The Honorable Bill Posey
U.S. House of Representatives
Washington, DC 20515
Dear Representative Posey:
Thank you for your letter regarding the interest reporting requirements of 26 C.F.R. §§ 1.6049-4(b)(5) and 1.6049-8 (referred to as bank deposit interest regulations), and the Foreign Account Tax Compliance Act (FATCA) and related intergovernmental agreements (IGAs).
As you know, FATCA was enacted in 2010 with strong bipartisan support. Under FATCA, foreign financial institutions must perform due diligence procedures to identify U.S. account holders and report their account information directly to the Internal Revenue Service (IRS), including the account balance and certain income flows, such as interest. In certain jurisdictions, laws of the foreign country where the financial institution is located would prevent that institution from complying with the requirements of the FATCA statute. For these reasons, the successful implementation of FATCA requires a cooperative international approach that results in foreign countries allowing banks to provide the information required by FATCA.
In order to achieve FATCA's information reporting objectives, the United States worked closely with France, Germany, Italy, Spain, and the United Kingdom to develop a model intergovernmental agreement (referred to as a "Model 1 IGA"). This Model 1 IGA was released in July 2012 to form the basis for bilateral agreements to implement FATCA. These agreements are based on the government-to-government exchange of information pursuant to an existing income tax treaty or tax information exchange agreement. Under a Model 1 IGA, a foreign government agrees to require all the relevant financial institutions located in its jurisdiction to identify U.S. accounts and report the information required under FATCA to the foreign government, which, in turn, will report the information to the IRS. Because a partner government under a Model 1 IGA agrees to establish rules to ensure that the United States will receive all of the FATCA information with respect to U.S. accounts in that jurisdiction, all of the financial institutions in that jurisdiction are treated as compliant with FATCA. The United States also developed a Model 2 IGA, under which a foreign government is required to direct and enable all relevant financial institutions located in its jurisdiction to identify and report information about their consenting U.S. accounts directly to the IRS.
The Model 1 IGA has a reciprocal version and a non-reciprocal version. Under the reciprocal version, the United States agrees to provide to the foreign government the information that U.S. financial institutions currently report with respect to accounts held by residents of the partner jurisdiction, including the information collected under the bank deposit interest regulations. Current U.S. Treasury regulations do not require U.S. financial institutions to report the same scope of information required of foreign financial institutions under FATCA. For example, FATCA requires reporting by foreign financial institutions on the account balance or value of all financial accounts, including bank deposits and custodial accounts, whereas the United States generally only collects information on the U.S. source income paid to those accounts. The United States' commitment to provide bank deposit interest information under the reciprocal Model 1 IGA was a central issue in the negotiations with the five countries that resulted in the Model 1 IGA. Several countries have expressed strong reservations about requiring other countries' financial institutions to provide significantly more information to the United States than U.S. financial institutions were required to provide to the foreign jurisdictions. The United States' agreement to report bank deposit interest information was key to securing agreement from numerous jurisdictions to follow the Model 1 IGA approach.
The effectiveness of the intergovernmental approach in addressing concerns by stakeholders is reflected in the overwhelmingly positive reaction to these agreements. As of early June 2014, the United States has either signed or has reached agreements in substance on IGAs with nearly 80 jurisdictions, and it is in active IGA negotiations with many others.
Time is a crucial factor in these negotiations because FATCA withholding on U.S. source payments made to non-participating foreign financial institutions begins on July 1, 2014. Suspending further negotiation of IGAs would negatively affect the United States' ability to enforce the provisions of FATCA without the imposition of substantial withholding tax. For countries with legal impediments to implementing FATCA, the IGAs are the chief means by which the United States can obtain FATCA information from financial institutions in those jurisdictions. If a moratorium were placed on IGA negotiations, financial institutions located in those jurisdictions would not be legally able to comply with the FATCA reporting regime. As a result, these institutions would be subject to a withholding tax of 30 percent on payments arising from their U.S. investments. This could result in harm to the interests of the United States because it could prompt divestment from U.S. investments by affected financial institutions.
Suspending enforcement of FATCA and further negotiation of IGAs would also harm the United States' efforts to enforce its own tax laws. FATCA is designed to combat noncompliance by U.S. taxpayers who are hiding income or assets in offshore accounts. If countries decide not to pursue IGAs for the reasons stated above, foreign financial institutions in those jurisdictions may be legally unable to report information on their U.S. account holders, and the United States would not be able to obtain the information that it needs to ensure that U.S. persons comply with U.S. tax laws.
Your letter also asks about statutory authority to enter into and implement the IGAs. The United States relies, among other things, on the following authorities to enter into and implement the IGAs: 22 USC Section 2656; Internal Revenue Code Sections 1471, 1474(f), 6011, and 6103(k)(4) and Subtitle F, Chapter 61, Subchapter A, Part III, Subpart B (Information Concerning Transactions with Other Persons).
The Treasury Department and the IRS will continue to work closely with businesses and foreign governments to implement FATCA, including implementation by means of IGAs, in a manner that appropriately balances the compliance objectives of the statute with whatever burdens the statue imposes.
We appreciate your continued attention to this important effort to reduce tax evasion. If you have additional questions, please contact Sandra Salstrom, Office of Legislative Affairs, at (202) 622-1900.
Alastair M. Fitzpayne
Assistant Secretary for Legislative
Addendum 7/5/14 9:45am
Allison Christians of the McGill University Faculty of Law has posted a response to the assertions in the above letter: IRS claims statutory authority for FATCA agreements where no such authority exists (Tax, Society and Culture 7/4/14), here. Allison is a respected member of the academic community, so her views should be taken into consideration on this issue.
Note: Thanks to Just_Me_Also for directing readers to this in a comment. Professor Alison had emailed me about it earlier in the day, but because of travel and vacation with family, I could not attend to it until just now.