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Global Transparency: More Than Just FATCA

The Foreign Account Tax Compliance Act (FATCA) has significantly expanded the reach of the IRS into the global financial network. Under FATCA, Foreign Financial Institutions (FFIs) are required to report information on financial accounts held by U.S. taxpayers or foreign entities with substantial U.S. ownership. Non-compliance by FFIs can result in 30% withholding tax on U.S.-sourced payments. This requirement has led to over 300,000 FFIs agreeing to report to the IRS. Furthermore, more than 110 countries have entered into agreements with the U.S. to facilitate the implementation of FATCA. These intergovernmental agreements to exchange information can be either reciprocal or non-reciprocal. However, this is not the only method for countries to exchange information.

Tax Information Exchange Agreements (TIEAs) are another kind of bi-lateral agreement to facilitate the exchange of tax-related information. These agreements allow for the exchange of tax-related information between countries, thereby facilitating the enforcement of domestic tax laws.

TIEAs are currently in effect with the following countries:

  • Argentina
  • Cayman Islands
  • Costa Rica

 

  • Ecuador
  • Guernsey
  • Hong Kong

 

  • Isle of Man
  • Jersey
  • Panama

 

  • Singapore
  • Uruguay

 

 

TIEAs differ in that TIEAs are broader agreements for the exchange of tax information that may not necessarily be related to financial accounts. TIEAs allow governments to share a broader range of information at the specific request of a tax authority like the IRS. FATCA reporting, on the other hand, is narrower in scope, but happens automatically. While these are two U.S. regimes for data collection, the Organization for Economic Co-operation and Development has also developed the “Common Reporting Standard (CRS)” to provide a framework for the systemic and periodic transmission of taxpayer information. Over 100 countries have implemented the CRS already, with the first exchanges of information occurring in 2017. The U.S. has not adopted CRS, the CRS is broader than FATCA, and insofar as it puts tax authorities in possession of additional information they would not otherwise have, this information may now be accessible to U.S. enforcement agencies through either intergovernmental agreements or TIEAs.

Also, “Tax Treaties,” “Double Taxation Agreements,” or “Income Tax Treaties,” are all bilateral agreements between countries that can serve several purposes. These treaties often include provisions that allow for the exchange of information relevant to the enforcement of domestic tax laws of the treaty partners. For example, Article 26 of the U.S. Model Income Tax Convention provides a framework for the exchange of information which is commonly included in most U.S. tax treaties. This article stipulates that the competent authorities of the contracting states shall exchange information that may be relevant for carrying out the provisions of the treaty or the domestic tax laws of the contracting states concerning taxes of every kind imposed by a contracting state. The types of information that can be exchanged under these treaties include, but are not limited to, taxpayer income, taxes paid, and financial account information. This exchange of information can be on request or automatic depending on the specific provisions of the treaty. U.S. treaties with the United Kingdom, Canada, Japan, Germany, and Australia contain information exchange provisions, among others.

U.S. taxpayers with international financial interests should be aware of the implications for TIEAs, treaties and FATCA on their tax compliance obligations. The exchange of information between the U.S. and other countries means that tax authorities are better equipped to detect unreported income and assets held abroad. Therefore, U.S. taxpayers must ensure they are compliant with their reporting obligations, including the Report of Foreign Bank and Financial Accounts (FBAR), filed on FinCEN Form 114, and the FATCA reporting requirements, to avoid penalties.

Taxpayers with unreported foreign income, assets, and interests should be particularly aware of the information that may be exchanged between tax authorities. Information on bank accounts, such as account numbers, the ownership of companies, trusts, foundations, and other legal entities may be transmitted through a TIEA or mutual sharing under a treaty. Account balances and other transactional information may also be exchanged, such that taxpayers who believe their foreign activity too small to attract the notice of the IRS should be wary that this activity may still be shared by foreign tax authorities with the IRS.

 

Disclaimer: Hone Maxwell LLP articles and blogs are not intended as legal advice. Additional facts, facts specific to your situation or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.

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