IRS Releases Final Qualified Intermediary and Foreign Financial Institution Agreements

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December 30, 2016

With the end of the year upon them, the IRS has kicked into high gear with a flurry of new administrative guidance. On the heels of yesterday’s release of final reporting rules on slot machine, bingo, and keno winnings, proposed rules on horse track, dog track, and jai lai winnings, and a revenue procedure on Certified Professional Employer Organizations, the IRS released final agreements for foreign financial institutions (FFIs) and qualified intermediaries (QIs) to enter with the IRS, set forth in Revenue Procedure 2017-16 and Revenue Procedure 2017-15, respectively.

FFI Agreement

FFIs enter into an FFI agreement with the IRS to become participating FFIs for purposes of Foreign Account Tax Compliance Act (FATCA) withholding and reporting obligations. The final FFI agreement set forth in Revenue Procedure 2017-16, which was previously published in Revenue Procedure 2014-38, applies to FFIs seeking to become participating FFIs under FATCA, as well as FFIs and branches of FFIs treated as reporting financial institutions under a Model 2 intergovernmental agreement (IGA).  The update was necessary because Revenue Procedure 2014-38 was set to expire on December 31, 2016.  Accordingly, the FFI agreement contained in Revenue Procedure 2017-16 applies to FFIs with an FFI agreement effective beginning January 1, 2017.

Changes were made to the FFI agreement generally to align with subsequent changes to IRS regulations, such as the withholding and reporting rules applicable to U.S. branches that are not U.S. persons. Additionally, several changes reflect the expiration of certain transitional rules provided in the 2014 FATCA regulations including those related to limited branches and limited FFIs.  (For additional information on the expiration of the transition relief for limited branches and limited FFIs, please see our prior post).  The FFI agreement also clarifies the presumption rules applicable to Model 2 FFIs, and the ability of Model 2 FFIs to rely on certain documentation for purposes of the due diligence requirements.

The FFI agreement also contains new certification requirements applicable to FFIs attempting to terminate an FFI agreement and clarifies that the obligations imposed with respect to the period the agreement was in force survive the termination of the agreement.

QI Agreement

A QI serves as an intermediary for payments of U.S. source income made to non-U.S. persons, and it must collect a taxpayer identification number from the payee, or else it must withhold 30% on the payment. When an intermediary acts as a QI, it may agree to assume the primary withholding and reporting obligations with respect to payments made through it for purposes of Chapter 3, Chapter 4, and/or Chapter 61 and backup withholding under Section 3406 of the Code.  When a QI assumes such responsibility, it is not required to provide a withholding statement to the withholding agent/payor making payment to it.  FFIs, foreign clearing organizations, and foreign branches of U.S. financial institutions and clearing organizations are eligible to enter into QI agreements by completing Form 8957 through the IRS website, as well as Form 14345.

Notice 2016-42 set forth a proposed QI agreement (prior coverage), which made revisions to the previous final QI agreement published in Revenue Procedure 2014-39.  The proposed QI agreement created a new regime that allowed certain entities to act as qualified derivatives dealers and act as the primary withholding agent on all dividend equivalent payments they make.  Several changes in the final QI agreement were made in response to comments on the rules applicable to qualified derivatives dealers (QDDs), including provisions that reflect changes to the treatment of dividend equivalents from U.S. sources and provisions clarifying that entities acting as QIs and QDDs must file separate Forms 1042-S when acting in each distinct capacity.  Some of the changes in the final QI agreement were previously announced in Notice 2016-76 (prior coverage).  However, the final QI agreement makes further changes based on anticipated revisions to the regulations under Section 871(m), which are expected to be published in January.

Additionally, the final QI agreement provides greater detail on the internal compliance measures that are to replace the external audit procedures previously applicable to QIs. The final QI agreement also eliminates the ability of limited FFIs to enter into QI agreements, as limited FFI status will no longer be available beginning January 1, 2017.  Additionally, QIs seeking to use documentary evidence to document an entity claiming reduced withholding under a treaty must collect certain information regarding the applicable limitation on benefits provision, though the IRS has enabled a two-year transition period for QIs to gather this information.  The final agreement also eliminates the ability of an NFFE seeking to become an intermediary with respect to its shareholders to enter into a QI agreement.  The QI agreement also contains a modified standard of knowledge to align with the reason-to-know standard adopted in regulations, and modified documentation requirements and presumption rules to align with IGA requirements.  Finally, the term of validity for a QI agreement is six calendar years, extended from the three years provided in the proposed agreement.  The updated final QI agreement is effective beginning January 1, 2017.

