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.
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.
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 fulfill 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 finalized 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.
The new alternative is a mixed alternative approach of a joint framework with France, Germany, Italy, Spain, and the United Kingdom for intergovernmental information sharing which would allow financial institutions in Switzerland and Japan to report directly to the IRS, with additional information supplied by their governments upon request.
Treasury said it is confident the new model represents a strong alternative to the country-to-country information sharing model announced earlier this year and said both models would boost FATCA implementation and international tax compliance.
As part of the agreement with Switzerland, that country is expected to make a legal change that would require financial institutions that are not otherwise exempt or deemed compliant under current FATCA rules to participate and enter into the agreements with the IRS or register their participation with the IRS to identify U.S. accounts and report information to the IRS.
The Treasury hopes to issue final regulations by this fall.
Read more at: Tax Times blog