Two more sign up to FATCA

Bermuda and the Netherlands have signed intergovernmental agreements (IGA) with the US in a bid to ensure that their respective 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 Netherlands’ agreement, signed as a ‘Model I IGA’, will see Dutch authorities exchange information on local US investors with US tax authority the Internal Revenue Service (IRS). In turn the IRS will share information on US financial accounts owned by Dutch 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.

However, Bermuda signed a ‘Model II’ IGA with the US. This differs in that Bermuda-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 Bermuda with information on Bermudan account holders in US financial institutions. Switzerland and Japan also will use the Model II IGA, which they signed in February and June respectively.

One US-based tax attorney 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.