Intergovernmental Agreements

Your Guide to State, Local, Federal, Estate + International Taxation

The Foreign Account Tax Compliance Act (FATCA) was created to prevent offshore tax evasion of U.S. taxpayers. As part of the IRS initiative for international data exchange, certain foreign entities have additional reporting requirements. If these entities fail to comply, they could potentially be subject to 30% tax withholding. Please refer to our previous blog to understand the basic reporting requirements.

There may be simplified reporting for foreign financial institutions (FFIs) in those jurisdictions that enter into an Intergovernmental Agreement (IGA) with the U.S. A list of jurisdictions that have an IGA in place can be found here.

There are two types of IGAs: Model 1 and Model 2. Under the Model 1 IGA, the FFI reports information about its U.S. accounts to the jurisdiction and the jurisdiction then reports the information to the IRS. The exchange of information under a Model 1 IGA may be on a reciprocal or nonreciprocal basis. Under the Model 2 IGA, the FFI reports the information directly to the IRS. Each jurisdiction will have its own specific terms under the IGA in place and should be carefully reviewed by those relying on these agreements.

Those FFIs in a jurisdiction without an IGA need to register and agree to comply with the terms of a FFI agreement in order to avoid being withheld upon under chapter 4 regulations. Please note, this information is general in nature and should not be relied upon. Be sure to seek guidance from a professional tax adviser as there are many complexities under the new FATCA rules.

By Jill A. Helm, CPA