What Are The Differences Between The Model 1 And Model 2 Intergovernmental Agreement


The introduction of FATCA is usually done in two stages. First, a foreign jurisdiction signs one of the two FATCA-IGA models with the IRS. Second, the legislator of the foreign court amends national law to implement the provisions of one of the two FATCA IG signed by the country. Model 2 FFI are required, in accordance with the provisions of each IGA, to register with the IRS and comply with the provisions of the FFI agreement. The FFI agreement defines Faffi`s Obligations in Model 2 with respect to the identification and documentation of financial account holders, as well as procedures for direct notification to the IRS of information relating to certain account holders. This direct reporting requirement is often described as the main feature of IGA Models 2 and 1, which allows reporting to a local tax authority rather than the IRS. However, in the structuring of cross-border transactions, the most important difference between model IGAs is the treatment of fatca withholding tax. As noted above, Model 1 FFIs are generally not required to withhold FATCA payments, while Model 2 FFIs may have an obligation to maintain the remainder. Under the FFI agreement, there are generally two situations in which Model 2 FFIs may have FATCA withholding obligations: (1) when Model 2 makes FFI payments as part of a commitment determined from dividends paid on U.S. shares (i.e.

equivalent payments under Section 871 (m)) and , more importantly, when Model 2 FFI acts as an intermediary. , and that an underlying payer from a U.S. “withheld payment” source will not be held in compliance with FATCA. The FFI agreement provides that a 2-FFI model operating in an intermediate property is generally not required to retain FATCA when it provides the underlying payer with sufficient information for the payer to hold back. However, Model 2 FFI must refrain from a reluctant payment to a final recipient who is not entitled to obtain FATCA unaleraled payments if Model 2 FFI is aware or has reason to know that the underlying payer did not take the task for fatca purposes. Craig Cohen is a senior counsel and John Hibbard is a partner at Allen -Overy LLP. In this article, the authors discuss the fatca withholding rules that apply to financial institutions in the intergovernmental legal orders of Model 2. The Model 1 and Model 2 IGAs provide an overview of the final rules, although there are likely to be significant discrepancies. Although the Department of Finance and the IRS have worked hard to propose alternative approaches to the implementation of FATCA, these different approaches should create challenges for the ffi who operate in different legal systems.

Given that more IGAs, of both flavours, are being negotiated and signed and final regulations are on the horizon, NATIONAL AUTHORITIES should closely monitor the various regulations that may apply to their activities and define the measures necessary to comply with them. Regardless of the type of agreement, it is important to keep in mind that the two FATCA IGAS of the model are designed to perform the same function – disclosure of foreign accounts held by American persons (directly or indirectly). This means that the proliferation of both types of FATCA AIG poses a direct threat to all undisclosed foreign accounts of U.S. persons, with potentially disastrous consequences for these U.S. individuals, including potential criminal prosecutions and deliberate FBAR sanctions beyond the balances of these secret accounts. In accordance with the Taiwan Relations Act, the parties to the agreement are the American Institute in Taiwan and the Taipei Economic and Cultural Representative Office in the United States.

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