FATCA rules still force global managers to be compliant with multiple IGAs

28 Jan, 2013

The final FATCA regulations still require managers with a global presence to be fully compliant with different intergovernmental agreements (IGAs) in multiple jurisdictions, and US authorities are unlikely to back down, a leading legal expert has said.

“The US authorities are going to keep this requirement in place. For example, if a UK-based hedge fund has a presence in France, then that hedge fund will have to comply with the IGAs in both the UK and France,” said Mary Burke Baker, government affairs advisor at K&L Gates in Washington DC.

The IRS and US Treasury are loathe to allow foreign financial institutions (FFIs) operating out of multiple locations to sign a uniform agreement despite being on the industry’s wish-list. “It would be difficult for firms and the US authorities to adopt a centralised IGA compliance programme as there are different nuances and financial products in every market,” she added.

IGAs were created to ameliorate legal barriers to compliance as well as reduce the burden on FFIs. IGAs with reciprocity clauses also make FATCA appear less one-sided in favour of the US by requiring the US to supply details on cooperating countries’ own accountholders in American financial institutions.

There are currently two IGA models in circulation. IGA Model one, put simply, allows the FFI to report directly details of US accountholders to its national authority, which will then pass the information onto the IRS. IGA Model two requires FFIs to report directly to the IRS details of US accountholders although details on recalcitrant accountholders will be passed to national authorities who will then hand it over to the IRS.

Despite the well-meaning intentions of these IGAs, they have unwittingly complicated the FATCA implementation process.  “IGAs were designed to make FATCA more palatable but it has actually made life more difficult. There are two IGA models and within those two models, there are multiple variances,” she added.

The US is reportedly in negotiations with 50 countries surrounding IGAs although only the UK, Denmark, Ireland, Mexico, Norway, Spain and Switzerland have signed up. “Just because an IGA has been signed does not mean it is ready to go. The UK will require parliamentary legislation to authorise FFIs to report the relevant data,” said Burke Baker.

Furthermore, there is a risk the reciprocal nature of the IGAs might break down as some Congressional members are reportedly uneasy about forcing US financial institutions to pass on data about their clients. “Congress might raise issues about sharing information at US financial institutions with third countries,” she commented.

These complexities though should not lead to a complete breakdown of FATCA or the IRS being unable to implement it accordingly. “FATCA is an important tool for the IRS to identify offshore tax evasion and they are devoting substantial resources to make it work,” she said.

Nonetheless, the final FATCA rules do appear to ease the onerous due diligence requirements FFIs have to undertake on their investors to determine whether or not they are US citizens. “In many cases, instead of having to carry out a paper search, hedge funds and other FFIs can rely on electronic information they have on their files,” said Burke Baker.