FATCA Model 2 Agreement published

The United States Treasury has published a second model agreement, developed in conjunction with Japan and Switzerland, designed to facilitate the implementation of FATCA.

In February this year, the US Treasury announced the first model agreement – negotiated with France, Germany, Italy, Spain and the UK - to facilitate a government-to-government mechanism for implementing FATCA.   Under the first model agreement, FFIs would report the necessary information regarding US persons to their respective governments rather than directly to the IRS.   The agreement also envisages tax information sharing between the governments on a reciprocal basis, based on existing bilateral tax treaties.  This model agreement is expected to be available only to jurisdictions who have signed a Tax Information Exchange Agreement with the US, or who have a double tax treaty in place.

The second form of model agreement takes a different approach.  It does not obviate the need for direct reporting by FFIs to the IRS, but it does deal with some perceived legal impediments which would otherwise prevent FFIs from passing the information across. In essence, governments using the second model agreement would issue a directive to their resident FFIs directing them to register with the IRS by January 1, 2014, to comply with all of the requirements of an FFI agreement, and instructing them to request the consent of pre-existing account holders to the reporting. 

There are likely to be some situations where existing US account holders refuse to consent to the reporting of their information.  The model agreement deals with this by providing that in those situations the FFI will provide aggregated information on all such accounts to its own government’s tax authority, which will then be authorized to transmit the data to the IRS.  

New accounts for US persons would only be permitted to be opened if the FFI first obtains consent from each account holder for the FFI to comply with the requirements of an FFI agreement. 

The model two agreement is a pragmatic solution to situations where a country’s laws would prevent the passing of data to a foreign tax authority without the explicit consent of the underlying client, and as such has been welcomed by American Citizens Abroad (ACA), a Geneva-based organisation which represents American expatriates.  However, as it does not obviate the need for the FFI to have a direct reporting relationship with the IRS, it is likely to be viewed in many quarters as less attractive than the first model agreement.

Some offshore jurisdictions, including the Channel Islands, have already announced their intention to put IGAs in place following model one.  The Cayman Islands, by contrast, decided not to commit themselves to any particular course of events until the second model agreement had been published.  It can therefore be expected to make an announcement as to its preferred course of action shortly.

The IRS is currently understood to be in dialogue with around 50 countries in relation to arrangements for FATCA compliance.