Intergovernmental agreements must be in force by Jan. 1, 2017
Under new policy IRS will ignore FATCA IGAs not implemented
TAX ALERT |
In 2010, Congress enacted the Foreign Account Tax Compliance Act (FATCA), which generally imposes a substantial penalty on certain foreign entities that receive U.S. source income if they fail to provide certain information to the IRS about their account holders. The IRS has negotiated intergovernmental agreements (IGAs) with dozens of countries under which a taxpayer may comply with FATCA by following the generally more lenient terms of an IGA.
Under current IRS policy, the IRS has treated as in effect an IGA with a foreign government that has either signed, or agreed in principle to, an IGA but has not yet brought it into force. Under this policy, taxpayers in these jurisdictions could take advantage of the benefits of an IGA as if it were in full effect, while their government works to sign or implement the IGA.
However, the IRS announced on July 29, 2016, that this policy is now coming to an end. Under this new policy, the IRS and the Department of the Treasury on Jan. 1, 2017, will update the list of jurisdictions treated as having valid IGAs (the ‘IGA List’) to remove jurisdictions that have not yet brought their IGA into force. Jurisdictions can avoid removal by submitting an explanation to Treasury of why the jurisdiction has not yet brought the IGA into force, along with a step-by-step plan that the jurisdiction will follow to bring the IGA into force. If Treasury believes that the submission shows the jurisdiction demonstrates ‘firm resolve’ to bring the IGA into force, it will not be stricken from the IGA List. The jurisdiction may, however, be later removed from the IGA List if it does not meet the timeline set out in its submission to Treasury.
If a jurisdiction is removed from the IGA List, it will continue to be treated as having an IGA in effect for at least an additional 60 days, to allow taxpayers time to adjust their FATCA compliance regime.
Jurisdictions with a status other than ‘in Force’ are potentially subject to removal Jan. 1, 2017, including such major business centers as China and Hong Kong. Taxpayers that make payments subject to FATCA should inspect this list to determine whether removal of a jurisdiction from the IGA List will impact their FATCA compliance plans.