Overview - The Foreign Accounts Tax Compliance
The mechanism used to facilitate the exchange of information with the IRS is the Inter-Governmental Agreement (IGA). IGAs were developed because many countries have laws on data protection that would prohibit the sharing of client information. Governments have therefore entered agreements with the U.S government that make FATCA compliance not only legal but also compulsory in their countries.
There are two alternative IGA models, both requiring Foreign Financial Institutions (FFI’s) in non-U.S jurisdictions to report information to the IRS. The Model 1 IGA requires that FFI’s identify U.S accounts based on rules specified by that country and report certain information to the relevant authority in that country. The authority then transmits that information to the IRS with the goal being that the IRS would receive the same quality and quantity of information it would receive under a bilateral agreement with the FFI.
Under the Model 2 IGA,governments agree to direct and enable all FFI’s located in their jurisdiction to register with the IRS and to report directly to the IRS specified information about U.S accounts. In the case where account holders do not provide the information required under FATCA to the FFI, information reported to the IRS is supplemented by a government-to-government exchange of information.
On November 3rd, 2014 The Bahamas entered an IGA with the United States. As a result, The Bahamas shall require that Reporting Bahamian Financial Institutions identify U.S Reportable Accounts and accounts held by Non-participating Financial Institutions based on due diligence rules adopted under The Bahamas IGA and report specified information to The Bahamas’ Competent Authority and not directly to the IRS. This information will be automatically exchanged by the Competent Authority with the IRS. A Bahamian FFI that complies with the due diligence and reporting requirements outlined in the IGA will be treated as a registered deemed-compliant FFI i.e., not subject to with holding.
The Model 1 IGA mechanism offers significant benefits to Bahamas FFIs:
- FFIs will not need to enter into direct agreements with the IRS (although registration has to be completed through the IRS’s portal)
- Provides the best treatment for key Bahamian product – trusts and funds
- Lower administrative costs and reporting burden for FFI’s than under a bilateral agreement
Bahamas Implementing Legislation
The regulatory frameworkcreated under the Model 1 IGA has to be brought into force by enabling legislation. The Bahamas and the United States of America Foreign Account Tax Compliance Agreement Bill, 2015 has been drafted along with supporting Regulations and Guidance Notes and is expected to be enacted during Q2 2015.