IRS Issues Final and Proposed Regulations on Treatment of Gambling Winnings

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December 30, 2016

Earlier this week, the IRS issued final regulations and proposed regulations governing the reporting and withholding obligations, respectively, associated with gambling winnings. The regulations are being seen as a win for the gambling industry, who desired the changes made by the final rule and proposed rule.

Final Regulations on Bingo, Slot Machine, and Keno Winnings

The final regulations, issued under Code section 6041, only affect payers and payees of $1,200 or more in bingo and slot machine winnings or $1,500 or more in keno winnings. The final regulations add a new section, Treas. Reg. § 1.6041-10, addressing reporting of such winnings, which requires every payer of “reportable gambling winnings” (a term defined in the new regulations) that is engaged in a trade or business to generally make a separate information return with respect to each such payment.  The payer must report by filing Form W-2G, “Certain Gambling Winnings” with the IRS.  However, payers may choose to report under an aggregate method that allows payers to aggregate multiple payments made within an “information reporting period” (either a calendar day or a gaming day) to the same payee onto a single Form W-2G if certain requirements are satisfied.  If a gaming day is used, such as 6:00 am to 6:00 am, the final information reporting period of the year must end at midnight on December 31.

The final regulations generally track the proposed regulations issued in March 2015, with several changes. For example, the final regulations dropped proposed special reporting rules for electronically tracked slot machine play, a process that typically involves cumulative tracking of a player’s winnings and losses at a particular casino through the use of an electronic card.  Commenters had explained the challenges associated with implementing controls necessary to use the electronic data for tax purposes and had expressed concern with customer responses to the proposed automatic electronic tax reporting.  In addition, the final regulations maintain the threshold for required reporting after the IRS’s request for comments on lowering the threshold in the proposed regulations drew fierce opposition from gamblers and gaming companies alike.  The IRS declined, however, to raise the limits as requested by some commenters.

The final regulations also loosen the requirements related to payee identification. Consistent with the proposed regulations, payees will no longer need to present identification containing their social security number, but may instead provide a completed Form W-9.  The final regulations also permit the use of tribal identification guides issued by federally recognized Indian tribes.  If presented at a casino owned by the tribe that issued the card, it may be accepted even though it lacks a photograph.

The final regulations are effective today.

Proposed Regulations

The IRS also issued proposed regulations under Code section 3402(q) related to winnings from horse races, dog races, and jai alai. Changes to the regulations were requested by commenters who explained that changes in the type of bets made on those events have resulted in scenarios where the amount withheld greatly exceeds the actual tax liability.  In response, the proposed regulations would alter the method of calculating the amount of the wager in the case of parimutuel wagers, a type of bet that differs from the typical straight wager, made on horse races, dog races, and jai alai to produce more accurate withholding.  Under the proposed rules, all wagers placed in a single parimutuel pool and represented on a single ticket are permitted to be aggregated and treated as a single wager. In determining whether the winnings are subject to withholding and reporting, the total amount wagered in a particular pool reflected on a single ticket is considered by the payer.

Comments on the proposed regulations are due by March 30.

Two Notable FATCA Transition Rules Set to Expire January 1, 2017

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December 29, 2016

The Foreign Account Tax Compliance Act (FATCA) provided several transition rules that are set to expire on January 1, 2017, one related to limited branches and limited foreign financial institutions (FFIs), and one related to the deadline for sponsoring entities to register their sponsored entities with the IRS.

Limited Branches and Limited FFIs

FATCA included a transition rule to temporarily ease compliance burdens for certain FFI groups with members otherwise unable to comply with FATCA that will no longer be available beginning January 1, 2017. Under Treas. Reg. § 1.1471-4(a)(4), an FFI that is a member of an expanded affiliated group (EAG) can become a participating FFI or a registered deemed-compliant FFI, but only if all FFIs in its EAG are participating FFIs, registered deemed-compliant FFIs, or exempt beneficial owners.

