The Foreign Account Tax Compliance Act (FATCA) was enacted by the United States of America (U.S.) on March 18, 2010 as part of the U.S. Hiring Incentives to Restore Employment (HIRE) Act. FATCA is geared towards combating tax evasion by U.S. taxpayers holding assets in non-U.S. financial accounts/ institutions. FATCA requires Foreign Financial Institutions (FFIs) to report to the U.S. Internal Revenue Service (IRS) information on assets held by U.S. tax payers, or by foreign entities in which U.S. taxpayers hold substantial (greater than 10%) ownership interest. Where an FFI chooses not to comply with FATCA, the IRS will impose 30% withholding on payments to FFIs and on behalf of its customers.
Non-U.S. financial institutions that accept deposits, hold financial assets for others, invest in securities or trade in securities for others. The following entities are required to report under FATCA:
- custodial institutions
- depository institutions
- investment entities
- specified insurance companies
These entities include Banks, Funds, Insurance Companies, Trusts, Private Equity Companies, and Special Purpose Entities.
In order to facilitate the transmittal of information from FFIs to the IRS, the U.S. Treasury Department has issued several model Inter-Governmental Agreements (“IGAs”). These are as follows:
- Reciprocal Model 1A Agreement, Preexisting TIEA or DTC
- Nonreciprocal Model 1B Agreement, Preexisting TIEA or DTC
- Nonreciprocal Model 1B Agreement, No TIEA or DTC
- Model 2 Agreement, Preexisting TIEA or DTC
- Model 2 Agreement, No TIEA or DTC
Model 1 IGA
The category of agreements referred to as the Model 1 IGA, requires Foreign Financial Institutions (“FFIs”) to report all FATCA-related information to their own governmental agencies. The government agency would then report the FATCA-related information to the U.S. Internal Revenue Service. The Model 1 IGA takes two forms – reciprocal and nonreciprocal. The Model 1A IGA is reciprocal, requiring the United States of America to provide certain information relating to residents of the FATCA Partner country to the government agency in that country. The FATCA Partner country will also provide FATCA-related information to the U.S.
The Model 1B IGA is nonreciprocal. This IGA is available to countries which do not currently have in effect a Double Taxation Convention (DTC) or a Tax Information Exchange Agreement (TIEA) that provides for automatic exchange of information with the U.S. Government. FATCA-related information is provided by the FATCA Partner country to the U.S., however no information is sent from the U.S. to the FATCA Partner country.
An FFI covered by a Model 1 IGA will not need to sign an FFI agreement, but it will need to register on the IRS’ FATCA Registration Portal online.
Model 2 IGA
The Model 2 IGA—requires FFIs to report information directly to the IRS. Under such an agreement, FFIs will need to register with the IRS. Certain Foreign Financial Institutions will also sign a version of the FFI agreement modified to reflect the IGA. In the event of any discrepancy found by the IRS with the information provided by the FFIs, the FATCA Partner’s government will be contacted by the IRS to deal with the query.
The Federation of St. Kitts and Nevis has selected to utilise the Model 1B IGA, where all information required under FATCA will be submitted by the FFI to the government’s Competent Authority for FATCA purposes. The Competent Authority would then relay such information to the IRS. All communication from and to the IRS will be done via the government’s Competent Authority.
The Model 1B IGA and Annexes I and II that pertain to St. Kitts and Nevis can be accessed by clicking on the links provided to the right under “FATCA: Related Downloads.”
Benefits of the Model 1B
- Allows for the Government to maintain control of the process and avoid reputational damage. The Government is able to monitor financial information which is sent out of the country;
- Preferable that the government deals with the IRS through an IGA rather than the individual FFIs directly;
- IGA would address certain legal concerns that may not have been an option had the FFIs been required to report information directly to the IRS;
- Stepping stone to obtaining a Model 1A, where information will be reciprocated;
- Greater transparency in respect to FATCA compliance by FFIs.
Requirements of Model
- The Competent Authority to be designated;
- FFIs are required to register with the IRS and will be assigned a Global Intermediary Identification Number (GIIN);
- FFIs are to report information to the Competent Authority, who transmits such information to the IRS;
- Information on assets of US$50,000.00 or more held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold substantial ownership interest (>10%), are to be identified and reported to the IRS by the FFIs;
- Pre-existing Entity accounts that have account balances that exceed US$250,000.00 are required to be identified, and reviewed to ascertain if the account holder is a U.S. person;
- The Competent Authority is required to enforce compliance if notified by the U.S. Competent Authority that an FFI has been significantly non-compliant, or else the FFI will be treated as a non-participating FFI (NPFFI) and has 18 months to resolve the issue.
On August, 31st 2015, the Government of the Federation of St. Kitts and Nevis represented by Prime Minister Hon. Dr. Timothy Harris and the Government of the United States of America represented by the U. S. Ambassador to Barbados, the Eastern Caribbean, and the Organization of the Eastern Caribbean States, Dr. Larry Palmer signed the Intergovernmental Agreement to implement the U. S. FATCA between the two countries. Please refer to the Press Release regarding the signing of the agreement.
St. Kitts and Nevis FATCA Legislation
The legislation to undertake the implementation of FATCA in the Federation was passed by the National Assembly on September 15th, 2015 and was subsequently gazetted. Please refer to the link under ‘FATCA: Related Downloads’ for access to the FATCA legislation.
The Federation is currently at an advanced stage of acquiring a software package that will facilitate the receipt and transmission of data for FATCA purposes. The implementation of the software will commence shortly.
Prior to going live, the software will be tested and the relevant persons will be trained. A selected number of FFIs will be given the opportunity to be involved in the testing phase and to understand the system before the official reporting commences.
The Competent Authority for St. Kitts and Nevis for FATCA purposes is the Financial Secretary. Specific duties to be performed by the FATCA Competent Authority will be delegated to the Comptroller of Inland Revenue Department. The St. Kitts and Nevis Inland Revenue Department is currently in the process of operationalizing a unit that will be responsible for dealing with FATCA. Staff from the Department will be trained in the use of the FATCA software and all FATCA related matters.
Foreign Financial Institutions are required to register on the IRS website before reporting commences. The U.S. IRS FATCA registration page can be found here. FFIs that have registered with the U.S. IRS will be issued a GIIN and will appear on a monthly published IRS FFI list.
A list of St. Kitts and Nevis entities that have already registered can be found by following this link.
(Instructions: In the list of countries search and click on “Saint Kitts and Nevis”. Use the arrow pointing to the right to add “Saint Kitts and Nevis” to the field entitled “Selected”. Click “Search” below.)
- Appointed to ensure the participating foreign financial institution (PFFI) meets the requirements of the agreement;
- Will be identified as the FATCA Responsible Officer in the FATCA registration system;
- May select points of contact to help complete all aspects of registration except signing;
- Officer in charge shall establish sufficient policies and procedures for the PFFI to meet the requirements of the agreement;
- Reviews the adequacy of the program;
- Reports material errors;
- Prepares certification within six months of every certification period.