There are a number of jurisdictions around the world whose Foreign Financial Institutions (FFIs) are not required to undertake FATCA reporting and are not subject to the FATCA “stick” of withholding.
In total, there are 22 jurisdictions that have a Model 1 Intergovernmental Agreement (IGA) signed but not in force or are treated as having a Model 1 agreement in substance. The result is that almost 11,000 FFIs that have registered for GIINs have not been required to report U.S. Persons since the inception of FATCA reporting.
Benefits of a Model 1 IGA
FATCA uses a “stick” to force FFIs to provide information about their U.S. account holders to the U.S. Internal Revenue Service (IRS). This stick is the imposition of a 30% withholding tax on withholdable payments made to certain FFIs and non-financial foreign entities (NFFEs) that do not undertake FATCA reporting.
FFIs and NFFEs located in a jurisdiction with a signed and implemented Model 1 IGA between the local jurisdiction and the U.S. are generally not subject to the 30% withholding.
In order to encourage jurisdictions to enter into an IGA and enact local legislation, the IRS provided leeway in the amount of time a jurisdiction could take to reach the stage of FATCA reporting.
The IRS announced in 2016 that as of January 1, 2017, it would begin updating the FATCA IGA List to reflect that jurisdictions that had not yet brought their IGA into force would no longer be treated as if they had an IGA in effect.
FFIs in a jurisdiction that ceased to be treated as if it had an IGA in effect would no longer be treated as complying with, and being exempt from withholding under, FATCA.
However, a jurisdiction could further delay being removed from the IGA list by providing the IRS a:
detailed explanation as to why the jurisdiction had not yet brought the IGA into force; and
step-by-step plan that the jurisdiction intended to follow in order to sign the IGA (if it had not yet been signed) and to bring the IGA into force, including expected dates for achieving each step.
The IRS made clear that jurisdictions that were initially determined to have demonstrated firm resolve to bring an IGA into force would not retain that status indefinitely.
Step-by-Step Plans Drag On
While FFIs in the rest of the world are dealing with disgruntled clients whose personal financial information is being shared among financial institutions, local tax authorities and the IRS, FFIs in 22 jurisdictions have been receiving a Model 1 IGA free ride with respect to FATCA reporting.
In Southeast Asia for example, Malaysia, Indonesia, Thailand and the Philippines account for 5871 of the almost 11,000 FFIs that have registered for GIINs but have not been required to report U.S. Persons.
Included within these jurisdictions is the Malaysian federal territory of Labuan.
Malaysia declared Labuan a tax haven in 1990. This small East Malaysian island in the South China Sea "was turned into the country's international financial hub with hundreds of international offshore finance firms registered and operating on the island” according to Labuan Member of Parliament Datuk Rozman Isli. [“Labuan banking on seven pillars for second phase economic growth,” Malay Mail Online 28 January 2018.]
The U.S.-Malaysia Model 1 IGA is, however, still in the process of finalization. The U.S. Treasury through a 25th April 2017 letter agreed that Malaysia remains on the Treasury IGA list and continues to be treated as if it has a Model 1 IGA in effect.
The Malaysian tax authority (Inland Revenue Board of Malaysia or IRBM) has continued to postpone the FATCA reporting date. Currently, the date for submitting the 2014, 2015, 2016, 2017 and 2018 reportable information and nil FATCA returns has been deferred to 30 June 2019.
No Status Updates
The IRS has not issued any updates regarding individual jurisdiction progress toward complete FATCA implementation. Thus, it is not clear whether the IRS will in fact remove any jurisdiction’s Model 1 IGA status.
So, as you spend time collecting client account data, reviewing xmls and cursing the overloaded tax portal that has already been taken down by the tax authority five times for fixes, try to avoid thinking about your counterparts in Labuan as they lead a FATCA free life in their tropical paradise. Maybe when you’re done, you can join them in time for a dive on World Oceans Day.