With respect to the analysis of source tax risk on cross-border transactions, in accordance with the Foreign Account Tax Compliance Act, the market has generally focused on the treatment of parties in jurisdictions that are considered a Model 1 intergovernmental agreement with the United States. Given that most of the major financial centres are located in IGA Model 1 countries (including China, France, Germany, Luxembourg, Singapore, the United Arab Emirates and the United Kingdom), this priority is largely understandable. However, there are significant differences in the way financial institutions are treated in the legal systems treated by a Model 2 IGA compared to financial institutions in Model 1 igA systems, particularly with respect to financial institutions operating in an agency or intermediary capacity. For more information on model IGAs, autographed IGAs and IGA negotiating contact information, visit the Ministry of Finance`s FATCA IGA Resource Center. ALERT: Updated Withholding Foreign Partnership (WP) and Withholding Foreign Trust (WT) Agreements have been published and published on the FATCA website. The two updated agreements are presented in the 2014-47 PDF Income Procedure, which updates and replaces the WP and WT agreements, originally published as the 2003-64 income procedure, 2003-2 C.B 306. While in Model 1 legal systems, FFIs are generally not required to close the accounts of “recalcitrant” account holders, this Model 2 advantage does not depend solely on the fact that the FFI enters into an agreement with the IRS and meets the requirements set out in it (including the aggregate reporting of non-consensual account holders) , but also because the FATCA partner government provides an appropriate exchange of information within six months of the date of an IRS request. If the latter condition is not met, the relevant FFI is required to treat and close account holders related to the object as recalcitrant account holders. Model 2 contains a provision indicating that the United States would be prepared to enter into new negotiations on a direct (reciprocal and non-reciprocal) notification system. As a result, Model 2 jurisdictions may have the option of renegotiating later in a Model 1 agreement (while retaining the benefits of similar conditions to other existing 1-IGA models) if they so wish.
The Loan Market Association (LMA) has proposed a language that explicitly addresses the residual obligations of Model 2 FFI intermediaries in the context of lending. Under the LMA approach, a lender that does not provide accurate FATCA information to a Model 2 FFI intermediary (usually a facility agent) is required to compensate the Model 2 FFI product intermediary for any liability arising from this failure, including all penalties resulting from the failure of the Model 2 FFI, to honour the remaining obligations.