However, certain FFIs in an EAG may be located in a country that prevents them from becoming participating FFIs or registered deemed-compliant FFIs. This can arise when the country does not have an intergovernmental agreement (IGA) with the United States to implement FATCA, and when domestic law in that country prevents FFIs located within its borders from complying with FATCA (e.g., preventing FFIs from entering into FFI agreements with the IRS).

The IRS included a transition rule for so-called “limited branches” and “limited FFIs” that eased the often harsh consequences of this rule by providing temporary relief for EAGs that included FFIs otherwise prevented from complying with FATCA, but the transition rule was only intended to ease the burden while the countries either negotiated IGAs with the United States or modified its local laws to permit compliance with FATCA, or while the EAGs decided whether to stop operating in that country. While the IRS announced in Notice 2015-66 its intent to extend the transition rule originally set to expire December 31, 2015 through December 31, 2016, no additional extension has been announced.  Accordingly, this transition rule will expire on January 1, 2017.

EAGs with limited branches or limited FFIs doing business in countries with local laws that prevent compliance with FATCA may be faced with a choice. If the EAG has FFIs located in non-IGA jurisdictions, the EAG will either need to stop doing business in those countries or the FFIs within the EAG that are resident in non-IGA jurisdictions will be treated as noncompliant with FATCA even if they could otherwise comply as participating FFIs.  FFIs resident in countries that have entered into IGAs will generally be unaffected by a “related entity” (generally, an entity within the same EAG) or branch that is prevented from complying with FATCA by local law, so long as each other FFI in the EAG treats the related entity as a nonparticipating financial institution, among other requirements.

This provision is contained in Article IV, Section 5 of all iterations of Treasury’s model IGA (e.g., Reciprocal Model 1A with a preexisting tax agreement, Nonreciprocal Model 1B and Model 2 with no preexisting tax agreements).  The primary effect of this IGA provision is that only the nonparticipating FFIs become subject to FATCA withholding while the EAG as a whole can remain untainted.

Sponsored Entity Registration

Another transition rule set to expire is the ability of sponsored entities to use the sponsoring entity’s global intermediary identification number (GIIN) on Forms W-8. Under FATCA, withholding is not required on payments to certain entities that are “sponsored” by entities that are properly registered with the IRS, under the theory that all FATCA requirements imposed on the sponsored entity (due diligence, reporting, withholding, etc.) will be completed by the sponsoring entity.  Under the transition rule, sponsored entities have been able to use the sponsoring entity’s GIIN on forms such as the W-8BEN-E, but beginning on January 1, 2017, certain sponsored entities will need to include their own GIIN.  This means that the sponsoring entity must register the sponsored entity with the IRS before that date.  If a sponsored entity required to include its own GIIN after December 31, 2016, on a withholding certificate furnishes a form containing only the sponsoring entity’s GIIN, a withholding agent may not rely on that withholding certificate under FATCA’s due diligence requirements.  In such instance, the withholding agent will be required to withhold 30% of any payment made to the sponsored entity.  Originally, sponsored entities were required to be registered with the IRS by December 31, 2015, but the deadline was extended by Notice 2015-66.  The IRS has not announced any additional extension and the FATCA registration portal began allowing sponsoring entities to register sponsored entities earlier this year.

D.C. Council Passes Mandatory Paid Leave Bill

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December 22, 2016

The District of Columbia Council passed a generous paid family leave bill on Tuesday by a 9-4 margin.  The bill will provide eight weeks of paid leave to new mothers and fathers, six weeks for employees caring for sick family members, and two weeks for personal sick leave.  As we explained in a prior post, the District will fund the new benefit with a new 0.62 percent payroll tax on employers.  Large employers, some of whom already provide similar benefits to employees, have been increasingly outspoken against the bill, taking issue with what it views as a bill requiring them to fund paid leave for small employers who do not currently offer such benefits.  Despite large employers’ strong lobbying effort, which were joined by Mayor Muriel Bowser, the bill still passed by a comfortable margin.  Mayor Bowser has not indicated whether she will sign the bill, but the 9-4 vote is sufficient to override a veto.  Regardless of Mayor Bowser’s decision, the program will likely not get off the ground until 2019 due to the administrative hurdles required to implement the new system.

