Date: 12/10/12

Topic: Foreign Accounts

Denmark and Mexico have become the second and third countries to enter into bilateral agreements with the United States regarding the implementation of FATCA. Concluded in mid-November, these agreements are similar to the agreement signed with the United Kingdom, that is, are based on the reciprocal model I agreement published by the Treasury Department in July.

Under the model I agreement, both the United States and its partner country are mutually obligated to report currently collected account information from financial institutions on residents of the partner countries. However, this version of the model agreement will only be available ostensibly to jurisdictions with which the United States has an income tax treaty or other tax information exchange agreement in place. Alternatively, countries where no such inter-governmental cooperation concerning taxes exists may agree to a non-reciprocal version. The non-reciprocal version imposes the same obligations but the partner countries would not receive banking information in return.

Recently, the Treasury Department released its second model agreement for countries to use in implementing FATCA. Whereas model I recognizes a government-to-government sharing of information to fulfill FATCAs requirements, model II takes a business-to-government approach. This means that foreign financial institutions (FFIs) will report directly to the IRS rather than the foreign government acting as an intermediary. In order to employ this method, FATCA partner countries must allow FFIs to register with the IRS by January 1, 2014 and sign a reporting agreement known as an FFI agreement. For FFIs, FATCA will apply but an FFI will not be required to withhold the 30% tax for wayward account holders if FATCA provisions are otherwise complied with.

Nonetheless, all three of the concluded agreements have requirements not found in either model issued by the Treasury Department. First, Article 7 grants the countries the benefit of any more favorable terms that the United States may enter into in a later agreement with another country. Second, Article 8 of the Denmark and Mexico Agreements provides for consultations between the parties should any difficulties in implementing the agreements arise, and, further, stipulates that the agreements can be amended with the countries’ written mutual consent. Finally, the agreements specify that the annexes form an integral part of the agreement.

Understanding the ramifications of FATCA on personal level requires the assistance of a knowledgeable and experienced tax practitioner.