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On March 5, the United States signed intergovernmental agreements (IGAs) with Finland and Chile to implement the Foreign Account Tax Compliance Act (FATCA), bringing the total of such agreements that have been signed to 24.
FATCA, enacted by the US Congress in 2010 and, taking effect on July 1, 2014, is intended to ensure that the US obtains information on accounts held abroad at foreign financial institutions (FFIs) by US persons. Failure by an FFI to disclose information on their US clients, including account ownership, balances and amounts moving in and out of the accounts, will result in a requirement to withhold 30 percent tax on payments of US-sourced income.
To address situations where foreign law would prevent an FFI from complying with the terms of an FFI agreement, US Treasury has developed model IGAs.
Under the terms of the Model 1 IGA between Finland and the US, Finnish FFIs will be required to report their information to the Finland's tax authorities, which will then automatically exchange the information with the US Internal Revenue Service (IRS). The automatic exchange of information will be reciprocal, and data will also be available on accounts held in the US by Finnish residents.
On the other hand, under the terms of the Model 2 IGA between Chile (said to be the first South American country to sign an IGA) and the US, there is no automatic exchange of information, and each FFI located in Chile will be required to enter into a separate agreement with the IRS, because they will have to report individual US account holder information directly to the IRS.
However, consistent with Chilean legislation, FFIs will only be able to provide the aggregate disclosure of those "recalcitrant" account holders who do not agree to the transmission of their data to the IRS. The latter may subsequently request specific information about those individual accounts from the Chilean Government, under the terms of the double taxation agreement between the two countries, which is currently in the process of being ratified.
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