In the June 2012 issue of The IFA’s WealthGram newsletter, we wrote about the proposed US Treasury Regulations implementing the Foreign Account Tax Compliance Act (FATCA). We further discussed a news release concerning an intergovernmental cooperation agreement for the implementation of FATCA. The model intergovernmental agreement (IGA) is referred to as the “Model I framework” and was released at the end of July. It is intended to address conflicts between local laws and FATCA and involves information reporting by Foreign Financial Institutions (FFIs) under FATCA on a national basis. In other words, an FFI in a Model I country will be required to provide FATCA required account information to their specified government authority, which in turn will exchange such information with the IRS on an automatic basis.

Model I is expected to be used for IGAs with France, Germany, Italy, Spain, and the United Kingdom. These countries have committed that their national laws will enable all FFIs in each country to collect account data, provide it to their respective government, and then automatically exchange such information under existing bilateral tax treaties or tax information exchange agreements. The Model I agreements strive to implement FATCA “in a way that is targeted and effective, while also providing a foundation for further international cooperation,” and are premised on the acceptance that global financial information exchange is a “good thing,” aimed at establishing common reporting and due diligence standards to develop “a more global system.”

Swiss-U.S. Joint Statement on FATCA
Prior to the release of the Model I IGA, Switzerland and the United States had issued a joint statement on their commitment to developing a framework for cooperation in implementing FATCA. The joint statement used strong language stating that if Switzerland refused to implement FATCA this “would cause major disadvantages for the financial centre” adding that “[T]he prohibitive withholding tax of 30% on all payments from the United States and the likely consequence that foreign financial institutions would terminate their business relationships with Swiss financial institutions in the medium term would result in exclusion from the world’s largest capital market”.  The text of the full joint statement appears on the Swiss Federal Administration’s website.

Although the statement acknowledges objectives that are similar to Model I, Switzerland and Japan are credited with developing what is now being called the “Model II framework”. Model II differs from Model I in that FFIs in Model II countries will report directly to the US Internal Revenue Service rather than to their respective domestic tax authority. Although no draft of the Model II IGA has been circulated, the Swiss IGA will include certain key provisions:

• Switzerland has agreed to direct all Swiss financial institutions, not otherwise exempt or deemed compliant, to execute an FFI agreement with the IRS;
• The Swiss government will enable Swiss financial institutions to comply with FATCA reporting obligations with respect to U.S. accounts by granting an exception to the Swiss Criminal Code, pertaining to banking privacy;
• Switzerland has agreed to “accept and promptly honor” group requests for additional information about U.S. accounts identified as recalcitrant;
• The U.S. has agreed to identify specific categories of Swiss FFIs that may be deemed compliant or exempt; this most likely will be limited to small, local FFIs involved in the Swiss pension system; and,
• The U.S. has agreed to take other measures intended to reduce burdens and simply FATCA implementation.

In addition, Switzerland will not be required to close the account(s) of a recalcitrant account holder, or impose the dreaded foreign passthru payment withholding on payments to recalcitrant account holders (discussed later). While no deadline was provided for the release of the complete and final cooperation agreement, the joint statement provides that Switzerland and U.S. have agreed to “work swiftly and constructively to negotiate and conclude” the framework.

Reconciling FATCA with Swiss Banking Privacy
Switzerland has a deeply rooted tradition of banking privacy reinforced by strict banking secrecy laws which have been a part of the Swiss Criminal Code since 1934, but as we all know, banking secrecy is facing much debate and uncertainty.

Originally written for The IFA’s Wealthgram Newsletter and can be found at https://www.gscgi.ch/en/wealthgram_details/8