FATCA International Agreements: US Treasury Department Releases “Model 2” FATCA Intergovernmental Agreement; Signs FATCA Agreements with Denmark, Mexico and Spain

Sullivan & Cromwell LLP - November 28, 2012

On November 14, the US Treasury Department released a template (the “Model 2 IGA”) that is to be used for negotiating “model 2” FATCA intergovernmental agreements. The “model 2” approach, which was first announced in joint statements made by the US Treasury Department and the governments of Japan and Switzerland, will generally require “foreign financial institutions” (“FFIs”) in “FATCA Partner” jurisdictions (that is, jurisdictions that enter into intergovernmental agreements with the United States) to report FATCA information to the IRS. Direct FFI reporting will then be supplemented by group requests (made under an applicable tax treaty or tax information exchange agreement between the United States and the FATCA Partner) for information about customers who do not consent to information reporting. The Model 2 IGA stands in contrast to the “model 1” approach that was negotiated with five European countries, which requires FFIs to report FATCA information to their home country revenue authority, which will then forward that information to the IRS. The benefits of the Model 2 IGA are similar to those conferred by the “model 1” approach: however, significantly, the Model 2 IGA does not fully suspend the requirement to perform “foreign passthru payment” or “gross proceeds” withholding, and does not limit FATCA withholding responsibility to “withholding qualified intermediaries” and other entities that have elected to assume US withholding duties.

In separate developments, the United States signed three FATCA agreements over the last several days, with Denmark, Mexico and Spain. The agreement with Denmark (the “Denmark Agreement”) is a “model 1” reciprocal agreement, and there are few significant differences between the Denmark Agreement and the FATCA agreement that was signed by the United States and the United Kingdom in September 2012 (the “UK Agreement”) apart from (i) the inclusion of certain collective investment vehicles in the annex of exempted entities (a feature that is also present in the Model 2 IGA), (ii) the release, in conjunction with the Denmark Agreement, of a memorandum of understanding limiting the reporting responsibilities of the Danish Central Securities Depository, (iii) the use of Danish TINs (rather than the account holder’s date of birth) in information exchange, and (iv) the absence of “international organizations” from the list of exempted entities.

The agreement with Mexico (the “Mexico Agreement”) is also a “model 1” agreement and is very similar to the Denmark Agreement. Like the Denmark Agreement, it is a reciprocal agreement that provides for automatic information exchange (including a commitment, by the US Treasury Department, to require US banks to collect Mexican TINs with respect to 2017 and subsequent years). Interestingly, the Mexico Agreement does not include “local FFIs” in its annex of exempted entities, and—in contrast to other “model 1” agreements—requires reporting of average monthly balances, rather than year-end balances (although the due diligence annex remains keyed off of year-end account balances). The Mexico Agreement also differs from other “model 1” agreements in that it requires the United States (but not Mexico) to make queries regarding “minor and administrative errors” through the Mexican competent authority (instead of requesting the information directly from the financial institution).

The agreement with Spain has not yet been published by the Treasury Department, but has been announced by the Spanish authorities.