First Friday FATCA Update

November 4, 2016 by  
Filed under FATCA, Information Reporting

Recently, the Treasury released the Model 1A Intergovernmental Agreement (IGA) entered into between the United States and Guyana.  The IRS also released the Competent Authority Agreement (CAA) implementing the Model 1B IGA between the United States and Kuwait entered into on April 29, 2015.

Since our last monthly FATCA update, we have also addressed one other recent FATCA development:

  • Rep. Edward R. Royce (R-Calif.) recently introduced in the House of Representatives a bill that would exempt premiums paid on non-cash-value property and casualty insurance from coverage under FATCA (see previous coverage).

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.

New Bill Would Exempt Premiums Paid on Non-Cash-Value Property Insurance From FATCA Withholding

Rep. Edward R. Royce (R-Calif.) recently introduced in the House of Representatives a bill that would exempt premiums paid on non-cash-value property and casualty insurance from coverage under the Foreign Account Tax Compliance Act (FATCA).  Specifically, H.R. 6159 would amend the definition of “withholdable payment,” to which FATCA reporting and withholding rules apply, under Code Section 1473(1) to exempt premiums paid for any insurance contract that has an aggregate cash value of zero or less, and that is not considered for purposes of determining whether the insurance company is a life insurance company under Code Section 816.  Cash value generally means the amount that is payable to the policyholder upon policy surrender or termination, or that can be borrowed, except that cash value does not include any death, sickness, or casualty loss benefit, refund of and dividends not exceeding premiums paid (less cost of insurance charges), and certain advance premium or deposit.  In other words, the proposed bill would exclude from FATCA coverage premiums paid on property and casualty insurance that does not have an investment or earnings component.

Currently, FATCA withholding potentially applies to all insurance premiums, regardless of whether the premiums are for life insurance, annuities, or property and casualty coverage, if the payments are made to a nonparticipating FFI or passive NFFE.  However, many non-U.S. property and casualty insurers are excepted NFFEs that are not subject to withholding.  The proposed legislation would streamline the documentation process required for withholding agents making property and casualty insurance premium payments for U.S. risks as the withholding agents would no longer be required to document the FATCA status of the insurance company they are paying.  Because such premiums are generally not subject to Chapter 3 withholding, the premium payments could in many cases be made without the need for a Form W-8BEN-E from the insurer.  Some insurance buyers currently pay premiums to foreign insurance companies through a U.S. insurance broker to avoid the requirement to collect documentation from non-U.S. insurers because the FATCA rules treat such payments as a payment to a U.S. person, provided that the buyer does not know or have reason to know that the broker will not comply with its withholding obligations under FATCA.