On Thursday, French finance minister Pierre Moscovici signed an intergovernmental agreement (IGA) with the US in a bid to ensure that French financial institutions will be ready to comply with the US Foreign Account Tax Compliance Act (FATCA).
The agreements will have the French tax authority exchange information on local US investors with US tax authority the Internal Revenue Service (IRS), which will in turn share information on US financial accounts owned by French 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 travelling outside the US.
The agreements follow the ‘Model I’ IGA, originally established in July 2012, which has also been signed by seven other countries: the UK, Ireland, Spain, Germany, Mexico, Norway and Denmark.
But the ‘Model I’ IGA is not the only option available. In June, Japan signed a ‘Model II’ IGA with the US. This differs in that Japan-based financial institutions will need to report directly to the IRS rather than through 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 accounts holders in US financial institutions. Switzerland also will use the Model II IGA, which it signed in February.
One US-based tax partner said countries may elect the Model II IGA because their governments wouldn't want to adopt the internal laws, regulations and enforcement provisions that FATCA's Model I requires.