Switzerland and Japan agree FATCA exemption model

25 June 2012

Switzerland and Japan have agreed to circumvent their own privacy laws to ease the implementation of the US Foreign Accounts Tax Compliance Act (FATCA).

FATCA forces foreign financial institutions (FFIs) to identify their American clients, report their financial affairs to the US Internal Revenue Service (IRS), and withhold 30 per cent from their US-sourced income if they are deemed ‘recalcitrant’. As from January 2013, it also requires all banks, US or foreign, to deduct 30 per cent from US-sourced payments they make to other FFIs that are not registered as FATCA-compliant. Thus FFIs that choose non-compliance are at a large disadvantage if they hold substantial US assets, as most do, especially in Switzerland.

The Swiss Federal Finance Department said any refusal by Switzerland to implement FATCA would cause it major disadvantages. ‘The prohibitive withholding tax of 30 per cent on all payments from the USA, and the likely consequence that foreign financial institutions would terminate their business relationships with Swiss financial institutions in the medium term, would result in exclusion from the world's largest capital market,’ it said in a statement. Japanese banks also have substantial holdings of US securities.

Therefore most FFIs would like to comply with the Act if they were able to so. However both countries - and many others too - have legislation forbidding banks to disclose exactly the kind of information that FATCA requires them to disclose. In Switzerland these laws are the traditional banking secrecy laws; in Japan they are personal data protection laws.

Last week both countries announced they had signed deals with the US under which these restrictive laws can be by-passed. Instead of reporting all client data direct to the US IRS, their financial institutions will be allowed to pass only a limited subset of client details to the IRS. The rest of the FATCA-required information will only be available to the IRS via a direct request to the Swiss or Japanese government. The Swiss Banking Association welcomed this part of the agreement.

The arrangements differ significantly from agreements the US Treasury Department is negotiating with Germany, France, Italy, Spain and the UK over FATCA. The difference is that the European proposals exempt the banks from dealing with the IRS at all - they simply fulfil their obligations by handing over agreed client information direct to their own governments, which is then automatically forwarded to the IRS.

As part of the Swiss-US model - which is not yet finalised in detail - Switzerland is also trying to get large classes of its financial institutions entirely exempted from FATCA. Moreover, it does not want its banks to have to report the names of ‘recalcitrant’ US clients, or deduct US tax from their payments, or close their accounts. Instead the IRS would have to obtain this information through an intergovernmental administrative assistance request. A simplified method of client identification is also one of the Swiss government's negotiating aims

 

Sources

Swiss Banking Association

Swiss Federal Finance Ministry

Bloomberg

Reuters

Swissinfo

Accounting Today

International Adviser

US Treasury (statement on Swiss agreement, PDF)

US Treasury (statement on Japan agreement, PDF)

Banking Business Review

 


Advert

Article Search

Browse jurisdictions by clicking on the map regions below

© 2012 Society of Trust & Estate Practitioners