IRS Finalizes Regulations Imposing Reporting Obligations on Foreign-Owned U.S. Entities

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December 13, 2016

Yesterday, the IRS issued final regulations that impose reporting obligations on a domestic disregarded entity wholly owned by a foreign person (foreign-owned DDE).  The final regulations amend Treasury Regulation § 301.7701-2(c) to treat a foreign-owned DDE as separate from its owner for purposes of reporting, recordkeeping, and other compliance requirements imposed under Code section 6038A.  The effect of these final regulations is to enhance the IRS’s access to information needed to enforce tax laws and international treaties and agreements.

We discussed the substance of these regulations in an earlier post, and the final regulations reflect the proposed regulations with only minor clarifying changes.  The primary clarification relates to the intent of the IRS to disallow the exceptions to the requirements of Code section 6038A for a foreign-owned DDE.  The proposed regulations explicitly disallowed two of these exceptions, but the application of two additional exceptions was left unclear.  In the final regulations, the IRS expressly prevents a foreign-owned DDE from utilizing either of the remaining two exceptions to the Code section 6038A reporting requirements.

Under the regulations, a transaction between a foreign-owned DDE and its foreign owner (or another disregarded entity of the same owner) would be considered a reportable transaction for purposes of the reporting and recordkeeping rules under Code section 6038A, even though the transaction involves a disregarded entity and generally would not be considered a transaction for other purposes (e.g., adjustment under Code section 482).  Thus, a foreign-owned DDE will be required to file Form 5472 for reportable transactions between the entity and its foreign owner or other foreign-related parties, and maintain supporting records.  Further, to file information returns, a foreign-owned DDE would have to obtain an Employer Identification Number by filing a Form SS-4 that includes responsible party information.

The final regulations reflect several other minor changes intended to ease the compliance burden for foreign-owned DDEs.  Specifically, a foreign-owned DDE has the same tax year as its foreign owner if the foreign owner has a U.S. tax return filing obligation, and if not, the foreign-owned DDE’s tax year is generally the calendar year.  The final regulations are applicable to tax years of entities beginning after December 31, 2016 and ending after December 12, 2017.

IRS Adds to Lists of Countries Subject to Bank Interest Reporting Requirements

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December 9, 2016

Earlier this week, the IRS issued Revenue Procedure 2016-56 to add to the list of countries subject to the reporting requirements of Code section 6049, which generally relate to reporting on bank interest paid to nonresident alien individuals.  Specifically, the Revenue Procedure adds Saint Lucia to the list of countries with which the U.S. has a bilateral tax information exchange agreement, and adds Saint Lucia, Israel, and the Republic of Korea to the list of countries with which Treasury and IRS have determined the automatic exchange of information to be appropriate.

Prior to 2013, interest on bank deposits was generally not required to be reported if paid to a nonresident alien other than a Canadian. In 2012, the IRS amended Treas. Reg. § 1.6049-8 in an effort to provide bilateral information exchanges under the intergovernmental agreements between the United States and partner jurisdictions that were being agreed to as part of the implementation of the Foreign Account Tax Compliance Act (FATCA).  In many cases, those agreements require the United States to share information obtained from U.S. financial institutions with foreign tax authorities.  Under the amended regulation, certain bank deposit interest paid on accounts held by nonresident aliens who are residents of certain countries must be reported to the IRS so that the IRS can satisfy its obligations under the agreements to provide such information reciprocally.

The bank interest reportable under Treas. Reg. § 1.6049-8(a) includes interest: (i) paid to a nonresident alien individual; (ii) not effectively connected with a U.S. trade or business; (iii) relating to a deposit maintained at an office within the U.S., and (iv) paid to an individual who is a resident of a country properly identified as one with which the U.S. has a bilateral tax information exchange agreement.  Under Treas. Reg. § 1.6049-4(b)(5), for such bank interest payable to a nonresident alien individual that exceeds $10, the payor must file Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” for the year of payment.

The list of countries will likely continue to expand as more countries enter into tax information exchange agreements with the U.S. in order to implement FATCA.

IRS Guidance Provides Transition Relief for Withholding Agents and Qualified Derivative Dealers under Section 871(m)

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December 7, 2016

Last week, the IRS issued Notice 2016-76 providing phased-in application of certain section 871(m) withholding rules applicable to dividend equivalents.  In addition to providing good-faith relief to certain transactions in 2017 and 2018, the Notice eases several reporting and withholding requirements for withholding agents and qualified derivatives dealers (QDDs).

