The US Treasury Department announced “FATCA partnerships” with France, Germany, Italy, Spain and the UK on February 8. The countries “agreed to explore a common approach to FATCA implementation through domestic reporting and reciprocal automatic exchange and based on existing bilateral tax treaties,” a joint statement said.

Without such agreements, FATCA, the US tax-avoidance regime, requires potentially every bank and investment fund in the world to file reports on their clients directly with American tax authorities, which would be a violation of many countries’ established rules.

The agreement revealed last week allows financial institutions in the five European countries to submit the required reports to their home governments, who will then be responsible for exchanging the needed information with the IRS, the US tax service.

Major European investment fund centres Ireland and Luxembourg, however, have not yet signed similar accords.

Washington talks

Luc Frieden, the Grand Duchy’s finance minister (photo), met with US Treasury officials in Washington on Monday “and FATCA was on their agenda,” a spokeswoman for the American Embassy in Luxembourg told Delano.

While the specifics of those conversations were not disclosed, the American administration is “generally open to discussing a government-to-government solution” with European countries, a senior official at the US Treasury Department told Delano.

The February 8 six-party agreement “allows for an alternative approach to implement the law,” she explained, noting that nothing about the legislation behind FACTA had been changed. The law still requires non-US financial institutions to identify and file reports on US tax persons, the official stressed.

The accord simply “allows us to enact FATCA but changes the route of information exchange,” to address potential legal and efficiency concerns of the EU member states. She acknowledged that FATCA was seen as being “in conflict” with the European countries’ privacy regulations, and that the agreement “took away data protection concerns about direct reporting [to US authorities] because foreign financial institutions can file reports with their governments” under existing national laws.

At the same time, it “allows foreign financial institutions to build off the existing systems that they built for the European Savings Directive,” the pan-EU tax information sharing scheme first implemented in 2003. Likewise, the American official said it would “enhance” the quality of tax information already exchanged on a reciprocal basis between the US and most European countries.

Bilateral negotiations

The Washington-based treasury official explained that the US is taking a bilateral approach to FACTA, as opposed to EU-wide discussions, because discussions with the European Commission would “take more time and FATCA is on a tight timeframe at this point.” All five of the countries that signed FATCA partnerships are interested in ensuring the concerns of their financial institutions are met, the official stated.

However, treasury officials would like last week’s announcement to serve as a template as international negotiations continue. They hope the accord “is the model for other countries. In that way, it is multilateral. We hope it will become multilateral,” she added.

A spokesman for Luxembourg’s finance ministry did not return Delano’s message requesting comment.

FATCA is due to go into effect in 2013.