FATCA Model Joint Agreements Released: U.S. Treasury Department publishes model intergovernmental agreements permitting Foreign Financial Institutions to report information about U.S. account holders to their home jurisdictions instead of the Internal Revenue Service

Sullivan & Cromwell LLP - August 1, 2012

On July 26, 2012, the U.S. Department of the Treasury published two FATCA model intergovernmental agreements (the “model agreements”) that provide for alternative means of complying with FATCA. These agreements were developed in consultation with France, Germany, Italy, Spain and the United Kingdom. The Treasury Department also released a joint communiqué with these same countries, endorsing the model agreements and announcing the parties’ expectation that bilateral agreements based on the model will shortly be concluded.

Both model agreements establish a framework for bilateral agreements with other countries (each a “FATCA Partner”) under which foreign financial institutions operating in a signatory country may report the required FATCA information to the relevant tax authority of the FATCA Partner instead of reporting required information to the U.S. Internal Revenue Service. The FATCA Partner tax authority would then transmit this information to the IRS under the tax treaty or tax information exchange agreement between the FATCA Partner and the United States.

The difference between the two model agreements is that one agreement (the “reciprocal agreement”) provides for the United States to send certain information on U.S. accounts held by residents of the FATCA Partner to the FATCA Partner, while the other (the “nonreciprocal agreement”) does not. Eligibility for home country reporting is based on the location of a financial institution’s relevant branch, rather than where the financial institution is incorporated or otherwise a tax resident. In other words, a French branch of a UK tax resident bank would report to the French tax authority under an agreement with France rather than to HMRC under a UK agreement.

Both model agreements provide benefits to financial institutions that operate in FATCA Partner jurisdictions (and report, as contemplated by the agreement, to their local revenue authority) that are consistent with the benefits identified in the joint statement released with the same five countries in February. These concessions include (i) being treated as compliant with FATCA and (ii) a suspension of the rules relating to “recalcitrant account holders.”