIINs. For those FFIs which do register, they can change their minds and cancel the registration. Nothing like being able to return an unwanted Christmas gift!

Commencing June 2, 2014, the IRS will publish a monthly electronic “IRS FFI List” of Participating FFIs and registered deemed-compliant FFIs to allow withholding agents to verify payees’ GIINs. Generally, an FFI should finalize its registration with the IRS no later than April 25, 2014 in order to be included in that first IRS FFI List.

FFIs located in Model 1 IGA countries will have additional time to register with the IRS and obtain GIINs. For an FFI located in a Model 1 IGA country, verification of a GIIN by a withholding agent (and FATCA withholding) will not be required for withholdable payments made prior to January 1, 2015. On the other hand, for other FFIs, verification of the GIIN and FATCA withholding will generally begin on July 1, 2014.

The IRS most recent update on FATCA financial institution registration is contained in Announcemenrt 2014-1

The IRS has finalized the format for automatically exchanging FATCA data with IGA jurisdictions. You can read more about the Intergovernmental FATCA XML Schema (version 1.1) here.

FATCA List Getting FATTER

So far, 18 jurisdictions have signed FATCA IGAs with the US. Malta, Isle of Man, Jersey and Guernsey and the Netherlands just signed Model 1 “reciprocal” IGAs this past week. Behind the scenes, the FATCA momentum continues picking up plenty of steam. Way back in November 2012, Treasury stated that it was in discussion with more than 50 countries about FATCA compliance and IGAs. Since then, officials have revised this number to over 70. Recently, several countries have already initialed accords, which is generally the last step before a formal IGA is a sealed deal. These countries include Hungary and Italy. According to statements made by the respective foreign governmental representatives for Canada, Israel, and the Czech Republic, IGA discussions are ongoing. Talks are also continuing in Belgium, Liechtenstein, Luxembourg, and Sweden. It has been reported that the government of New Zealand just recently introduced legislation to its Parliament that would permit New Zealand financial institutions to comply with any possible future IGA.

One by one we see the nations are bowing to FATCA. Might fiscal transparency be a Christmas wish that’s eventually coming true? Let’s not hold our breath – we have not heard a word yet from many jurisdictions in the Far East – notably China, the sleeping giant.

In accordance with Circular 230 Disclosure