Foreign Account Tax Compliance Act An Overview

Abstract

The Hiring Incentives to Restore Employment (HIRE) Act of 2010 was enacted by the 111th United States (US) Congress on March 18, 2010 to provide payroll tax forgiveness for hiring unemployed workers and business credit for retention of certain newly hired individuals in 2010. The Foreign Account Tax Compliance Act (FATCA) was also enacted March 18, 2010 as a new Chapter 4 to sub-title A of the Internal Revenue Code (IRC), as part of the HIRE Act to combat tax evasion by US persons holding investments in offshore accounts. The Foreign Financial Institutions (FFIs) were required to enter into an agreement with the US Treasury Department consequent to which they become participating FFIs. However, to counter the difficulty of high costs and clashes with the domestic laws of other countries, US came up with Inter Governmental Agreements (IGA) as an alternative for the implementation of FATCA. Under the IGA Model, FFIs in a FATCA partner country wouldn’t be required to enter into an agreement with US Internal Revenue Service (IRS) though, would be subject to an IRS registration requirement. Two models of IGA have been proposed: -‹‹Model 1 IGA is based on G5 (Germany, the United King- dom, Spain, France and Italy) joint statement under which reports on US account holders is to be made available by the FFIs to local tax authorities, who then will share this information with the US IRS under existing information sharing arrangements. -Model 2 IGA is based on joint statement made with Japan and Switzerland under which the FFIs would be required to report to IRS directly, and IRS with a view to obtain the information on those account holders who refuse to provide it to the FFI, can request the local authorities to provide it.