On Friday, Italy signed an intergovernmental agreement (IGA) with the US in a bid to ensure that the country’s financial institutions will be ready to comply with the US Foreign Account Tax Compliance Act (FATCA).
Without this type of IGA, non-US private equity firms with US investors would need to enter into a direct reporting relationship with the IRS or face a 30 percent withholding tax on certain payments traveling outside the US.
Under the agreement, Italy’s tax authority will exchange information on local US investors with its US counterpart the Internal Revenue Service (IRS), which will in turn share information on US financial accounts owned by Italian citizens.
The agreement follows the ‘Model I’ IGA, originally established in July 2012, which has also been signed by the UK, Ireland, Spain, Germany, Mexico, Norway, France 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.