The U.S. Department of the Treasury on their FATCA web-site lists 113 Jurisdictions with whom they having either a FATCA Model-1 IGA or a FATCA Model-2 IGA in effect.
The Inland Revenue Authority of Singapore (“IRAS”) in late August 2020 announced on their International Tax compliance web-site that on January 01, 2021 the Singapore-US reciprocal FATCA Model-1 IGA enters into force.
This IGA supersedes the actual non-reciprocal Model 1 IGA signed between Singapore and the US in December 2014.
With this latest progress, the USA has agreed to 60 reciprocal Model-1 IGA’s (for more details please refer to Annex I) and confirmed to exchange financial account information with the contracting jurisdictions on financial accounts held by their residents with Financial Institutions located in the U.S.
With this article I would like to bring the attention to the following question:
Is a reciprocal Model-1 IGA truly reciprocal?
Under the FATCA regulations Non-US Foreign Financial Institutions (“FFI’s”) had to establish policies and procedures enabling them to identify accounts held by individuals and certain legal entities having connection to the U.S. and to annually report such accounts including their balances, interest/dividends received and gross proceeds to the U.S. Internal Revenue Service (“IRS”). This, by definition, includes U.S. and Non-U.S. sourced income (e.g. a dividend payed by a Non-US corporation).
This supports the purpose of detecting potential tax evasion by reportable persons because the US claims the right to tax the worldwide income of their residents and citizens.
It's natural therefore that they will want to know about global income of reportable persons, not just US sourced income paid to these persons outside the US. However, this sets up a disparity in reporting that means the word ‘reciprocal’ does not mean ‘equal’.
However, like most people when reading the term “reciprocal”, my assumption is, that the IRS acts mutually and exchanges the same details on offshore accounts held by residents in contracting reciprocal Model-1 IGA jurisdictions held with a US-Financial Institutions (“US-FI’s”).
Article 1 of the FATCA Model 1A IGA reveals, that US-FI’s have not the level of disclosure obligation on offshore accounts. Article 1 actually limits the reciprocal reportable payments to U.S. sourced income subject to Chapter 3 or Chapter 61 of the U.S. Internal Revenue Code[1].
Consequently non-U.S. sourced income is not in scope and US-FI’s will not report this income to the IRS. As a result, non-U.S. sourced income will not be disclosed to the partnering tax administration in which the account holder is resident for tax purposes.
Take away
The reporting obligations of the US government under the ‘reciprocal’ IGAs is limited to U.S. sourced income only.
It is in my opinion obvious that a reciprocal Model-1 IGA is not reciprocal related to the details the IRS exchanges with their contracting partner jurisdictions by comparing what the IRS expect to be disclosed from FFI’s
Annex I - Reciprocal Model-1 IGA Jurisdictions
[1] Model 1A IGA Reciprocal, Preexisting TIEA or DTC , Article 1 Definition