As FATCA is being adopted by more and more countries, it is important to understand that there are two types of model FATCA IGAs (i.e. intergovernmental agreements to implement FATCA) that are signed between various countries and the United States. Both model FATCA IGAs were issued by the US Treasury Department and both model FATCA IGAs are perfectly valid, but some countries prefer one model FATCA IGA over the other. In this article, I would like briefly discuss the main differences between the two model FATCA IGAs.
Model FATCA IGAs Background
FATCA (Foreign Account Tax Compliance Act) was enacted by US Congress in 2010 to target tax non-compliance of U.S. taxpayers with foreign accounts. Since that time, this law has established the global standard for promoting tax transparency and has been adopted by a very large number of countries around the globe.
The adoption of FATCA usually occurs as a two-step process. First, a foreign jurisdiction signs one of the two model FATCA IGAs with the IRS. Second, the foreign jurisdiction’s legislature modifies domestic law to implement the provisions of whatever one of the two model FATCA IGAs that the country signed.
Model FATCA IGAs: Model 1
The first of the two Model FATCA IGAs is called “Model 1IGA”. Its principal feature is that it requires foreign financial institutions (FFIs) to report all information required under FATCA to their domestic government tax agencies. The domestic tax agencies would collect all of the FATCA information and turn it over of the IRS.
Since the FFIs would do all of their reporting domestically to their own agencies, Model 1 IGA is sometimes negotiated as a reciprocal agreement. This means that some Model 1 IGAs require the IRS to provide certain information with respect to the tax residents of the country that signed such a reciprocal Model 1 IGA.
Finally, the FFIs covered by a Model 1 IGA do not need to sign an FFI agreement. However, the FFIs will still need to register on the IRS’s FATCA Registration Portal or file IRS Form 8957.
Model FATCA IGAs: Model 2
The second of the two Model FATCA IGAs is called “Model 2 IGA”. Unlike the other model IGA, Model 2 IGA requires FFIs to report the FATCA-related information directly to the IRS and without any intermediaries.
Since the FFIs report all FATCA-related information directly to he IRS, they need to register with the IRS and sign an FFI agreement (which should reflect the specific changes to the model FATCA IGAs negotiated by the foreign jurisdiction).
Both Model FATCA IGAs Lead to Disclosure of Foreign Accounts Held by US Persons
Irrespective of the type of the agreement, it is important to remember that both model FATCA IGAs are designed to perform the same function – disclosure of foreign accounts held by US persons (directly or indirectly). This means that the spread of both types of model FATCA IGAs presents a direct threat to any undisclosed foreign accounts of US persons with potentially catastrophic consequences for these US persons, including potential criminal prosecution and willful FBAR penalties in excess of the balances of these secret accounts.
Contact Sherayzen Law Office for Help with Undisclosed Foreign Accounts
If you have undisclosed foreign accounts, please contact Sherayzen Law Office as soon as possible. Our international tax lawyers will first carefully review the facts of your case and identify the best voluntary disclosure options available to you. Our international tax professionals will conduct your voluntary disclosure process from the beginning through the end, including the preparation all of the required legal documents and tax forms.