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The online magazine of the Swiss Bankers Association
2016/06/30 00:00:00 GMT+2

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FATCA: Turn 2 into 1

FATCA: Turn 2 into 1

FATCA only entered into force around two years ago, but Swiss banks have been dealing with it for over twice as long. The administrative and financial burden for the Swiss banks is enormous, but has been reduced thanks to the conclusion of a FATCA agreement.

On 14 February 2013, Switzerland concluded a FATCA agreement (Foreign Account Tax Compliance Act) under Model 2. Under this agreement, Swiss banks are obliged, among other things, to register with the IRS (the US tax authority), and agree to comply with the contractual obligations contained in the so-called FFI agreement. In particular, Swiss banks must identify and document all their customers as set out by FATCA, proactively report certain account information to the IRS, and under certain conditions, levy a 30 percent FATCA withholding tax for the IRS. By taking on an enormous administrative and financial burden, Swiss banks make a significant contribution to the prevention of tax evasion in Switzerland to the benefit of the US tax authority. So anyone who asks themselves just what exactly Switzerland is getting from the US in exchange is right to pose the question.

Swiss banks make a significant contribution to the prevention of tax evasion in Switzerland.

To date, Switzerland has come away empty-handed

And it is an easy question to answer: nothing. The FATCA agreement under model 2 is one-sided. Account information is only sent from Switzerland to the US, but not the other way around. But this is set to change in future. On 8 October 2014, the Federal Council approved the mandate for negotiations with the US on switching to a reciprocal FATCA agreement under Model 1. A two-directional flow of certain account information is therefore planned for the future. The Swiss tax authority will benefit from this amendment. However, one fly does remain in the ointment: the FATCA notifications sent from the US to Switzerland will be less comprehensive than those sent from Switzerland to the US. But a FATCA agreement under Model 1 also has certain advantages for Swiss banks.

A two-directional flow of certain account information is therefore planned for the future.

Greater legal certainty under Model 1

One major advantage lies in the fact that under a Model 1 agreement, only the FATCA agreement itself and local law apply for the Swiss banks. This gives the banks significantly more legal certainty than under the Model 2 agreement, according to which primarily US law applies.

Further to this, notifications regarding account information under the Model 1 agreement are not sent directly from the bank to the IRS, but rather from the bank to the Swiss Federal Tax Administration (FTA), and from the FTA to the IRS. It will likely be much simpler for Swiss banks to no longer interact directly with the IRS for FATCA notifications, but instead with the FTA.

The change of model is a welcome development.

A further advantage of a FATCA agreement under Model 1 is that no certification by a so-called FATCA Responsible Officer is foreseen. In contrast, financial institutions that come under Model 2 must designate a Responsible Officer for FATCA. This person must monitor the FATCA processes at the bank and must confirm to the IRS that they are being adhered to at periodic intervals. Moreover, unlike Model 2, the Model 1 agreement does not foresee the possibility for the IRS to make group requests.

So all in all, it can be expected that the switch to a FATCA agreement under Model 1 will simplify the banks’ dealings with FATCA-related matters. The change of model is therefore a welcome development. The negotiations are well-underway. The new reciprocal FATCA agreement is expected to come into force effective 1 January 2019.