In an effort to combat tax evasion by US taxpayers through undisclosed offshore investments, the United States Congress (“Congress”) adopted the Foreign Account Tax Compliance Act (FATCA) March 18, 2010 as a part of the Hiring Incentives to Restore Employment Act. Under the FATCA, financial institutions across the world are required to register with the US tax authorities (Internal Revenue Service) and report, on an annual basis, specific details of their US clients and interest holders. Should a foreign financial institution fail to do so, the FATCA imposes a 30% withholding tax on most US payments to such noncompliant institutions. The requirements to submit such information and for US payors to start withholding the aforementioned tax entered into force on July 1, 2014.
Effectively, the FATCA requires all non-US financial institutions to contribute to Congress’s effort to increase US tax revenue on offshore investments. Because such investments may vary in shape and size, the FATCA’s impact extends beyond “traditional” investment managers such as banks and funds. Under the FATCA, all non-US recipients of US source payments will need to assess their FATCA status, which they are required to disclose to the payor when receiving a US source payment.
Unsurprisingly, we have seen a wide variety of objections to the FATCA. One argument against the FATCA relates to the fact a non-US financial institution may be violating its local laws when it is effectively forced to submit its clients’ information directly to a foreign government (i.e., the United States). Another argument is that the FATCA in itself is a unilateral effort by the US, offering no room for the receipt of information by a foreign government. Moreover, the FATCA was initially only written in US domestic laws and Treasury regulations, containing broad definitions to ensure that no US tax would be avoided through alternative investment avenues. As a result, no foreign government had any formal opportunity to consult with the United States regarding specific types of business in its country that would have a minimal risk to be used for tax avoidance purposes by the United States. In recognition of a number of legal and practical arguments against the FATCA, the US in 2012 first announced that it had started engaging with more than 50 countries to enter into so-called Intergovernmental Agreements (IGAs) with respect to the FATCA. On December 18, 2013, the Netherlands signed the Intergovernmental FATCA Agreement between the Netherlands and the United States.
As described, the US domestic laws relating to the FATCA require that financial institutions report information regarding US investors directly to the Internal Revenue Service (IRS). Under the IGA, however, financial institutions will report the information to the Dutch tax authorities, which will subsequently exchange the information with the IRS under Article 30 of the US-Netherlands tax treaty. Arguably, this two-step approach invalidates legal objections against Dutch financial institutions directly providing the US government with information regarding their clients and interest holders.
On another note, the Dutch government has been able to limit the scope of the FATCA to a certain extent during negotiations of the IGA with the United States, as Dutch pension funds are deemed compliant financial institutions under the IGA (and as a result, not subject to FATCA reporting requirements).
Finally, the Dutch-US IGA contains a reciprocity provision in Article 6, Paragraph 1, in which the United States acknowledges the need for the reciprocal exchange of information by implementing legislation that would enable the exchange of information on equal footing. However, while the Netherlands specifically commits to implement national laws that enable FATCA reporting, the United States makes no such commitment vis-à-vis the Netherlands under the IGA.
Under the IGA, both states intend to commence the automatic exchange of information in 2015, with respect to the 2014 fiscal year. The legislative proposal and the explanatory memorandum that would convert the obligations to the Netherlands under the IGA into Dutch domestic law have been submitted with the Dutch Parliament. The goal is to complete the ratification and implementation process before September 30, 2015, when the first exchange of information is scheduled to take place.
Interestingly, all Dutch financial institutions are considered FATCA-compliant during the time in which the Netherlands is in the process of enacting legislation that allows it to comply with its obligations under the IGA (principally, laws that allow it to submit information from Dutch financial institutions to the IRS). Notwithstanding this deemed FATCA compliance, however, Dutch financial institutions should still collect the relevant FATCA information of their clients and interest holders that relates to 2014, as they are required to submit it to the Dutch authorities once the Dutch legislation relating to the FATCA comes into effect in 2015.
If you would like to receive more information on how your business may be impacted by this IGA or the FATCA in general, please contact a Ryan International Tax professional.
TECHNICAL INFORMATION CONTACTS:
Mark H. van der Linden
Principal
Ryan
212.871.3901
mark.vanderlinden@ryan.com
Scott Dayan
Director
Ryan
571.481.9393
scott.dayan@ryan.com