What

  Y ou   G ive   a nd   W hat   Y ou   G et:   R eciprocity   u nder   a   M odel   1  

Intergovernmental   A greement   o n   F ATCA  
Allison Christians*

Abstract  

As is well known within international tax circles by now, the United States Congress
enacted FATCA in response to publicity surrounding well known foreign institutions,
most especially in Switzerland, that helped US customers hide income and assets from
the IRS. That publicity continues, reinforcing the need for the protection of the US tax
base against erosion through criminal activity. Thus FATCA emerges as a defensive
move against criminal behavior. But in the absence of reciprocity from US institutions,
the reverse proposition remains possible: the United States perversely positions itself to
gain from the very behavior it seeks to eliminate in other jurisdictions. This brief look at
what countries give and what they get under an IGA with the US signals the vital role of
reciprocity in making sure countries use international agreements to gain mutual
advantage through cooperation rather than a unilateral edge in a dangerous game of
undermine-thy-neighbor.
 

Article  

As is well known by now, the United States enacted a tax reform in 2010 known as the
Foreign Account Tax Compliance Act (FATCA), which seeks to end global tax evasion
by Americans through the use of offshore bank accounts.1 Because by its terms the
FATCA provisions do violence to other country’s laws (for example by requiring
financial institutions to release personal and financial data to third parties in
contravention of confidentiality laws), the US Treasury decided it would need to enter
into intergovernmental agreements to overcome foreign legal obstacles to enforcement.
Thus the FATCA “intergovernmental agreement,” or IGA was born.

                                                                                                                       
*
Allison Christians, H. Heward Stikeman Chair in Taxation, McGill University Faculty of Law
1
FATCA came into force as part of the Hiring Incentives to Restore Employment Act (HIRE Act),
which was signed into law by President Obama on March 18, 2010. Public Law 111–147: Hiring Incentives
to Restore Employment Act, (18 March 2010), 124 STAT. 71 Title V, Subtitle A, online:
<http://www.gpo.gov/fdsys/pkg/PLAW-111publ147/pdf/PLAW-111publ147.pdf>.
Christians-­‐What  You  Give  and  What  You  Get    

In fact, two models of IGA sprang forth. The first, Model 1, enables foreign governments
to act as intermediaries on behalf of their financial institutions, by having the institutions
report to their own governments, followed by government-level automatic information
exchange with the United States. The second, Model 2, is a more simple agreement in
which the non-US government agrees to require its financial institutions to deal directly
with the US IRS notwithstanding any domestic regulatory regime that would otherwise
prevent transmission of personal financial data to third parties. Most countries that have
initialed or signed IGAs have opted for the Model 1 approach, and it appears that this is
the Model that the Cayman Islands has recently decided to pursue.
But the Model 1 Agreement itself comes in two flavors: non-reciprocal and “reciprocal”,
so the Model 1 choice is an opportunity for additional decision-making. The non-
reciprocal model is just that: in such an agreement, the US undertakes to do little more
than refrain from immediately imposing FATCA penalties in the case of noncompliance.
The primary purpose of a Model 1-based agreement is therefore to bypass domestic
confidentiality laws by interposing foreign governments as information conduits between
foreign institutions and the IRS, and perhaps to make some administrative concessions
with respect to the reach of FATCA.
In contrast, under the “Reciprocal” Model 1, the US undertakes a few more obligations.
The term “reciprocal” nevertheless belongs in quotes, because if there is one
characteristic that defines the Reciprocal Model 1 IGA, it is that agreements drafted on
this model will most certainly not be reciprocal for some time, if ever. Instead, the IGA is
almost comically ill-named, by its own admission: in Article 6, it states that:
The United States acknowledges the need to achieve equivalent levels
of reciprocal automatic information exchange with [FATCA Partner]. The
United States is committed to further improve transparency and enhance
the exchange relationship with [FATCA Partner] by pursuing the
adoption of regulations and advocating and supporting relevant
legislation to achieve such equivalent levels of reciprocal automatic
exchange.