Section 871(m) of the Code imposes withholding on certain payments that are determined by reference to or contingent upon the payment of a U.S. source dividend.  Thus, when a foreign financial institution issues derivatives based on U.S. equities to non-U.S. investors, it must withhold on the dividend payments it makes to the non-U.S. investors.  In 2015, the IRS issued final and temporary regulations (T.D. 9734) specifying certain withholding and reporting requirements under section 871(m).  Earlier this summer, the IRS proposed a qualified intermediary (QI) agreement (Notice 2016-42) that spells out a new QDD regime, which was developed to mitigate cascading withholding that would occur as a result of the withholding requirements imposed on dividend equivalents (see prior coverage).

Good-Faith Relief

Notice 2016-76 provides good-faith transition relief during 2017 for delta-one transactions and during 2018 for non-delta-one transactions.  (Delta means the “ratio of a change in the fair market value of a contract to a small change in the fair market value of the property referenced by the contract.”  A delta-one transaction is a transaction in which changes in the fair market value of the derivative precisely mirror changes in the fair market value of the underlying property.)  The IRS will take into account the extent to which a taxpayer or withholding agent made “a good faith effort” to comply with the section 871(m) regulations.  Relevant factors include a withholding agent’s efforts to build or update documentation and withholding systems and comply with the transition rules under Notice 2016-76.

Quarterly Deposit of Withholdings in 2017

During 2017, a withholding agent will be considered to have satisfied the deposit requirements for section 871(m) dividend equivalent payments if it deposits amounts withheld during any calendar quarter by the last day of that quarter.  The agent should write “Notice 2016-76” on the center, top portion of the 2017 Form 1042.

Qualified Derivative Dealers

The Notice also eased, in four ways, the reporting obligations of intermediaries applying for QDD status.  First, the IRS’s enforcement of the QDD rules and the 871(m) regulations in 2017 will take into account good-faith efforts by intermediaries to comply with the regulations and the QI agreement.

Second, the Notice allows an intermediary to certify its QDD status during interim periods.  Generally, a QDD must provide a valid Form W-8IMY certifying QDD status to a withholding agent, and the agent is not required to withhold on its payments regarding a potential or actual section 871(m) transaction to a QDD in its QDD capacity.  An intermediary that has submitted a QI application by March 31, 2017 may claim QDD status on Form W-8IMY for six months after submitting the application, pending approval of its QI agreement and QDD status.  If an intermediary has not yet submitted a QI application but intends to do so by March 31, 2017, it may claim QDD status on Form W-8IMY until the end of the sixth full month after the month in which it actually submits the QI application (provided the application is submitted by March 31, 2017).  An intermediary may not represent QDD status if it no longer intends to submit an application by March 31, 2017, or if its application has been denied.

Third, the Notice allows an intermediary to provide a Form W-8IMY certifying its QDD status to a withholding agent before it has received a QI-EIN from the IRS.  The intermediary must write “awaiting QI-EIN” on line 8 of Part I of the Form W-8IMY.  While the intermediary must provide its QI-EIN to the withholding agent as soon as practicable after receiving it, the intermediary need not provide a newly executed form, provided the original form remains accurate and valid.  If QDD status is denied, however, an intermediary must notify the withholding agent immediately, and the agent must notify the IRS such notification when it files its Form 1042, listing the name and EIN (if available) of any intermediary whose QDD status was withdrawn for any of these reasons.

A withholding agent may rely on the “awaiting QI-EIN” statement unless it knows or has reason to know that the intermediary cannot validly represent that it is a QDD.  Thus, a withholding agent is not required to determine when a QDD has applied for or actually possesses a QI agreement.  Nor is it required to verify whether a QDD’s EIN is a QI-EIN.  A withholding agent may only rely on an “awaiting QI-EIN” statement for up to six months after receiving the form, unless a QI-EIN is provided within that time.

Fourth, the Notice provides that failure-to-deposit penalties will not be assessed against a QDD before it actually receives its QI-EIN (which the IRS issues upon approving a QI application).  This relief from penalty is available only if the QDD deposits the amounts withheld within 3 days of receiving its QI-EIN.  Extended relief is available to a QDD that applies to enroll in the Electronic Federal Tax Payment Systems (EFTPS) within 30 days of receiving a QI-EIN, provided that the QDD deposits the amounts withheld within 3 days of enrolling in EFTPS.

