IRS Turns Up the Heat With Announcement 2016-27

    By Virginia La Torre Jeker J.D.


    The Internal Revenue Service (IRS) just provided guidance in Announcement 2016-27 to jurisdictions that are treated as if they have an Intergovernmental Agreement (IGA) "in effect" and to "foreign financial institutions" (FFIs) located in those jurisdictions. For the particular interest of my readers, the United Arab Emirates is one such jurisdiction – it has signed the IGA but it is not yet "in force". Bahrain and Saudi Arabia lag behind the UAE, and merely have agreements "in substance"; nothing has yet been signed. Yet, all of these jurisdictions are treated as having an IGA "in effect".

    You can access the list here to determine which jurisdictions are treated as having an IGA "in effect." Remember, just because an IGA has been signed, does not mean it is automatically "in effect".

    Is the Jurisdiction Demonstrating "Firm Resolve"?

    It may be recalled that many partner jurisdictions that have signed IGAs or reached an agreement in substance on the text of an IGA continue to work through their internal procedures to bring the IGA into force. For Model 1 IGAs that had not yet entered into force on September 30, 2015, Treasury announced in Notice 2015-66 that it intended to continue to treat FFIs covered by the IGA as complying with, and not subject to withholding under FATCA so long as the partner jurisdiction continued to demonstrate firm resolve to bring the IGA into force and any information that would have been reportable under the IGA on September 30, 2015, is exchanged by September 30, 2016, together with any information that is reportable under the IGA on September 30, 2016 (hmmm, a date that is right around the corner).

    Step-by-Step Plan is Now Required to Maintain Status

    Under the latest news contained in Announcement 2016-27, each jurisdiction that is treated as if it has an IGA in effect and that wishes to continue to be treated as if it has an IGA in effect must provide the Treasury Department, by December 31, 2016, with a detailed explanation of why the jurisdiction has not yet brought the IGA into force and provide a step-by-step plan that the jurisdiction intends to follow in order to sign the IGA (if it has not been signed) and bring the IGA into force.

    According to the Announcement, the United States has signed IGAs with 83 jurisdictions; of those IGAs, 61 are "in force". The United States has also reached agreements in substance with 30 jurisdictions. Sorry to say, a long road to travel lies ahead for full implementation of FATCA. In order to fully implement FATCA, Treasury has in principle to negotiate an IGA with each of the 195 other countries in the world. Of course, without an IGA in place, the FFIs must enter into a so-called FFI agreement with the IRS in order to avoid the 30% withholding on US source payments. The problem here is that many FFIs cannot simply enter into such an agreement without being in violation of their own home-country data protection or privacy laws. The IGAs make it easier for foreign governments and financial institutions to be compliant with FATCA since the IGA effectively takes into account the other country's rules (for example, regarding data protection and privacy) that may have otherwise made implementation difficult if not impossible, to achieve.

    Loss of "In Effect" Status

    The IRS warns that jurisdictions that were initially determined to have demonstrated "firm resolve" to bring an IGA into force will not retain that status indefinitely. A failure to adhere to the expected timeline set out in the jurisdiction's explanation could result in a determination that the jurisdiction is no longer demonstrating "firm resolve" to bring its IGA into force and therefore will no longer be treated as if it has an IGA "in effect".

    On January 1, 2017, Treasury will begin updating the IGA List to remove certain jurisdictions that have not brought their IGA into force; they will no longer be treated as if they have an IGA in effect. This is bad news for FFIs located in any such jurisdiction. They will generally no longer be able to rely on the IGA to be treated as complying with, and exempt from withholding under, FATCA and will have to enter into a FFI agreement with the IRS.

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  • The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.

Virginia La Torre Jeker J.D.

Virginia La Torre Jeker J.D., is based in Dubai. Virginia has been a member of the New York Bar since 1984 and is also admitted to practice before the United States Tax Court. She has over 30 years of experience specializing in the international aspects of US tax, including FATCA. She has been quoted in the New York Times and Newsweek, and is regularly quoted in many local news articles and publications."

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