Anyone who pays attention to tax reform (or indeed any legal reform) in the United
States will not feel very optimistic for the cause of reciprocity upon reading this
language. People living in jurisdictions looking to become FATCA partners might
therefore wonder: when my government signs an IGA, what will it give, and what will it
get in return?
A careful reading of the text of any negotiated IGA will be necessary to answer that
question with certainty. Yet the Model IGAs exist for a reason: they are meant to create
uniformity, thus employing a series of bilateral agreements to in effect achieve a
multilateral information exchange regime. This is confirmed by the inclusion of a “most
favored nation” clause—something rare in double tax agreements, since it prevents
differential treatment across nations, the sine qua non of such agreements. The pertinent

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language is found in Article 7 of the Model IGA, and it reads virtually identically in the
IGAs signed to date:
Consistency in the Application of FATCA to Partner Jurisdictions

1. [FATCA Partner] shall be granted the benefit of any more favorable

terms under Article 4 or Annex I of this Agreement relating to the
application of FATCA to [FATCA Partner] Financial Institutions afforded
to another Partner Jurisdiction ....

2. The United States shall notify [FATCA Partner] of any such more
favorable terms and shall apply such more favorable terms automatically
under this Agreement as if they were specified in this Agreement and
effective as of the date of the entry into force of the agreement
incorporating the more favorable terms.

As a result, the Model language is a good place to begin an inquiry into what the
respective parties will do under a finalized arrangement. The following table outlines the
various tasks that each party will undertake either directly or on behalf of its institutions,
to demonstrate the ways in which the Model IGA is and is not reciprocal in its terms. It
demonstrates in simplified terms what countries get, and what they give, under a Model 1
“Reciprocal” Agreement. Of course, in the name of simplifying for the sake of clarity,
many technical details have been left out and it will obviously be critical to look at the
text of actual agreements in order to assess what is specifically undertaken by the
signatory countries. The goal here is not to provide an encyclopedic resource but rather a
general overview, to illustrate what the quid pro quo looks like in a Reciprocal IGA.
Thus, according to the text of the Model 1 Agreement, the following table lays out what
governments can expect to give and what they can expect to get in return:

FATCA
Action Partner USA Source
Government will require resident Financial Institutions (FIs) to:
• maintain and periodically search electronically searchable database
2 ✓ ✗ Annex I
with indicia of accountholder’s residence status
• undertake “enhanced review” (additional due diligence) for accounts
✓ ✗ Annex I
over $1 million
• treat account holders with specified indicia as resident of the other
✓ ✗ Annex I
jurisdiction unless certification requirements are met
• Annually identify and report accounts held by residents of the other
✓ ✗ Art. 4
country

                                                                                                                       
2
In the US, this includes physical residence in the US or citizenship or possession of a US green-
card regardless of physical residence, and relevant indicia include place of birth, mailing address, telephone
numbers, standing transfer orders, powers of attorney, and signatory authority. For virtually all other
countries, residence refers to physical residence.

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 Christians-­‐What  You  Give  and  What  You  Get    

FATCA
Action Partner USA Source
• Identify and report any payments made to non-participating FIs in
✓ ✗ Art 4
2015 and 2016
• Comply with registration requirements applicable to other IGA
✓ ✗ Art 4
jurisdictions
• Withhold 30% of certain payments to non-participating FIs ✓ ✗ Art 4
• Provide info to allow withholding and reporting by other payors in
✓ ✗ Art 4
certain circumstances
• Identify and report on any of their branches that are non-participating
✓ ✗ Art 4
FIs
Governments will provide each other:
• name and identification numbers of financial institutions collecting
✓ ✓ Art. 2
and exchanging the above
Government will collect from FIs & exchange with other country:
• names and addresses of account holders deemed resident of the
✓ [✓]3 Art. 2
other country
• Taxpayer Identification Numbers of account holders deemed resident
4 ✓ [✓]3 Art. 2,3
of the other country
• names, addresses, and TINs of entities that are controlled by
✓ ✗ Art. 2
persons deemed resident of the other jurisdiction
• with respect to entities controlled by residents of the other
✓ ✗ Art. 2
jurisdiction, names, addresses, and TINs of such controlling residents
• account numbers of accounts held by residents of the other country ✓ [✓]3 Art. 2
• periodic account balances of accounts held by residents of the other
✓ ✗ Art. 2
country
• gross amount of interest paid/credited to accounts held by residents
✓ [✓]3 Art. 2
of the other country
• gross amount of domestic source dividends paid/credited to accounts
✓ [✓]3 Art. 2\
held by residents of the other country
• gross amount of other domestic source payments made/credited to
accounts held by residents of the other country, if reporting is ✓ [✓3 Art. 2
required by domestic law
• gross amount of other payments made/credited to accounts held by
residents of the other country, including dividends and gross sales
5 ✓ ✗ Art. 2
proceeds, regardless of source and regardless of domestic reporting
requirements
• amounts described above paid/credited to a (custodial) account that
✓ ✗ Art. 2
has a resident of the other country as a beneficiary
• amounts described above paid/credited to an account that involves
✓ ✗ Art. 2
the FI as obligor or debtor
                                                                                                                       
