Most people would avoid barging in on their neighbors, for obvious consequences. Nevertheless, the United States clearly had the first option in its mind when it announced the Foreign Account Tax Compliance Act (“FATCA”) in 2010. The FATCA targets non U.S. foreign financial institutions(“FFI”) that serve U.S. taxpayers such as bankers, brokers, insurance or other investment companies. It requires FFIs to have an agreement with the United States to disclose and report any U.S. taxpayers’ identity, account information, and other related financial information to the U.S. Department of Treasury regardless of their business frequency or size with their U.S. taxpayer clients. If the FFIs does not enter into an agreement with the United States, the plan was to assess the FFI , 30% of the withholding tax for all of its U.S. source income.
How feasible is it to regulate someone who is not under your jurisdiction? What if it is against their domestic laws to disclose or share the client information to a third party? As the largest economy in the world, the United States may have the power to push the FATCA into effect. However, the Department of Treasury has wisely changed its direction to implement the FATCA. The United States is currently engaging with more than 50 countries to facilitate the FATCA implementation.
The agreements signed thus far are all based on intergovernmental information exchanges under the Model I document. Under Model I, FFIs are required to report the FATCA information to their home country revenue authorities, and the revenue authorities exchange the information directly with the Internal Revenue Service. If the Revenue Agency wants to have similar information from the United States, it can reciprocally request the information from the IRS. The United States has already established bilateral agreements this way with the United Kingdom, Denmark, Mexico and Spain. In addition, there is another intergovernmental agreement model that incorporates FFI’s direct reporting to the United States. The Model II reflects a framework that the United States is working with Japan and Switzerland. However, there is not a signed agreement yet under Model II.
The Department of Treasury clearly abandoned or set aside its unilateral approach to implement the FATCA by negotiating bilateral agreements with a number of countries. By all means, the FATCA could have been viewed as a nonsense U.S. law encroaching on other countries sovereignty. Through international reciprocity, however, the FATCA seems to find a legal basis. It is still interesting to see though, how the FATCA will be implemented against FFIs in countries without bilateral agreements with the United States.
 Hiring Incentives to Restore Employment Act signed into law on March 18, 2010
 The informaiton is available at http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA.aspx
 U.S. Engaging with More than 50 Jurisdictions to Curtail Offshore Tax Evasion November 8, 2012 available at http://www.treasury.gov/press-center/press-releases/Pages/tg1759.aspx
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