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Once people and businesses cross borders, they by necessity encounter two legal and tax systems that must be reconciled: their own and the foreign country where they wish to operate.

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FATCA Agreements in Substance to be treated as Agreements in Effect

Last Wednesday, the US Treasury and IRS announced that jurisdictions that have reached agreements in substance with the US on the provisions of intergovernmental agreements under the Foreign Account Tax Compliance Act (“FATCA”) will be treated as having agreements in effect until December 31, 2014.

Under FATCA, withholding agents are required to verify the status of foreign financial institutions (“FFI’s) starting July 1, 2014.  To encourage FFI’s to report the foreign financial accounts held by US persons (which term includes US citizens and permanent residents and companies controlled by them), FATCA imposes a 30% withholding tax on an FFI’s US source payments if the FFI does not comply with the FATCA reporting requirements.  The IRS will be able to use the information obtained from FFI’s to ensure US persons disclosing their foreign financial bank accounts and other financial assets.

The Treasury announcement will allow jurisdictions that reached agreements in substance before July 1, and consented to be included on a list, to be treated for FATCA purposes as having intergovernmental agreements in effect until December 31, 2014.  This will allow the FFI’s in those countries to register on the FATCA website and avoid withholdings on their US activities.

The US has signed 26 intergovernmental agreements with various foreign countries.  Treasury’s announcement adds 19 more jurisdictions which will be treated as having intergovernmental agreements in effect until December 31, 2014.  The countries on the updated list can be found here.

In a Treasury news release, Robert Stack of the Treasury stated:

The robust international support behind FATCA is undeniable. … Today’s announcement both adds to our global effort against tax evasion and provides clarity for foreign financial institutions as they prepare to comply with FATCA starting July 1.