3
Although contemplated by the IGA, this assumes that Treasury will authorize exchange with
respect to information it has recently begun to require from US FIs under revisions to the IRC § 6049
regulations; see Treas. Reg. § 1.6049-4(b)(5).
4
Beginning in 2017. The TIN refers to that of the residence-country, and this applies only to new
accounts; for existing accounts, or in cases where the FATCA partner jurisdiction does not issue TINs,
institutions will collect and exchange date of birth; for the US, this is qualified as “where available.”
5
Beginning in 2015; 2016 for gross sales proceeds.

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Christians-­‐What  You  Give  and  What  You  Get    

This table highlights what can reasonably be expected from the United States pursuant to
the terms of an agreement modeled after the Reciprocal Model 1 IGA, under current US
law. At present, the best a foreign country can hope for in terms of equivalent
information from the US is its addition to a list of countries with which the US will
exchange portfolio interest-related information on an automatic basis.6 There is only one
country currently on that list—Canada—and that country was already in a reciprocal
information sharing relationship with the United States with respect to such payments.7
As the table above shows, there remain important gaps in what the US is undertaking to
provide by way of cooperative mutual behavior.
While Article 7 provides some hope that more checkmarks will appear in the “USA”
column in the above table, the case for pessimism appears high because the United States
is the source of mixed messages with respect to the role and virtue of tax havens and
inconsistency in the approach to information exchange. The mixed message emanates
from some prominent US lawmakers, who suggest that the United States ought to behave
more like a tax haven even while sometimes simultaneously arguing against Americans’
use of offshore tax shelters.
For example, recently Congressman Devin Nunes said that the US should abandon
corporate income tax in order to “make the U.S. the largest tax haven in human history.”8
Congressman Nunes may not be well known internationally, but he is the co-chair of one
of 11 tax reform working groups convened by Ways & Means Committee members
Sandy Levin and Dave Camp, which are collectively tasked with preparing a report on
the best way forward for the US tax system.9 Nunes’ comments echo sentiments by his
more well-known fellow Ways & Means Committee member and 2012 vice-presidential
candidate Paul Ryan, who in 2010 said:
we need to have a tax system that makes America a haven for capital
formation. Let’s make this country a tax shelter for other countries instead of
having other countries be a tax shelter for America. This would ultimately raise
revenues and promote economic growth.10

                                                                                                                       
6
Treas. Reg. §§ 1.6049-4(b)(5), 1.6049-8. According to the Treasury, the IRS will exchange
information only to “foreign governments with which the United States has an agreement providing for the
exchange and when certain additional requirements are satisfied. Even when such an agreement exists, the
IRS is not compelled to exchange information… if there is concern regarding the use of the information or
other factors exist that would make exchange inappropriate.”
7
Reg 1.6049-8. This is the case even though the US-Mexico IGA is currently in force and the US
has begun requiring reporting from US financial institutions with respect to Mexican account holders.
8
Ramesh Ponnuru, How to Make America a Global Tax Haven, at
<http://www.bloomberg.com/news/2013-03-25/how-to-make-america-a-global-tax-haven.html>.
9
Levin and Camp Announce Ways and Means Tax Reform Working Groups, Feb. 13, 2013, at
http://levin.house.gov/press-release/levin-and-camp-announce-ways-and-means-tax-reform-working-
groups
10
Geoffrey Gabor, “Inside The Budget Battle With Congressman Paul Ryan”, TJE American
Business Magazine, online: <http://www.americanbusinessmag.com/2011/08/inside-the-budget-battle-
with-congressman-paul-ryan/>.

