Editor’s note: We may be in the holiday season, but that legislative juggernaut known as the US FATCA Act means there is not much of a vacation for financial institutions wrestling with the compliance costs this act brings about. Here, Withers, the law firm, spells out fresh developments.

The US, UK, France, Germany, Italy, and Spain have jointly issued drafts of two versions of model agreements implementing FATCA through a process of intergovernmental information exchange (the “model agreements”). Although these drafts clarify the broad strokes of these agreements and contain a number of provisions that are likely to be favourably received, they also raise a number of questions and concerns.

Summary of key provisions

Under one version of the model agreements, certain “FATCA partner” countries will  implement legislation requiring financial institutions located in those jurisdictions to collect and report information regarding their accountholders to the relevant local tax authorities, who will compile and forward this information to the US.

In exchange, the IRS would collect information regarding accounts held with financial institutions in the US by tax residents of the relevant FATCA partner, and report this to the tax authorities of that partner country.

Due to US laws restricting the distribution of such information, however, it is anticipated that the reciprocal agreement will only be available to countries that have a treaty and tax information exchange agreement with the US and otherwise have “robust” protections limiting the use of the information exchanged under local law.

Under another, non-reciprocal, version of the model agreements, foreign financial institutions located in the relevant FATCA partner jurisdiction would collect and report information regarding their accountholders, which would be forwarded to the IRS, but the tax authorities of that jurisdiction would not receive any corresponding information from the US regarding accounts its tax residents maintain with US financial institutions. FFIs in jurisdictions with which the US has signed either a reciprocal or non-reciprocal agreement would not be subject to the new US withholding tax under FATCA. In addition, they will not be required to separately enter into agreements with the IRS under which they would become participating FFIs and agree to identify their US accountholders to the IRS, thereby addressing concerns regarding data protection and bank secrecy laws that would potentially prevent FFIs in those jurisdictions from releasing such information to the IRS.

Expanded phase-in of implementation timeframe

The model agreements broadly mirror the implementation timeline introduced in the proposed regulations, but relax certain requirements and would not require institutions in jurisdictions covered by these agreements to report information regarding accounts maintained in the 2013 calendar year until end September 2015. In addition, procedures to collect certain information such as the US or FATCA partner TIN of accountholders will not be required until January of 2017.

The model agreements also extend the date by which an account may be opened and still qualify as a “pre-existing” account until end December 2013.

Expanded categories of excepted and deemed compliant entities

The model agreements clarify that certain specified retirement plans, charitable organizations, and other entities will be treated as deemed-compliant and excluded from the application of this intergovernmental information sharing regime and will not be subject to the FATCA withholding taxes that would otherwise apply. Further details as to the specific types of entities and arrangements that will be treated as deemed compliant are expected to be forthcoming in a schedule that will be attached to the final agreement with each FATCA partner country. This should provide welcome clarification and certainty as to the status of a number of specific categories of institutions in each partner jurisdiction.

Relaxed due-diligence requirements

If an FFI’s database includes sufficient records to perform a search for the required indicia of the US status of account holders, the model agreements would no longer require the FFI to review paper records when implementing the enhanced review procedures applicable to accounts with a balance over $1 million; however, inquiry of relationship managers as to the actual knowledge of any US indicia will still be required.

Trusts

The model agreements raise issues and concerns for trusts that have a connection to the US, as they deviate from the approach initially adopted in the proposed FATCA regulations by introducing a new concept of “controlling persons” (defined to mean natural persons who exercise control over an entity), into the test for determining whether an account should be categorised as having US owners. The model agreements specify that, in the case of a trust, the category of controlling persons includes settlors, trustees, protectors, and beneficiaries or classes of beneficiary (to be interpreted consistently with FATF recommendations).

Although the model agreements allow FFIs to instead rely on the proposed regulations when identifying their US accountholders, many may choose to apply the “controlling person” test. This might well result in more trusts being categorised as having US owners than would have been the case under the procedures outlined in the proposed FATCA regulations.

A two-way street?

Finally, the success of these Model Agreements ultimately still depends on whether FATCA partner countries will be willing to enter into such accords, which in the case of certain partner jurisdictions hinge on whether there will be a reciprocal sharing of information with these countries. It has been noted, for example, that there may be opposition in Germany to entering into such an agreement with the US unless there is reciprocity.

The situation is further complicated by legislation currently pending in the US Congress that would, if enacted, likely hinder efforts by the IRS and Treasury to effectively implement the reporting by US financial institutions necessary to provide such reciprocal information to other governments. Although it remains uncertain whether this legislation will pass, it is clear that much work remains to be done in the US before any such reciprocal agreements could be effectively implemented.