Just days before the Foreign Account Tax Compliance Act comes into force, the US and China have signed an agreement in substance for a Model 1 Intergovernmental Agreement.

China has become the latest country to sign an agreement with the US to implement the Foreign Account Tax Compliance Act.

The US and China both signed an agreement in substance for a Model 1 Intergovernmental Agreement on 26 June. Under the agreement, US persons will report their taxes directly to the Chinese government, which will then send the information to the US Internal Revenue Service.

FATCA was enabled in 2010 as part of the US government’s plan to curtail offshore tax evasion by encouraging transparency through the collection of information on accounts held by US citizens abroad.

It is set to take effect on 1 July and requires all financial institutions outside of the US to regularly submit information on financial accounts held by US persons to the IRS. When the act comes into force, those who are not compliant will suffer a 30 per cent withholding tax on income and gross proceeds, as of January 2015.

The IRS and Treasury Department announced in early April 2014 that foreign financial institutions located in jurisdictions that have reached an agreement in substance with the US will be treated as having an agreement in effect until the end of 2014.

Model 1 IGAs have a number of benefits, including a relaxation of deadlines; simplified due diligence; Increased clarity around due diligence with country specific provisions; and reduced withholding requirements.