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Christians-­‐What  You  Give  and  What  You  Get    

Rep. Ryan at the same time expressed his belief that “there must be a decrease in the
amount of tax shelters for people to park their income overseas.” If there is a coherent
message here, it is that the United States should try to gain a competitive advantage by
becoming a tax haven while preventing foreign countries from doing the same. That
suggests that despite the language in Article 7, America’s FATCA partners should
probably not count on receiving “equivalent levels of reciprocal automatic information
exchange” any time soon.
Statements by other American legislators suggest additional reason for pessimism.
Legislators have long opposed changing rules that would have US financial institutions
report on portfolio interest payments made to foreign account holders—which are just
one aspect of information that will be exchanged under the IGAs. These payments are not
taxed in the United States and, other than in the case of Canada, have not traditionally
been reported to the IRS.11 As a result, there is virtually no way for the home
governments of such account holders to ensure that their taxpayers report and pay tax
where it is due. This is the essential problem FATCA seeks to solve. Yet, in opposition to
a proposed expansion of the reporting rules in 2003, Senator Gordon Smith expressed his
failure to understand “why we put the enforcement of other nations’ tax laws as a priority
at Treasury,” and urged the Treasury not to “drive the savings of foreigners out of bank
accounts in the United States and into bank accounts in other nations.”12 Private sector
advocates similarly argue that interest reporting would “hinder tax competition between
nations” and “help oppressive governments track down flight capital.”13
These long-held sentiments have been repeated in response to the Treasury’s decision to
revise the interest reporting rules to make it possible to reciprocate under IGAs with
respect to interest payments. Thus Florida’s Congress members wrote a letter to the
President to oppose the revision on the grounds that reporting interest earned by foreign
account holders to their home countries would cause serious harm to the US economy by
chasing hundreds of billions of dollars out of US financial institutions, and would
moreover violate the intent of Congress in exempting such payments from interest and
reporting for over 90 years.14 Florida Senator Marco Rubio joined in these dire warnings,
stating that:
forcing banks to report interest paid to nonresident aliens would
encourage the flight of capital overseas to jurisdictions without onerous
reporting requirements, place unnecessary burdens on the American
economy, put our financial system at a fundamental competitive

                                                                                                                       
11
The rule is found in IRC § 6049(b), defining interest, and Reg. 1.6049-4, 1.6049-8.
12
Letter from Sen. Gordon Smith to Treasury Secretary John Snow, reprinted in BLOOMBERG’S
DAILY TAX REPORT, (20 February 2003) (concerning proposed non-resident alien interest reporting rules
(REG-133254-02)).
13
Katherine M. Stimmel “Free Market Interest Groups Urge Treasury to Withdraw Alien Interest
Reporting Rules” (27 January 2004) Bloomberg BNA, 16 S G-2.
14
Letter from Florida Congresspersons to the President, March 2, 2011, at
http://posey.house.gov/uploadedfiles/irs-delegationletter-march3-2011.pdf

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Christians-­‐What  You  Give  and  What  You  Get    

disadvantage, and would restrict access to capital when our economy can
least afford it.15

The head of the American Bankers Association warned against expanding the
information reporting rules and later condemned the Treasury for ostensibly agreeing to
automatic exchange with Mexico “in secret” and without notice or consultation with
relevant stakeholders.16
The message is clear that while preventing Americans from sheltering their taxes abroad
might be a worthy goal for the state, it is not so clear that a preferred strategy would
include eliminating those services at home in order to attract foreigners. This is further
evidenced by the initial tepid contribution and later outright rejection by the United States
of an OECD initiative that addressed tax evasion through the use of offshore bank
accounts.17
This may because the US has much at stake in the global competition for foreign capital.
Indeed, a report from Global Financial Integrity in 2010 found that “the three
jurisdictions holding the largest amount of non-resident deposits are the United States,
the United Kingdom, and the Cayman Islands,” with the US leading with over $2 trillion
in private, non-resident deposits.18 Moreover, the United States ranks number one on the
Financial Secrecy Index, which “identifies the jurisdictions which are most aggressive in
providing secrecy in international finance and which most actively shun co-operation
with other jurisdictions.”19 This puts the United States in “the role of Switzerland” for
other countries,20 and particularly has allowed the state of Delaware to become “the best
place to hide wealth”:21
One of the smallest states in the US, it offers the best protection for
anyone who does not want to disclose their identity as a beneficial owner
of a company. That is one very good reason why the East Coast state hosts
50% of the US’s quoted firms and 650,000 companies – almost equivalent
to one company per Delaware resident.

