The US Treasury has released a “Model 2” version of inter-governmental agreements on how to enforce controversial US laws designed to prevent expatriate citizens dodge taxes. Withers, the law firm, has spelled out some of its key features.  

Some countries, such as the UK, have signed bi-lateral agreements with the US over how the recently enacted FATCA Act will be enforced in practice. In the case of UK fund managers and banks, for example, they will report information to their own governments and relevant information, such as about US account holders, will be transferred to the US. The agreements are designed to make the act less onerous.

The act is designed to force foreign financial institutions to establish the identify of any American clients, such as expats. If they do not show they have made such checks, the US Internal Revenue Service will impose a 30 per cent withholding tax. The legislation has prompted concerns that an already rising burden of compliance costs on banks and other institutions will make it unprofitable for businesses to serve Americans who live abroad. The roll-out of the Act, which is due to take effect in stages, has been recently delayed. 

Model 2

Withers, in a note, explained that the “Model 2” intergovernmental agreement on FATCA is expected to be the base for US diplomatic revenue deals with Switzerland, Japan, and certain other countries where there might be domestic legal or administrative barriers to entering into a “Model 1” agreement.

Unlike the first version of the agreement, “Model 2” requires foreign financial institutions to register direct with the US Internal Revenue Service by 1 January 2014. Under “Model 1”, firms can register with their own governments’ revenue agencies, such as the UK’s HM Revenue & Customs.

FFIs that are resident in, or organised under the laws of, Model 2 jurisdictions just ask for consent from account holders (where this is required under local law) to report information about US accounts and accounts or obligations of non-participating FFIs.

If account-holders do not agree to give consent, FFIs must report aggregate information regarding these account holders and obligations to the IRS, which may then ask for more details. The Model 2 FATCA Partner government will then have six months to respond to this information request by the IRS by providing the requested information regarding these accounts and obligations as if it had been reported directly to the IRS by the FFI.

As reported in October, a rising number of American citizens living outside the US are considering renouncing their US citizenship because of reporting complexities and penalty risks related to FATCA.

Asian firms appear to be behind their European counterparts in getting ready for the US FATCA tax compliance regulations, although all regions have much work ahead to prepare, accountancy firm WeiserMazars argued earlier this year.