Bilateral Agreement Alternative to FATCA Implementation Brings New Twist to International Tax Cooperation


              On the evening of February 8, 2012, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) issued proposed regulations on the Foreign Account Taxpayers Compliance Act[1] and a joint statement regarding an intergovernmental approach with five major trading partners of the U.S. with respect to improving international tax compliance and implementing FATCA (hereafter the Joint Statement).[2] This article discusses some of the policy issues surrounding the Joint Statement.

             The preamble states that Treasury and the IRS are considering an alternative approach to implementing FATCA, based on bilateral agreements between the U.S. and foreign countries, to have foreign financial institutions (FFIs) collect and report information to authorities in their residence country and have those foreign authorities report the information to the IRS. In this regard, on February 8, 2012, the U.S. Treasury Department announced that the United States and five other countries (France, Germany, Italy, Spain, and the United Kingdom) are exploring a framework to share information on bank accounts across borders under a ground-breaking intergovernmental approach to implementing the Foreign Account Tax Compliance Act (FATCA). 

              The Joint Statement observes that FATCA has raised a number of issues, including that FFIs in some countries may not be able to comply with the reporting, withholding and account closure requirements because of legal restrictions.  The Joint Statement would respond to these legal barriers to compliance, simplify practical implementation, and reduce FFI costs.

            The proposed framework would allow the U.S. and a partner country to conclude an agreement in which the foreign country would agree to collect information required by FATCA and transfer that information to the IRS.  As a result, FFIs in the foreign country could avoid having to conclude directly a FFI agreement with the IRS and would eliminate U.S. withholding on payments to FFIs established in the foreign country. The agreement would also obligate the U.S. to reciprocate regarding automatic collecting and reporting on the U.S. accounts of residents of the FATCA partner.

               In order to reciprocate, the U.S. would need to finalize the proposed bank interest reporting regulations (REG-146097-09) under section 6049.  Those proposed rules would extend information reporting to include bank deposit interest paid to nonresident alien individuals who are residents of any foreign country. At present the U.S. reports only on interest paid to U.S. persons and Canadian residents.

            Treasury has said the agreements may be used as models for similar accords with other appropriate governments, acknowledging that the U.S. is in talks with other governments interested in this approach to implementing FATCA for their FFIs.[3]

            In the Joint Statement the six countries commit to "working with other FATCA partners, the OECD, and where appropriate, the EU, on adapting FATCA in the medium term to a common model for automatic exchange of information."4

                According to the Joint Statement, the U.S. and a FATCA partner would conclude an agreement pursuant to which, subject to certain terms and conditions, the FATCA partner would agree to:  (1) pursue the necessary implementing legislation to require FFIs in its jurisdiction to collect and report to the authorities of the FTCA partner the required information; (2) enable FFIs established in the FATCA partner (other than FFIs that are excepted pursuant to the agreement or in U.S. guidance) to apply the necessary diligence to identify U.S. accounts; and (3) transfer to the U.S., on an automatic basis, the information reported by the FFIs.

            The bilateral agreement would require the U.S. to: (1) eliminate the obligation for each FFI in the FATCA partner to enter into a separate comprehensive FFI agreement directly with the IRS, provided that each FFI is registered with the IRS or is excepted from registration pursuant to the agreement or IRS guidance; (2) allow FFIs in the FATCA partner to comply with their reporting obligations under FATCA by reporting information to the FATCA partner rather than reporting it directly to the IRS; (3) eliminate U.S. withholding under FATCA on payments to FFIs in the FATCA partner (i.e., by identifying all FFIs in the FATCA partner as participating FFIs or deemed-complaint FFIs, as appropriate); (4) identify in the agreement specific categories of FFIs established in the FATCA partner that would be treated, consistent with the IRS guidelines, as deemed compliant or presenting a low risk of tax evasion; and (5) commit to reciprocity with respect to collecting and reporting on an automatic basis to the authorities of the FATCA partner information on the U.S. accounts of residents of the FATCA partner.  Additionally, pursuant to the agreement FFIs in the FATCA partner would not have to:  terminate the account of a recalcitrant account holder; impose passthru payment withholding in payments to recalcitrant account holders; and impose passthru payment withholding on payments to other FFIs organized in the FATCA treaty partner or in another jurisdiction with which the U.S. has a FATCA implementing agreement.

            In return, the FATCA partner would commit to developing a practical and effective alternative approach to achieve the policy objectives of passthru payment withholding that minimizes burden, and commit to working with other FATCA partners, the OECD, and where appropriate the EU, on adapting FATCA in the medium term to a common model for automatic exchange of information, including the development of reporting and due diligence standards.