                                                                                                                       
15
Letter from Marco Rubio to the President, April 4, 2011,
http://www.floridabankersassociation.com/docs/links/IRS_NRA_Rubio.pdf
16
Letter from Frank Keating to Timothy Geithner et al, Dec 12, 2012, a
http://www.aba.com/Solutions/Acct/Documents/ABANRALetter%28USMexicoIGA%29121212.pdf
17
See, e.g., Robert Kudrle, The OECD’s Harmful Tax Competition Initiative and the Tax Havens:
From Bombshell to Damp Squib, 8 GLOBAL ECON. J. (2008) (describing shifts in OECD approach and US
reaction to the harmful tax practices project as it evolved).
18
Ann Hollingshead, Privately Held, Non-Resident Deposits in Secrecy Jurisdictions, at
http://www.gfintegrity.org/storage/gfip/documents/reports/gfi_privatelyheld_web.pdf
19
Id at 10.
20
Kevin Stier, Foreign Tax Cheats Find U.S. Banks a Safe Haven, Oct. 29, 2009, at
http://www.time.com/time/business/article/0,8599,1933288,00.html.
21
Nick Mathiason, Delaware – a black hole in the heart of America, The Guardian, Nov. 1, 2009, at
http://www.guardian.co.uk/business/2009/nov/01/delaware-leading-tax-haven.

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…Delaware – the political power-base of the US vice-president, Joe

Biden – offers high levels of banking secrecy and does not make details of
trusts, company accounts and beneficial ownership a matter of public
record. Delaware also allows companies to re-domicile within its borders
with minimal disclosure, and allows the existence of privacy-enhancing
“protected cell” or “segregated portfolio” companies, among many other
stratagems useful for protecting the identity of those who do business
there.

FATCA arose directly in response to publicity surrounding well known foreign

institutions, most especially in Switzerland, that helped US customers hide income and
assets from the IRS.22 The publicity continues, reinforcing the need for the protection of
the US tax base against erosion through criminal activity.23 Thus FATCA is cast by its
proponents in a defensive role against criminal behavior. But in the absence of reciprocity
from US institutions, the reverse proposition remains possible and the United States
perversely positions itself to gain from the very behavior it seeks to eliminate in other
jurisdictions. This brief look at what countries give and what they get under an IGA with
the US signals the vital role of reciprocity in making sure countries use international
agreements to gain mutual advantage through cooperation rather than a unilateral edge
through coercion and competition.

                                                                                                                       
22
See William McGurn, “Obama’s IRS Snoops Abroad” (16 July 2012) The Wall Street Journal,
online: <http://online.wsj.com/article/SB10001424052702303933704577531280097324446.html> (“David
Axelrod invoked the holy grail behind the FATCA led, global IRS expansion. ‘We lose $100 billion a year
to offshore tax shelters,’ Mr. Axelrod told CNN”.). For background information on base erosion via
offshore holdings, see David Voreacos, “Offshore Tax Scorecard: UBS, Credit Suisse, HSBC, Julius Baer”
(12 October 2011), Bloomberg News, online: <http://www.businessweek.com/news/2011-10-12/offshore-
tax-scorecard-ubs-credit-suisse-hsbc-julius-baer.html>; Kim Dixon, “Nearly 15,000 Americans Admit
Offshore Tax Cheating” (17 November 2009), Reuters, online:
<http://www.reuters.com/article/idUSTRE5AG3IU20091117>; Martin Sullivan, U.S. Citizens Hide
Hundreds of Billions in the Caymans, TAX NOTES, May 24, 2004, p. 96; John DiCicco, Acting Attorney
Gen., U.S. Dep’t of Justice Tax Div., Dep’t of Justice Asks Court to Serve Summons for Offshore Records
(15 April 2009), online: <http://www.justice.gov/ opa/pr/2009/April/09-tax-349.html> (“Some United
States taxpayers are evading billions of dollars per year in United States taxes through the use of offshore
accounts”).
23
See, e.g., Department of Justice: Office of Public Affairs, “South Florida Woman Pleads Guilty to
Failing to Disclose Income from Swiss Bank Accounts and Agrees to $21 Million Penalty (8 January 2013)
online: <http://www.justice.gov/opa/pr/2013/January/13-tax-030.html> (“‘The Justice Department
continues to pursue those who hide income and assets from the IRS through the use of nominee businesses
and offshore bank accounts,’ said Assistant Attorney General Keneally. ‘U.S. taxpayers who fail to come
forward in the voluntary disclosure program risk prosecution and substantial fines, as this case
demonstrates.’”).

8