Is a reciprocal FATCA Model-1 IGA truly reciprocal?

The Swiss State Secretariat of International Finance SIF announced[1] on November 16, 2023 that Switzerland has reached an agreement with the U.S. Department of the Treasury to exchange FATCA information based on a reciprocal FATCA Model-1 IGA by shifting away from the existing IGA-Model 2 enforced in June 2014.

Like most people when reading the term “reciprocal”, assumes, that the IRS acts mutually and exchanges the same level of information on accounts held by residents in contracting reciprocal Model-1 IGA jurisdictions (here Switzerland) with US-Financial Institutions (“US-FI’s”).

With this blog, I like to manage the expecations by anwering the questions

"Is a reciprocal Model-1 IGA truly reciprocal"?

So, let's elaborate it.

Under the FATCA regulations, Non-US Financial Institutions (“FFI’s”) has establish policies and procedures enabling them to identify accounts held by U.S. Specified Persons and certain non-U.S. legal entities having connection to the U.S., and to annually report such accounts including their balances, interest/dividends and gross proceeds received to the U.S. Internal Revenue Service (“IRS”).

This, by definition, includes U.S. and non-U.S. sourced income (e.g. a dividend paid by a non-US corporation to a U.S. person). 

The exchange of such account information supports the purpose of detecting potential tax evasion by U.S. persons because the US claims the right to tax their citizens and residents on their worldwide income. 

It's therefore in the interest of the IRS to gain sufficient knowledge about the income of of their U.S. Citizens and residents, that goes beyond US-sourced income paid to U.S. Citizens residing outside the US.

So far so good. Now is time to read through the reciprocal FATCA Model 1 IGA/

Article 1 of the reciprocal FATCA Model 1A IGA reveals, that US-Financial Institution’s do have not the level of disclosure obligation on accounts held by off-shore account holder.

So Article 1 actually limits the reciprocal exchange approach to U.S. sourced income subject to Chapter 3 or Chapter 61 of the U.S. Internal Revenue Code[2] only.

Consequently, non-U.S. sourced income obtained through an offhsore account held with a US-Financial Institution will not be in scope of the reciprocal FATCA Model 1 IGA and consequently will not report 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 a resident for tax purposes. 

Take away

The reporting obligations of the US government under the ‘reciprocal’ IGAs are limited to U.S.-sourced income only. 

This creates a disparity in reporting, meaning the word ‘reciprocal’ does not mean ‘equal’.

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 expects to be disclosed from FFI’s

[1] November 16 - "STEP Industry News: Swiss FATCA information exchange agreement ..."

[2] Model 1 IGA Reciprocal, Pre-existing TIEA or DTC, Article 1, Paragraph bb