            Most likely the U.S. will approach various countries about concluding an arrangement similar to the intergovernmental approach of the six countries, while other countries may also approach the U.S. about negotiating such an approach.  The reaction of those countries that adhere to an approach prioritizing financial confidentiality will be important to watch.  It may be possible that some countries that have legal impediments to automatic exchange of information, such as financial or data privacy, will need to change their laws prior to concluding a bilateral arrangement.  Where such laws are considered fundamental laws, the changes may take time.

            These commitments will provide significant clarity for the financial services community that deals with U.S. clients, taxpayers, and assets or any transaction cleared in the U.S.  The breadth of FATCA and potential costs, burdens and complications make clarity and certainty important from an economics perspective.

            The one burden imposed on other governments concluding a Joint Statement with the U.S. is that it does require them to receive the FATCA reports and forward them to the U.S.  Hence, there would be additional cost and human resource burden on the tax authority of the FATCA partner. 

            Notwithstanding the benefits, it may be that some jurisdictions prioritizing financial confidentiality may not want to conclude such arrangements, at least in the short-term.  Other governments will need changes to their statutory or even fundamental laws before they have the authority to sign.  For instance, the EU privacy data law, which is fundamental law, does not allow automatic exchange of information.  Changing EU fundamental law will take time and will need to involve more than the five countries participating in the Joint Arrangement. Indeed, even the U.S. would need to finalize the proposed bank interest reporting regulations (REG-146097-09) under section 6049 before it is authorized to implement the commitments in the draft regulation.

            Countries that may have the most difficulty to take advantage of the Joint Statement are ones without any income tax treaty or tax information exchange agreement with the U.S.  They will need to conclude a new bilateral DTA or TIEA or join the OECD/Council of Europe Convention on Administrative Assistance in Tax Matters.  Hence, unless they can focus on the potential options and act quickly, they may be the losers.

            One of the winners of the joint arrangement may be the Convention on Administrative Assistance in Tax Mattes. At the G-20 leaders' summit in November 2011 all G-20 members committed to signing the updated multilateral Convention on Mutual Administrative Assistance in Tax Matters.5  One of the easiest ways for countries wanting to have a bilateral arrangement to FATCA will be to accede to the multilateral Convention on Mutual Administrative Assistance in Tax Matters.  Accession to that convention will be quicker than negotiating a new DTA or TIEA with the U.S.  In this regard,  the new proposed FATCA framework complements work already undertaken in the context of OECD's Tax Relief and Compliance Enforcement (TRACE) project and will help OECD’s work in this regard.  The TRACE project aims to develop a unified information reporting system on a multilateral basis.6

            The announcement of the joint arrangement may impact the potential application of a similar approach by the EU in its savings tax directive with third countries, assuming that Austria and Luxembourg remove their objections to revising the EU Savings Tax Directive.  The decision by Austria and Luxembourg on the joint arrangement may impact their decision on whether they remove their objectives to revising the EU Savings Tax Directive.7

            A major issue will be whether the U.S. legislative and executive branches are able to reciprocate in terms of furnishing information on FATCA “withholdable payments” since they include not only U.S.-source payments such as dividends, interest and other types of U.S.-source payments, but also gross proceeds from the sale of assets that can produce U.S. source interest or dividends.   In addition, if the U.S. financial institutions must look through corporate and passthru entities to determine the ultimate beneficial owner and provide gross amounts of transactions to the IRS for transmission to foreign governments, the U.S. financial community and the IRS will have to do much more work. The details and timing remain unknown. 

[1]              U.S. Department of Treasury, Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities, REG-121647-10, Feb. 8, 2012.


[2]              U.S. Department of Treasury, Joint Statement regarding an Intergovernmental Approach to Improving International Tax Compliance and Implementing FATCA, Feb. 8, 2012.

[3]              Marie Sapirie, Jeremiah Coder, and Kristen A. Parillo, U.S. Treasury Releases FATCA Regs, Multilateral Statement on Info Exchange, 2012 Worldwide Tax Daily 27-1, Feb. 9, 2012.

4              Joint Statement regarding an Intergovernmental Approach to Improving International Tax Compliance and Implementing FATCA, Feb. 8, 2012, at B.2.4.

5              For background see Rick Mitchell, Six-Country Plan for Information Sharing Could Attract Big Offshore Hubs, Owens Says, Daily Rep. For Exec., Feb. 10, 2012, at GG-2.

6              Id.


7              Joe Kirwin. Eric J. Lyman, Daniel Pruzin and Andrea Schuessler, European Tax Experts Wary of FATCA Rules But EU, Other Officials Praise Bilateral Pacts, Daily Rep. For Exec., Feb. 10, 2012, at GG-1.



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