This blog was last updated on June 27, 2021
FATCA Intergovernmental Agreements (IGAs) The Foreign Account Tax Compliance Act (FATCA) is a US law that requires foreign financial institutions and some other entities around the world to report to the Internal Revenue Service on accounts held by US Persons, so that such amounts may be properly taxed in accordance with the Internal Revenue Code. The act is facilitated by Intergovernmental Agreements (IGAs) between the United States and other nations, which are based on one of two types of model agreements. Model 2 IGAs are simpler from a data exchange perspective, but they are far less common than Model 1 IGAs. Countries that have signed a Model 2 IGA with the United States will be required to implement national laws that require reporting entities to submit data directly to the IRS. The tax authorities in these countries may have some role in effectuating this exchange of data, but they do not have the responsibility of actually collecting the information. Alternatively, countries with Model 1 IGAs will have to pass national legislation that requires Financial Institutions and other reporting entities to transmit the required data to the tax authority in the entity’s home country. The foreign tax authority will, in turn, package and submit that data to the Internal Revenue Service. Due to the nature of the Model 1 information exchange system, the tax authorities in each Model 1 country need to decide how and when they want to receive the data on reportable accounts. Of course, no two countries are exactly alike. This means that the FATCA reporting landscape for an institution with business in several nations across the globe is very complex. Penalty for Non-Compliance with FATCA Foreign governments and financial institutions will undergo tremendous expense to comply with the complex FATCA system of reporting, which many may loath to do. However, at the time of this writing, 57 countries have signed IGAs. One reason that there has been so much progress worldwide to comply with this reporting framework may be due to the potential withholding cost. Currently, the penalty for non-compliance with the FATCA reporting scheme is a withholding rate of 30% on all United States sourced income – a significant figure for many financial institutions. Comprehensive FATCA Reporting Solution Sovos Compliance has developed a comprehensive solution to handle the complexities associated with FATCA reporting that will help facilitate compliance with the rules of the IRS and foreign tax authorities. This product will assist institutions in minimizing risk exposure by preparing the data files in the proper format for the jurisdiction so that they may be transmitted as seamlessly as possible. Related: FATCA Reporting Software Taxport FATCA Education Center Talk to Sovos about our FATCA Reporting Solutions
