Now that a model agreement for international cooperation in chasing tax evaders is available to be duplicated country by country, even tax havens like the Cayman Islands will start signing up to share information that tax evaders would like to hide, a U.S. Treasury official said Thursday.

The Department earlier in the day released the language of a model agreement, accepted by OECD member countries, that standardises and in some cases goes beyond arrangements already in place with a few European countries.

U.S taxpayer data relating to income tax liability has been shared for years with the UK. Chancellor of the Exchequer George Osborne announced his endorsement of the model agreement simultaneously with the U.S. announcement.

In all cases of cooperation, the official said, the U.S. will only provide outgoing information after a case-by-case review. A second version of the agreement that does not provide for reciprocal information flows is also being made available.

Mexico expressed interest in 2009 in sharing information with the IRS detailing payments liable for taxation of its investors and U.S. investors. The official, who asked not to be quoted directly, said Treasury is ready to solidify such an agreement with Mexico if the government there is still interested.

Meanwhile, facing the prospect of a 30% penalty withholding tax on payments if they don’t cooperate, even popular offshore tax havens are ready to sign up as soon as the fall, the official said. The U.S. is also working toward a model agreement acceptable to Switzerland and Japan, Treasury announced last month.

The model agreement overcomes the biggest objection from other countries by ensuring all information sharing is done government to government. Financial institutions, wherever they are located, are not required to deal directly with foreign governments although they may face slightly different reporting formats when the law takes full effect. It also provides for affiliates that operate under different
national rules than their parent firms.

While major provisions of the law do not begin to take effect until 2014 and the official beginning of enforcement is not until Jan. 1, the effect on tax havens of now having available a document to sign is likely to be immediate, the official said. Other countries will have to approve their own implementing legislation to comply.

Although slow to develop, the model agreement is not welcome news to many foreign financial institutions, which did not expect the U.S.-led effort to get this far this soon.

Although the U.S. Congress need not take any further action beyond what has already been done in passing the Foreign Account Tax Compliance Act in 2010, some members of Congress who have huge concerns about sending such information to some countries have threatened to change the law.

 

“Today’s announcement is an important milestone in our joint efforts to combat offshore tax evasion and make our tax systems more efficient and fair,” Treasury Secretary Tim Geithner said in a statement included with the day’s announcement. The model agreement was worked out in consultations with France, Germany, Italy, Spain and the UK.

 

A country signing the agreement sets up automatic information sharing with other countries, relaying information identifying account holders that financial institutions already provide to their local regulators and that has long been routine with some countries.

Although the reporting process is automatic, financial institutions and funds in and outside the United States under such agreements are forced to do more rigorous — and potentially very costly — due diligence so the source of customers’ income is pinned down. The OECD is expected to recommend streamlined procedures for reporting after a September briefing on the law’s provisions to be held in Paris.

The law requires not only account numbers and addresses, but telephone numbers, birthplace location, identifications of any related powers of attorney or alternate beneficiaries. The law covers individuals, partnership, corporations, estates and trusts. The law applies to any accounts involving more than $50,000. Life insurance policy payments up to $250,000 may be exempted.

The official said the amount of tax revenue believed hidden from collection around the world is huge, though unspecified. The government effort to collect it is necessary not only because of the revenue involved but because all taxpayers deserve a fair collection regime, the official said.

U.S. financial institutions paying dividends, interest or other proceeds to U.S. taxpayers living outside of the country face a 30% punitive withholding tax if information the IRS needs is withheld. The law exempts routine retirement accounts and Treasury will provide a list of acceptable retirement programs eligible for that exemption.  Tax professionals have been waiting to see the final language of the model agreement for years, as Treasury and the IRS plodded ahead to implement the 2010 law.

“This agreement implements FATCA in a way that is targeted and effective, while also providing a foundation for further international coordination,” Geithner’s statement said. “We look forward to quickly concluding bilateral agreements based on today’s model.”

The law has a broad reach, affecting any entity that accepts deposits, holds any financial assets for others, is involved in securities trading or partnership administration and includes commodities trading and investment. European authorities are working on another type of international tax collection agreement for the years ahead that may be much more elaborate than FATCA.

For more on this story go to:

http://www.forexlive.com/blog/2012/07/26/update-us-tsys-tax-evasion-intl-net-tightens-in-september/