FATCA: Model I or II?

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The UK, Germany, France, Italy and Spain have signed bilateral agreements with the US concerning the exemption of FFIs (Foreign Financial Institutions) from FATCA (the Foreign Account Tax Compliance Act). Meanwhile, Luxembourg is still in negotiations with the US Internal Revenue Service. Is Luxembourg likely to lose business to other financial centres, because it is lagging behind? Michael Delano from PwC Luxembourg says: no!

The negotiations involve Annex II of the FATCA legislation. The former lists financial institutions and products that will be exempted from FATCA or deemed compliant with the legislation. Annex II can be negotiated on a country-by-country basis.

Michael Delano, Partner at PwC Luxembourg explains the situation: “The Luxembourg government wants to include as much as possible in the “deemed-compliant FFI” status. Once the decision is taken on what is going to be included in Annex II, then they can make the decision, do we go for Model I or Model II IGA (Intergovernmental Agreement)”.

Model I and II differ mainly in the way, information is transmitted to the IRS. Under Model I, the government of the respective country has to collect the data from FFIs and is obliged to report them to the Internal Revenue Service (IRS). Under Model II, FFIs will have to report the necessary information directly to the IRS. If national law requires it, FFIs will have to obtain consent from their account holders before transmitting the information to the IRS. This would be the case in Luxembourg, since the financial privacy guidelines do not allow the passing on of client information to a foreign entity.

Whichever model Luxembourg chooses, it will be incompatible with current national law. So what is the likely impact of an IGA with the US?

“It depends”, Michael Delano says. ”If you look at the trends around the world, what’s happening generally regarding financial privacy, it is not really what it used to be. You begin to wonder if financial privacy is really going on for much longer, especially when you look at what’s happening in other countries”.

However the story ends, the sense of FATCA is questionable since the expected revenues for the US do not justify the effort the whole world has had to make in order to comply. “If you look at it from the US perspective, it’s a very easy sell at home. In the US, the consensus is: we are implementing FATCA to capture tax cheats. All major financial services companies are impacted by FATCA because of the global nature of their business. I don’t believe that the revenue that will end up being generated by FATCA will exceed the costs that the industry will have to undertake”, Michael Delano agrees.

The way the legislation is written, FATCA cannot be avoided. Whatever happens, it is likely to have a significant impact on the future of financial privacy in Luxembourg. EA

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