Model 1 IGA - Australia's way forward to FATCA
This blog is co-authored by Mayank Goel (Mayank_Goel03@infosys.com)
The Foreign Account Tax Compliance Act (FATCA) Model 1 Intergovernmental Agreement (IGA) has been signed between the Australian and United States governments. Several Australian financial institutions have invested in developing a FATCA solution in-house or purchasing third-party FATCA products to meet the July 1, 2014 FATCA deadline.
Enacted in March 2010, as a part of the Hiring Incentives to Restore Employment (HIRE) Act, FATCA is effective from July 1, 2014. FATCA aims to combat cross-border tax evasion by US individuals and entities holding investments in offshore accounts. According to FATCA, foreign financial institutions (FFIs) and non-financial intermediaries must adhere to stringent Internal Revenue Service (IRS) disclosure requirements. Non-compliance with FATCA regulation can result in a 30% tax withholding.
Foreign institutions can implement FATCA by adopting the FATCA regulations or adopting the IGA (IGA1 and IGA2) approach. The Australian government has adopted the IGA 1 approach to implement FATCA. It significantly reduces the pressure of implementing regulations by FFIs.
Adopting the IGA1 approach has several advantages:
1. Reduction in the cost of compliance: IGA helps Australian financial institutions reduce the burden of FATCA regulations
- Australian financial institutions do not have to withhold 30% tax on payments made to recalcitrant accounts or close such accounts if the IRS receives information about recalcitrant accounts in a timely manner. In the event that IGA was not signed, Australian financial institutions had to withhold 30% tax on payments made to recalcitrant accounts.
- Financial institutions do not have to enter individual FATCA agreements with the IRS. One agreement at the country level is applicable to all financial institutions
- The reporting stipulation is significantly reduced for Australian financial institutions
2. Reciprocity of information between governments: The US government will also reciprocate by sharing information with the Australian government about accounts of Australian individuals maintained by US financial institutions. It is a win-win situation for both countries as they receive information on people who evade tax by investing in foreign countries.
3. Addressing legal barriers: Several countries have restrictions on the level of information that can be shared with other countries. Signing the IGA provides direction to Australian financial institutions about the kind of information that they must share with the IRS. Financial institutions will share information with the Australian Competent Authority, which will consolidate information shared by financial institutions in the required format and share it with the IRS.
Compliance with FATCA
An Australian financial institution will be deemed as FATCA compliant and not subject to withholding when it complies with statutory requirements. However, if a financial institution does not fulfill the requirements, it will not be subject to withholding unless it is treated as a non-participating financial institution. A financial institution will be treated as a non-participating financial institution if it does not resolve significant non-compliance within 18 months from notification by the IRS.
1. Reports providing information about identified US reportable accounts to the Australian Competent Authority, annually
2. Reports to the Australian Competent Authority about each non-participating financial institution to which it has made payments and aggregate amount of such payments for 2015 and 2016, annually
3. Perform 30% withholding on any US source withholdable payment made to the non-participating financial institution if Australian financial institution has assumed withholding responsibility under Chapter 3. If the Australian financial institution has not assumed withholding responsibility and makes it's US source withhold payments to a non-participating financial institution, then the financial institution must provide information for withholding and reporting to the immediate payer of such payment.
4. The financial institution complies with IRS registration requirements provided on the IRS registration website
The signing of the IGA will benefit the Australian government, financial institutions and citizens. Both Australian and US governments will save millions of dollars from tax evaders based on the information exchanged. Financial institutions will have less pressure to comply with FATCA since IGA compliance is less stringent than FATCA Regulations. IGA also provides a level playing field for individuals which don't have investment opportunities overseas. In the long term, tax evasion will be curbed globally as regulations similar to FATCA will be drafted by governments. Do you have a road map for FATCA compliance and beyond?
1. FATCA IGA Model1 Agreement US Australia - 28.04.2014