Spain and Germany have signed intergovernmental agreements (IGA) with the US in a bid to ensure that Spanish and German financial institutions will be ready to comply with the US Foreign Account Tax Compliance Act (FATCA).
FATCA requires foreign financial institutions (FFIs), which include non-US private equity firms with US investors, to enter into a reporting relationship with US tax authorities or face a hefty 30 percent withholding tax on certain payments travelling outside the US.
The agreements will have Spainish and German authorities exchange information on local US investors with US tax authority the Internal Revenue Service, which will in turn share information on US financial accounts owned by Spanish and German 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.
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.