Model 2 essentially builds upon the foundation of Model 1 with some significant differences, as discussed below, but not too many surprises.
Mechanics of the Model 2 IGA
Whereas, under Model 1, the “FATCA Partner” government is tasked with collecting information from resident Foreign Financial Institutions (“FFIs”) and reporting this to the IRS, Model 2 instead requires that FFIs register with the IRS by 1 January 2014 and comply with the requirements of an FFI Agreement with the US.
FFIs resident in, or organized under the laws of, Model 2 jurisdictions will be required to request consent from account holders (where this is required under local law) to report information regarding US accounts and accounts or obligations of non-participating FFIs. Where such consent is granted, FFIs will then report directly to the IRS customer-specific information as required under the FFI Agreement and US Treasury Regulations (the “Regulations”).
Where consent is not granted, FFIs will be required to report aggregate information regarding these non-consenting account holders and obligations to the IRS, which may then seek to obtain additional information by making group requests to the FATCA Partner government based on the aggregate information reported.
The Model 2 FATCA Partner government will then have six months to respond to this information request by the IRS by providing the requested information regarding these accounts and obligations as if it had been reported directly to the IRS by the FFI (i.e., the same information and format as would have been required to be reported by the FFI under the FFI Agreement and the Regulations, had the laws of the local jurisdiction not prevented the FFI from delivering this information directly to the IRS).
Key Differences from Model 1 IGA
Benefits to FFIs dependent on both FFI’s compliance and FATCA partner’s cooperation
While FFIs located in Model 1 jurisdictions generally need not close the accounts of “recalcitrant” account holders, under Model 2 this benefit is contingent not only on the FFI entering into an agreement with the IRS and complying with the requirements thereunder (including aggregate reporting of non-consenting account holders), but also on the FATCA Partner government providing adequate exchange of information within six months from the date of a request from the IRS. If this latter condition is not fulfilled, the FFI in question will be required to treat account holders covered by such aggregate information request as recalcitrant account holders and presumably would be required to close these accounts.
Increased reliance on regulations
Model 2 defines certain key terms, including the meaning of the terms “financial account” and “foreign reportable amount” by reference to the Regulations, rather than be reference to FATF or local law concepts.
Model 1 permitted FFIs to elect to apply the account identification due diligence procedures under the Regulations rather than those specified in the IGA only if the FATCA Partner permitted them to do so. FFIs in Model 2 jurisdictions will automatically be able to elect to do so (although, once they so elect they will be required to continue to apply these procedures consistently).
Because Model 2 does not delineate the specific account information that will be required to be reported, but instead references the FFI Agreement and the Regulations, the information required to be reported by Model 1 and Model 2 jurisdictions could differ slightly during the “phase-in” period depending on the specific reporting requirements under Model 1 and the eagerly awaited final Regulations.
Timing
Model 2 coordinates with the Regulations, including the timing changes introduced by Announcement 2012-42 that we expect will be incorporated in the final Regulations. Therefore, FFIs in Model 2 jurisdictions will only have until March 31, 2015 to report information to the IRS regarding accounts open in 2013, whereas under Model 1 this information need not be reported to the IRS by the relevant Model 1 FATCA Partner government until six months later.
Reduced time to remedy significant non-compliance
Under Model 1, FFIs have 18 months to remedy “significant” non-compliance before the IRS lists them as nonparticipating FFIs. Model 2 permits only 12 months to do so.
Option to convert from Model 2 to Model 1
Model 2 contains a provision indicating that the US would be willing to enter into further negotiation regarding a direct reporting system (both reciprocal and non-reciprocal). Thus, Model 2 jurisdictions may have the option to renegotiate into a Model 1 agreement (retaining the benefit of terms similar to other existing Model 1 IGAs) at some future date, should they wish to do so.
Remaining Questions
Annex II appears to omit certain categories of exempt or deemed compliant entities included in the Annex to Model 1. It is unclear as of yet what significance (if any) this omission has. In addition, the timing and mechanism for resolving certain specific issues addressed under the mutual agreement procedures in Model 1 are left vague in Model 2. For example, although Model 2 includes a commitment to work together to develop an administrable approach to passthru payments, unlike Model 1 there is no commitment to engage in such consultation by any specific date.
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This article was originally published on November 20 2012.
