The Holy See has reached a Model 1 intergovernmental agreement (IGA) in substance to comply with the Foreign Account Tax Compliance Act (FATCA). Even though the overall reporting is expected to be small, this represents a big win for the expanding international tax legislation as the jurisdiction has a history of maintaining secrecy.
In fact, the Vatican Bank didn’t release its first annual report until 2013, according to Forbes. However, Pope Francis believes the financial institution could use some improvements. His move to reform the bank comes as part of a wider push to better the public image of the Catholic Church and its administration, Tax Analysts reported.
Although the European Union (EU) has its own financial regulations regarding transparency, the Holy See has not adhered to these rules because it is not part of the EU. Without a larger regulatory body, the Holy See operated behind a barrier of secrecy for some time.
Major victories for tax information transparency
The Holy See’s FATCA agreement in substance marks one of many symbolic steps forward for the international tax legislation. Since the U.S. enacted the law in 2010, more than 100 jurisdictions have showed their support, according to Forbes.
Some of these nations were major tax havens in the past. The Cayman Islands and Switzerland, for example, have longstanding reputations as tax shelters but have signed a Model 1 and Model 2 IGA, respectively, to comply with FATCA regulations.
Willful compliance with international tax laws
Countries and foreign financial institutions (FFIs) that do not adhere to FATCA face hefty penalties for non-compliance, which include 30 percent withholding on U.S.-source income. However, the threat of penalties isn’t the only reason governments and FFIs are getting on board.
As with the Holy See and the pope’s goals, some nations simply want to improve their public images. The Vatican Bank has in the past received various allegations of illegal financial practices, including money laundering and other issues, according to The New York Times.
Francis’ work to improve the jurisdiction’s transparency began not long after he took office. His plan included an overhaul of the Holy See’s management and the creation of a financial regulation agency, which instituted an auditor general to keep an eye on the books.
At the moment, the Holy See has not indicated when it will formally sign its FATCA agreement, according to Tax Analysts, but the jurisdiction is free from penalties with the current status of its IGA.
For a comprehensive list of the current FATCA agreements, please visit our FATCA education section.
