June 24, 2012

The Treasury Department has issued on June 22, 2012 two separate joint statements with the governments of Japan and Switzerland that express the countries' mutual intent to pursue a framework of intergovernmental cooperation with the United States for implementing the Foreign Account Tax Compliance Act (FATCA), as enacted in the Hiring Incentives to Restore Employment (HIRE) Act of 2010. FATCA imposes numerous reporting and withholding obligations for payments to U.S. accountholders held in certain foreign financial institutions (FFIs).

The Treasury and IRS have actively engaged in discussions with foreign governments regarding the legal impediments to reporting and withholding. Treasury and IRS officials have previously stated that part of the implementation process for FATCA would involve reaching agreements with foreign governments on issues including withholding and information reporting. Currently, the United Sates has already signed FATCA agreements with the United Kingdom, Germany, France, Spain and Italy.

The U.S. government has proposed two types of model agreements for cooperative intergovernmental frameworks, the first requiring that FFIs report information on certain U.S. accountholders to their own governments, which would then automatically report that information to the IRS. A second model would involve foreign FFIs reporting the information directly to the IRS, which would then be able to make a request—where authorized by a foreign tax treaty—for information on accounts held by likely U.S. accountholders. These two joint statements represent a step toward the United States reaching frameworks with Japan and Switzerland under the second model, the official reported.

The official also noted that the first model was generally preferred by FFIs since they already report information to their own governments. The official noted that the Treasury would welcome the conversion of a "model two jurisdiction" to a "model one jurisdiction" when it is ready to do so. In the meantime, the Treasury plans to develop and release a second model draft agreement for jurisdictions that are interested and willing to enter into a framework with the United States under those terms.

Japan

Under the framework with Japan, the United States would agree to eliminate certain obligations for Japanese FFIs that are registered or excepted from registration with the IRS. The United States would also determine which categories of Japanese FFIs would be treated as deemed compliant or exempt due to presenting a low risk of tax evasion, and provide certain other measures to reduce burdens and simplify the implementation of FATCA. In exchange, Japan would agree to accept and promptly honor group requests from the IRS for additional information on recalcitrant U.S. accounts that have been reported on an aggregate basis by Japanese financial institutions.

Switzerland

Under the framework with Switzerland, the United States would agree, among other things, to identify more specifically the categories of Swiss FFIs that would be treated as deemed compliant or exempt. The United States would also eliminate U.S. withholding under FATCA on payments to Swiss financial institutions.

Although both the Swiss and Japanese agreements provide for treaty exchange requests, it is expected that the majority of information would come from direct reporting from the institutions and only exceptional cases would require a treaty request.

Recently, the IRS published draft W-8 Forms for individuals and for entities to included information required for FATCA reporting.

The U.S. government has made it clear that FATCA is not going to be repealed and that it hopes to issue final regulations by this fall.