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FATCA Update

September 14, 2012

On 26 July 2012 the governments of France, Germany, Italy, Spain, the UK and the US jointly published the first model for an intergovernmental agreement (Model IGA) in relation to FATCA.

Purpose

The primary aim of FATCA is to combat tax evasion by US persons by way of offshore accounts at foreign financial institutions (FFI) (an entity that accepts deposits; holds financial assets for the account of others; or is engaged in trading or investing in securities, commodities or partnership interests.  Funds will fall within this definition given their business of investing/trading).

Effect

FATCA imposes reporting and disclosure responsibilities on US persons and requires withholding of 30% on “withholdable payments” made to FFIs who are not in compliance with FATCA.

Foreign Financial Institutions

Draft Regulations were issued by the US Internal Revenue Services (IRS) on 8 February 2012 dividing FFIs into three categories:

  • Participating FFI
  • Deemed compliant FFI
  • FFIs exempt from FATCA (these exemptions are unlikely to apply to Irish funds as they relate to entities that are excluded from the definition of FFI (including certain holding companies and start-up entities) and exempt beneficial owners (including foreign governments and retirement funds)

If an entity is/becomes either a participating or deemed compliant FFI, no FATCA withholding tax will be imposed on payments made to the entity.

Deemed Compliant FFI

There are two main types of deemed compliant FFIs, registered and certified. Registered deemed compliant FFIs are those which have no US accounts or accounts of non-participating FFIs, including restricted funds, qualified collective investment vehicles, local FFIs and non-reporting members of participating FFI groups. These FFIs must register with the IRS, but do not have to enter into an agreement with the IRS. 

Certified deemed compliant FFIs are not required to register with the IRS but must satisfy a number of conditions and be either a non-registering local bank, retirement fund, non-profit organisation, or an FFI with only low value accounts.

Participating FFI

If a fund is not exempt from FATCA or a deemed compliant FFI, it must become a participating FFI to comply with FATCA. Participating FFIs must enter into an agreement with the IRS to become a Participating FFI, put in place procedures to identify potential US account holders and to report this information to the IRS.  In addition it must carry out due diligence on pre-existing and new investors; make initial and periodic certifications to the IRS; report information to the IRS and withhold US tax from certain payments made.

Funds are liable for their own compliance with FATCA and any underpayment of withholding tax, regardless of whether the fund has outsourced such compliance to third parties.  A Participating FFI who fails to withhold tax while knowing or having reason to know that a claim of non-US status is unreliable or incorrect will be liable for the tax plus interest and penalties.  

Alternative FATCA Compliance under Bilateral Agreements

On 26 July 2012 the governments of France, Germany, Italy, Spain, the UK and the US jointly published the first model for an intergovernmental agreement (Model IGA) in relation to FATCA.

The Model IGA establishes a framework to improve tax compliance by enhancing the information exchange between the US and each FATCA Partner (France, Germany, Italy, Spain and the UK) and achieving common reporting and due diligence standards.  Annex II to the Model IGA will contain details of exempt products and deemed compliant financial institutions, which will be tailored on a country-specific basis.

A second model agreement is expected to be published shortly between the US, Japan and Switzerland. 

Earlier this year the IFIA confirmed that the Irish Revenue Commissioners were in discussions with the US authorities to develop a bilateral agreement in respect of FATCA.  Since the publication of the Model IGA, it is hoped that discussions will progress further and Ireland will also have a bilateral arrangement with the US authorities sooner rather than later.

For further information, please contact one of the key contacts listed above or your usual contact in our Asset Management and Investment Funds Team.