The month of July has seen several significant developments regarding implementation of the Foreign Account Tax Compliance Act (FATCA), which has been fully effective since July 1, 2014.  First, the IRS Office of Chief Counsel issued an advice memorandum regarding the applicability of the tax returns and return information confidentiality provisions of IRC 6103 and 6105.  Second, Treasury announced that sent letters to 40 countries which executed early versions of Intergovernmental Agreements (IGAs) that, based upon the “more favorable terms” provision in their IGAs, they could take advantage of more favorable provisions contained in more recent IGAs.  Finally, Treasury announced several new IGAs with partner jurisdictions.

IDES and Confidentiality

The Internal Revenue Service maintains a computerized system for secure, encrypted transmission of taxpayer financial account information called the International Data Exchange Service (IDES).  IDES was designed by the IRS and developed and implemented by a third-party vendor in order to facilitate the required transmission of financial account information pursuant to FATCA.  IDES will be used by the IRS and foreign tax administrations to exchange financial account information, as well as by the IRS to receive submissions directly from foreign financial institutions.  The IDES web site may be accessed here.

Pursuant to section 6103(a) of the Internal Revenue Code, tax returns and return information must be maintained as confidential by the IRS and may only be disclosed as provided by the code.  Information provided to the IRS by a foreign government is also subject to confidentiality pursuant to IRC 6105.  In addition, each of the tax treaties, and IGAs, to which the United States is a party include confidentiality provisions that require all information exchanged to be kept confidential in accordance with the provisions of such treaty or agreement, as well as provisions generally limiting the use of the information only for purposes of tax administration.

The Office of Chief Counsel advice memorandum contains an extensive analysis of when, precisely, the confidentiality protections of IRC 6103 and 6105 apply to tax information transmitted through IDES.  In the case of outbound information (that is, tax information transmitted by the IRS to a foreign tax authority), the memorandum concludes that such information, which is necessarily in the possession of the IRS, is protected by confidentiality throughout the IDES process.  Once the foreign tax authority receives the information, it will be obligated to maintain confidentiality under the terms of the applicable tax treaty or IGA.

The confidentiality of inbound information is less clear, as the advice memorandum acknowledges.  The Office of Chief Counsel concludes, ultimately, that confidentiality protection arises the moment the information is successfully uploaded to IDES by the transmitting party (whether a foreign tax authority or a foreign financial information).  The memorandum notes that information transmitted through IDES will be provided on FATCA Form 8966, which would likely constitute an “information return” within the meaning of IRC 6103(b)(1).

In a related development, the IRS updated its Frequently Asked Questions regarding technical aspects of IDES at the end of July to address certain recurring questions by IDES uses.

Notification of “More Favorable Terms” to Certain IGA Jurisdictions

Article 7 of the Model 1 IGA provides that the United States shall notify partner jurisdictions of any more favorable terms under Article 4 or Annex I of the IGA afforded to another partner jurisdiction.  The purpose of such provision is to ensure that countries signing early IGAs may take advantage of later modifications to the Model 1 IGA that are more favorable.  Pursuant to this particular article, Treasury has announced that it sent a “more favorable terms” letter in July to the following countries:

• Australia
• Barbados
• Belarus
• Belgium
• Brazil
• Canada
• Cayman Islands
• Costa Rica
• Czech Republic
• Denmark
• Estonia
• Finland
• France
• Germany
• Gibraltar
• Guernsey
• Honduras
• Hungary
• Ireland
• Isle of Man
• Italy
• Jamaica
• Jersey
• Latvia
• Liechtenstein
• Lithuania
• Luxembourg
• Malta
• Mauritius
• Mexico
• Netherlands
• New Zealand
• Norway
• Poland
• Qatar
• Slovenia
• Spain
• South Africa
• Sweden
• United Kingdom

As described in the letter sent to each of these countries, the United States considers the following provisions, contained in the IGA entered into with the British Virgin Islands, to be “more favorable terms” and thereafter available to be utilized by the jurisdictions receiving such letter:

• Paragraph G of Section VI of Annex I, which addresses alternative procedures for new accounts opened prior to entry into force of the IGA; and
• Paragraph H of Section VI of Annex I, which addresses alternative procedures for new entity accounts opened on or after July 1, 2014, and before January 1, 2015.

Announcement of Additional IGAs

During the month of July, Treasury announced that it had formally executed IGAs with the following jurisdictions:  Georgia, India, Philippines, and Turkey.  All of these agreements are Model 1 IGAs.