United States tax authorities publish draft FATCA agreement for financial institutions

On 29 October 2013, the United States Department of the Treasury and the Internal Revenue Service (IRS) took a further essential step that has long been awaited by institutions in the financial services industry worldwide, in the implementation of the Foreign Account Tax Compliance Act (FATCA)

The U.S. authorities have published Notice 2013-69 on the IRS website, providing new guidance on compliance by Foreign Financial Institutions (FFIs) with FATCA for withholding and information reporting directly to the IRS, in countries where the local tax authorities will not be involved in this reporting. Presently, to become FATCA-compliant, Romanian financial institutions which have reporting or withholding obligations under FATCA (banks, insurance companies, investment funds, brokers etc.) need to sign a contract with the U.S. tax authorities before registering on the IRS website, no later than 25 April 2014.


FATCA is one of the most important developments in international tax in recent years and it is rapidly becoming the global standard in the effort to curb offshore tax evasion. The U.S. Department of the Treasury has revealed that, to date, they have engaged more than eighty countries in discussions to implement FATCA through intergovernmental agreements (IGAs). At the moment, nine signed IGAs are in place and sixteen more agreements in substance have been outlined. Romania is currently working to explore options for intergovernmental engagement with the U.S. Treasury, although the start of negotiations has yet to be announced.


The recently-published Notice 2013-69 provides detailed guidance on the reporting and withholding obligations of FFIs entering into agreements directly with the IRS, and those reporting through a Model 2 IGA. These FFIs are located in countries without a signed Model 1 IGA agreement (which would facilitate reporting tax information to the national tax authorities with subsequent forwarding by these authorities to the IRS), thus requiring direct submission of tax information to the IRS, on the basis of a so-called ‘FFI Agreement’, which is included as a draft in Notice 2013-69.


The U.S. Treasury has announced that the draft FFI agreement will be finalized by 31 December 2013, so that financial institutions can undertake the necessary procedures for signing this contract with the IRS before FATCA withholding and due diligence requirements come into force on 1 July 2014.


“Romania has notified its intention to sign a Model 1 IGA agreement with the U.S. However, it is still not entirely clear that this will happen before FATCA takes effect. Consequently, Romanian FFIs need to plan ahead, and carefully consider signing the FFI Agreement, so they are ready to apply the Final Regulations from 1 July 2014, when FATCA takes effect. Waiting for the Romanian authorities to sign an agreement with the U.S. Treasury could be a risky strategy,” declares Ramona Jurubita, Deputy Head of Taxation Services, KPMG in Romania.


Notice 2013-69 sets out new draft guidance for due diligence, withholding, and other reporting requirements for institutions which sign an FFI Agreement with the IRS. Furthermore, Ionut Mastacaneanu, Senior Manager at KPMG Romania, points out that “for FFIs which are part of a group, FATCA compliance by each entity influences the status of the whole group. As such, the FFI Agreement requires that, for a financial institution to qualify as a participating FFI, each member of the group – other than exempt entities – should obtain classification under one of the categories of compliant FFI or as a nonreporting one under an IGA agreement.


FATCA represents a series of information reporting and withholding tax provisions published on 18 March 2010 by the IRS as part of the HIRE (Hiring Incentives to Restore Employment) Act, adding new clauses to the United States’ Internal Revenue Code. According to FATCA, FFIs are required to report to the IRS certain information with respect to U.S. accounts or accounts held by entities with substantial U.S. ownership. Recalcitrant individuals and FFIs not participating in FATCA will be penalized by having 30 percent of certain U.S.-source payments made to them withheld. In recent months, the IRS has published instructions for the implementation of FATCA. The most notable change was made by Notice 2013-43 on 12 July 2013, which provided a six-month postponement of the start of FATCA withholding to 1 July 2014 and also delayed the deadline for finalization of registration on the portal opened in August, allowing an additional preparation period for financial institutions to implement FATCA requirements.