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In 2010 the United States Congress enacted sections 1471 to 1474 of the Internal Revenue Code, commonly known as “FATCA”. Under FATCA, foreign financial institutions (“FFIs”) are generally required to report information on financial accounts of U.S. persons and foreign entities with significant U.S. ownership (“U.S. accounts”) to the IRS beginning in 2015, or be subject to a withholding tax on the gross amount of certain payments from U.S. sources and the proceeds from the disposition of certain U.S. investments. Compliance under FATCA regulations is complex and raises a series of conflict of law issues. To mitigate these conflict of law issues and facilitate FATCA implementation, the Treasury has held discussions with dozens of countries and entered into a series of intergovernmental agreements (“IGAs”). So-called “Model I IGAs” allow the agreeing government to adopt its own rules requiring financial institutions within their jurisdiction to identify and report information relating to U.S. accounts. Other IGAs require compliance with Treasury regulations, but with specified modifications (“Model II IGAs”). Some countries will not enter into an IGA, and therefore, FFIs in those countries will be subject to FATCA as administered under Treasury regulations without any modification. Although IGAs facilitate FATCA implementation within specific jurisdictions by removing domestic legal impediments and simplifying other aspects of compliance for institutions in a given jurisdiction, they also may complicate compliance for multinational FFIs by giving rise to a patchwork of differing FATCA regimes.
In this environment, how are multinational FFIs planning to embed FATCA compliance infrastructure within existing compliance structures? What elements of compliance, if any, may be managed centrally? Is a standardized compliance process (a “centralized compliance model”) across jurisdictional boundaries possible? Or must FFIs customize compliance processes in each individual jurisdiction in which they operate? Should FFIs encourage governments to coordinate to make centralized compliance possible? To what extent could multinational FFIs’ costs be reduced if governments would agree on a standardized architecture for compliance? To what degree would it matter from a cost perspective if these rules required reporting on all offshore accounts, rather than just U.S. accounts, so long as the rules facilitated a centralized compliance model?
By Professor Itai Grinberg, Georgetown University Law Center
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Coordinated and Consistently-Applied FATCA Responses Will Benefit the Global Fund Industry
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