With less than two weeks remaining until many countries are required to exchange tax information with the U.S. pursuant to the Foreign Account Tax Compliance Act (FATCA), the U.S. has agreed to provide partner jurisdictions with more time to implement information exchange systems. Today, the Treasury Department and the Internal Revenue Service issued Notice 2015-66 which relaxes the September 30, 2015, deadline for countries which have signed Model 1 Intergovernmental Agreements (IGAs) to hand over information regarding accounts held by U.S. taxpayers. As of today, 112 countries have either signed an IGA with the U.S. or agreed in substance to the terms of an IGA. (A complete list is available here.) Under the terms of the Model 1 IGA, once the agreement enters into force, information relating to calendar year 2014 is generally required to be reported to the U.S. by September 30, 2015.
Treasury has released two versions of the Model 1 IGA. A Model 1A IGA provides for reciprocal information exchange between the United States and the partner jurisdiction. The obligation to exchange information generally begins after the IGA enters into force under Article 10(1) of the IGA and the competent authorities provide notification that each is satisfied that the other jurisdiction has in place the necessary safeguards to ensure that the information received will remain confidential and be used solely for tax purposes and the infrastructure necessary for an effective exchange relationship. A Model 1B IGA provides for information to be exchanged only by the partner jurisdiction. Under a Model 1B IGA, the obligation for a partner jurisdiction to exchange information with the United States begins when the IGA enters into force under Article 10(1) or Article 12(1) (as applicable) of the IGA.
Once an IGA has entered into force and any relevant notifications described above for the Model 1A IGA have been provided, Article 2 of both versions of the Model 1 IGA requires the partner jurisdiction to obtain and exchange specified information with respect to each U.S. reportable account. Under Article 3(5) of the Model 1 IGA, the partner jurisdiction is obligated to obtain and exchange information within nine months after the end of the calendar year to which the information relates. In the case of information required to be obtained and exchanged with respect to 2014 pursuant to a Model 1 IGA that is in force, the 2014 information should be exchanged by the partner jurisdiction by September 30, 2015.
Notice 2015-66 recognizes that many countries that have signed IGAs, or have agreed to such in principle, are continuing to work through their internal procedures in order to bring the IGA into force. Such countries are continuing to develop and implement systems needed for automatic exchange and may not have those systems in place by September 30, 2015. In addition, several partner jurisdictions are in the process of enacting legislation to implement their IGAs, without which they are unable to exchange tax information with the U.S. For these reasons, Treasury and the IRS have decided to relax the September 30 reporting deadline.
Model 1 IGA Jurisdictions for Which the Obligation to Exchange Has Not Taken Effect
For those Model 1 IGA jurisdictions where the obligation to exchange information has not yet taken effect, Notice 2015-66 provides that FFIs in that country will be treated as FATCA compliant, and not subject to withholding, so long as the jurisdiction “continues to demonstrate firm resolve to bring the IGA into force.” Under these circumstances, the deadline to exchange information for calendar year 2014 will be extended one full year, to September 30, 2016. Notice 2015-66 does not, however, change the deadline for FFIs to report information to their local tax authority, which remains governed by law of that country.
Model 1 IGA Jurisdictions for Which the Obligation to Exchange Is In Effect
For those Model 1 IGA jurisdictions where the obligation to exchange is in effect now, Notice 2015-66 provides that FFIs in that country will be treated as FATCA compliant, and not subject to withholding, so long as the partner jurisdiction notifies the U.S. before September 30 that it requires more time, and “provides assurance that the jurisdiction is making good faith efforts to exchange the information as soon as possible.” Notice 2015-66 does not, however, change the deadline for FFIs to report information to their local tax authority, which remains governed by law of that country.
Notice 2015-66 provides a much-needed reprieve for Model 1 IGA countries and affords such jurisdictions more time to implement information exchange systems and, if necessary, legislation to implement IGAs. Unless the Model 1 IGA jurisdiction modifies its internal deadline for reporting, FFIs in those jurisdictions will still have to report information regarding their U.S. reportable accounts to their respective tax authorities irrespective of the relaxed deadlines in Notice 2015-66. Today’s announcement also provides a reprieve, of sorts, to non-compliant U.S. taxpayers who maintain financial accounts at FFIs in Model 1 IGA jurisdictions. The relaxation of the September 30 deadline for reporting to the U.S. affords such taxpayers additional time to take steps to become compliant, by utilizing the various IRS voluntary disclosure programs such as the Offshore Voluntary Disclosure Program or the Streamlined Filing Compliance Procedures. Once a foreign jurisdiction turns over account information to the U.S., non-compliant taxpayers generally cannot take advantage of the IRS disclosure programs and will be subject to audit or, worse, a criminal investigation.
Matthew D. Lee is the author of The Foreign Account Tax Compliance Act Answer Book 2015 (published by the Practising Law Institute), a definitive treatment of the due diligence, withholding, reporting, and compliance obligations imposed by FATCA on foreign financial institutions, non-financial foreign entities, and withholding agents. For more information on this publication, please click here.