FATCA is directed at financial institutions around the world and requires them to periodically provide the US tax authorities with information regarding so-called US accounts. Pressure to comply comes in the form of a 30 percent withholding tax penalty on income earned from US securities. The implementation of FATCA entails very high administrative and financial outlays for financial institutions.
Along with many other countries, Switzerland has concluded an intergovernmental agreement with the US to facilitate the implementation of FATCA. A Swiss FATCA law was enacted on the basis of this intergovernmental agreement (the so-called Swiss FATCA Agreement), which came into effect on 30 June 2014. The FATCA agreement reduces the implementation costs for Swiss financial institutions.
The FATCA agreement currently in force between Switzerland and the US is based on the so-called Model 2. According to this model, Swiss financial institutions provide the US tax authorities (IRS) directly with the account information that is subject to reporting with the consent of the clients concerned. In cases where no consent has been granted, an anonymous, aggregated report containing certain account information is provided. On the basis of the aggregated notification, the US tax authorities can then seek disclosure of specific client and account information by means of a request for administrative assistance, if this is provided for under the double taxation agreement between Switzerland and the US.
The FATCA agreement under Model 2 is unilateral. Account information is only sent from Switzerland to the US, but not vice versa. This is set to change in future. On 8 October 2014, the Federal Council approved a mandate for negotiations with the US on changing to a reciprocal FATCA agreement under Model 1. It is therefore envisaged that in future, certain account information will flow in both directions. However, FATCA reporting from the US to Switzerland will be less comprehensive than the reporting from Switzerland to the US.
Unlike under the Model 2 agreement, reporting from financial institutions under Model 1 is not provided directly by the financial institution to the US tax authorities. Instead, it is sent to the Swiss Federal Tax Administration (FTA), which in turn forwards this to the US tax authorities.
A FATCA agreement under Model 1 has a number of advantages for Swiss banks:
- One significant advantage for the Swiss banks is that under the Model 1 agreement, only the FATCA agreement itself and local law apply. For the banks, this translates into significantly higher legal certainty than under the Model 2 agreement, according to which US law also applies.
- In addition, under Model 1, reporting of account information is conducted not by the bank directly to the IRS, but by the bank to the FTA and from the FTA to the IRS. In future, it is expected to be significantly simpler for the Swiss banks to interact with the FTA instead of directly with the IRS in matters of FATCA reporting.
- A further advantage of a FATCA agreement under Model 1 is that no certification by a so-called FATCA-Responsible Officer is foreseen. Under the Model 2 agreement, financial institutions must designate a FATCA-Responsible Officer. This person is responsible for monitoring the bank’s FATCA processes, and must periodically report to the IRS that these are being adhered to.
- In addition to this, in contrast to the current Swiss FATCA agreement under Model 2, the Model 1 agreement does not provide for group inquiries from the IRS.
On balance, it can be expected that the changeover to a FATCA agreement under Model 1 will simplify the banks’ dealings with the complex FATCA subject matter. Negotiations for a change of model are already underway.
FATCA Qualification Committee
The FATCA Qualification Committee serves in the interests of collaboration between the various stakeholders, and addresses questions arising from the implementation of the FATCA agreement. Switzerland is not autonomous when it comes to interpreting the agreement, however; consultation with the US is necessary in certain cases. The opinions developed in response to the questions addressed represent the view of the FATCA Qualification Committee. The competent US authorities are consulted where required.
The Qualification Committee is led by the State Secretariat for International Financial Matters (SIF). Also involved are representatives of the Swiss Federal Tax Administration (FTA), the Federal Social Insurance Office (FSIO) and the following institutions: