On Tuesday, Costa Rican Finance Minister Edgar Ayales signed an intergovernmental agreement (IGA) with the US in a bid to ensure that Costa Rican financial institutions will be ready to comply with the US Foreign Account Tax Compliance Act (FATCA).
As a result of the agreement, the Costa Rican tax authority will exchange information on local US investors with the Internal Revenue Service (IRS), the US tax authority, which will in turn share information on US financial accounts owned by Costa Rican citizens.
The information will be shared through local authorities, removing the need for GPs and other entities to enter into direct relationships with foreign tax authorities.
FATCA requires foreign financial institutions (FFIs), which include non-US private equity firms with US investors, to enter into a reporting relationship with the IRS or face a hefty 30 percent withholding tax on certain payments that travel outside the US.
The agreements follow the ‘Model I’ IGA, originally established in July 2012, which has also been signed by eight other countries: the UK, Ireland, Spain, France, Germany, Mexico, Norway and Denmark.
However. the ‘Model I’ IGA is not the only option available. In June, Japan signed a ‘Model II’ IGA with the US. The difference here is that Japan-based financial institutions will need to report directly to the IRS, rather than via their local tax authority.
The Model II type of IGA also has no reciprocal provision, meaning that the IRS will not need to provide Japan with information on Japanese account holders in US financial institutions. Switzerland will also use the Model II IGA, which it signed in February.
One US-based tax partner said countries might choose the Model II IGA because their governments wouldn't want to adopt the internal laws, regulations and enforcement provisions required by FATCA's Model I.