Other Rules

The Notice also addressed other issues under the section 871(m) regulations.  Specifically, the Notice provided: (a) a simplified standard that withholding agents may use to determine whether transactions are combined transactions under Treas. Reg. §1.871-15(n); (b) a net-delta exposure test for a QDD’s section 871(m) amount; and (c) transition relief for certain existing exchange-traded notes listed in section V.d of the Notice until January 1, 2020.

D.C. Council Moves Closer to Enacting Employer Payroll Tax to Create Nation’s Most Generous Family Leave Law

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December 7, 2016

On December 6, the District of Columbia Council advanced a bill known as the Universal Paid Leave Act of 2016.  The bill would impose an estimated $250 million in employer payroll taxes on local businesses to fund a paid leave benefit created by the bill.  The bill would raise the funds by creating a new employer payroll tax of 0.62%.  Self-employed individuals may also opt-in to the program by paying the tax.  Federal government employees and District residents who work outside of the District would not be covered by the bill.  However, Maryland and Virginia residents who work within the district would be covered and entitled to benefits from the government fund created by the bill.

If ultimately passed, the bill would require businesses to provide eight weeks of paid time-off for both full and part-time workers to care for newborn or adopted children.  The bill, which advanced on an 11-2 vote, will also guarantee six weeks of paid leave for workers to care for sick relatives, as well as two weeks of annual personal sick leave.  (Many employees would already qualify for unpaid leave under the Federal and District family and medical leave laws.)

A government insurance fund funded with the new employer payroll taxes would pay workers during their leaves. The bill provides for progressive payment rates, such that lower-income individuals receive a greater percentage of their normal salary during periods of time off covered by the program.  The fund created with the tax revenue would pay a base amount equal to 90% of a worker’s average weekly wage up to 150% of the District’s minimum wage.  (Based on the District’s current minimum wage laws, the base amount is expected to be calculated on up to $900 in weekly salary by the time the program would take effect based on a $15 per hour minimum wage rate that is currently being phased in.)  An employee whose average weekly wage exceeds 150% of the District’s minimum wage would receive the base amount plus 50% of the worker’s weekly wage above the District’s minimum wage.  Payments would be capped at $1,000 a week, with the cap being subject to increases for inflation beginning in 2021.

The bill must pass a final D.C. Council vote on December 20 and approval by District Mayor Muriel E. Bowser. A Bowser spokesman reported that the mayor was still undecided on the bill.  If the bill ultimately passes, benefits would likely not be available before 2019, as the District would need time to prepare and fund the program.

First Friday FATCA Update

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December 2, 2016

Recently, the IRS released the Competent Authority Agreements (CAAs) implementing the intergovernmental agreements (IGAs) between the United States and the following treaty partners:

  • Qatar (Model 1B IGA signed on January 7, 2015);
  • Kosovo (Model 1B IGA signed on February 26, 2015).

Under FATCA, IGAs come in two forms: Model 1 or Model 2.  Under a Model 1 IGA, the foreign treaty partner agrees to collect information of U.S. accountholders in foreign financial institutions (FFIs) operating within its jurisdiction and transmit the information to the IRS.  Model 1 IGAs are drafted as either reciprocal (Model 1A) agreements or nonreciprocal (Model 1B) agreements.  By contrast, Model 2 IGAs are issued in only a nonreciprocal format and require FFIs to report information directly to the IRS.

A CAA is a bilateral agreement between the United States and the treaty partner to clarify or interpret treaty provisions.  A CAA implementing an IGA typically establishes and prescribes the rules and procedures necessary to implement certain provisions in the IGA and the Tax Information Exchange Agreement, if applicable.  Specific topics include registration of the treaty partner’s financial institutions, time and manner of exchange of information, remediation and enforcement, confidentiality and data safeguards, and cost allocation.  Generally, a CAA becomes operative on the later of (1) the date the IGA enters into force, or (2) the date the CAA is signed by the competent authorities of the United States and the treaty partner.

The Treasury Department website publishes IGAs, and the IRS publishes their implementing CAAs.