On Friday, 31 May 2013, the German Ministry of Finance, Bundesfinanzministerium (BMF), announced the release of the FATCA Intergovernmental Agreement between the Federal Republic of Germany and the United States (German-U.S. IGA) for implementing the broad ranging provisions of the Foreign Account Tax Compliance Act (“FATCA”). The BMF had issued a news release on 21 February 2013, announcing that it had initialed the German-U.S. IGA without releasing the contents of the agreement, and the industry has been eagerly awaiting this release of the signed version. On 31 May 2013, the German-U.S. IGA was finally signed and published in the English and German languages, with both texts being equally authentic.
The German-U.S IGA was not accompanied by draft implementation guidance. However, it was accompanied by a brief Declaration of Understanding regarding the IGA, which provided some additional information.
Although the Articles and Annexes in the German-U.S. IGA follow a consistent format with similar content as the reciprocal version of the Model 1 IGA, some differences do exist.
This Newsbrief provides an overview of the key elements of the German-U.S. IGA and how it compares to the Model 1 IGA.
The German-U.S. IGA seems to be based almost exclusively on the reciprocal version of the Model 1 IGA released in November, with very limited changes. Accordingly, only a few of the changes from the updated Model 1 IGA released on 9 May 2013 were incorporated.
Further, the revisions to Annex II which were released on 28 May 2013, are not reflected in the German-U.S. IGA. One update it does, however, incorporate is that Art. 4 no. 7 of the IGA states that Germany may permit its financial institutions to use definitions in relevant U.S.
Treasury Regulations in lieu of corresponding definitions in the German-U.S. IGA, “provided that such application would not frustrate the purpose of” the German-U.S. IGA. Overall, Annex II seems to fall short of industry expectations, providing a limited number of additional exceptions specific to Germany.
Given the “more favorable terms” clause in the German-U.S. IGA, the impact of the German-U.S. IGA not incorporating many of the changes from the Model 1 IGA as updated on 9 May 2013, remain to be seen. These changes may subsequently be incorporated into German law as a result of the inclusion of more favorable terms in subsequent IGAs. It should be noted that this clause addresses the Federal Republic of Germany and not the individual institutions within Germany. Thus, prior to applying a more favorable term, details should be included in the relevant implementation guidance on how this will function, which is expected in the form of a BMF Circular (BMF-Schreiben), and does not constitute an option eligible at the level of the individual FFI.
Further, it is thought that U.S. Treasury officials would like to eliminate the tailoring of Annex II since they believe the final FATCA regulations provide sufficient clarity on the types of institutions, and products which should be exempt or deemed compliant. Nonetheless, Annex II still contains language stating that it may be updated to reflect mutual agreement between the Competent Authorities in Germany and the United States “… to include additional entities, accounts, and products that present a low risk of being used by U.S. persons to evade U.S. tax …” though the practical application of such provision also remains to be seen.
Impact on Scope and Compliance
The German-U.S. IGA does not provide significant additional clarification relating to scope and compliance. However, the Declaration of Understanding provides some clarification related to the registration requirements as well as the compliance status for German financial institutions.
As with all Model 1 IGA jurisdictions, financial institutions resident in Germany, including any German branches of non-German financial institutions, will not be required to enter into FFI Agreements with the IRS. However, the German-U.S. IGA states that German financial institutions will be required to comply with registration requirements applicable to financial institutions in IGA jurisdictions.
The Declaration of Understanding confirms that the current understanding between Germany and the U.S. is that the registration requirements applicable to IGA jurisdiction financial institutions include registering with the IRS and obtaining a Global Intermediary Identification Number (“GIIN”), as each Reporting German financial institution will use its GIIN as the identifying number referenced in the German-U.S. IGA.
With this information, and subject to further guidance, it is clear that German Reporting Financial Institutions will be required to register with the IRS and obtain a GIIN. It remains, however, unclear whether certain deemed-compliant German financial institutions must also register with the IRS. The declaration does not state whether institutions or entities which are not required to register may do so, even if only to obtain a GIIN in an effort to minimize administrative burdens when sharing their withholding status in the market.
Registration guidance is expected in the coming weeks from the IRS.
Article 10 of the German-U.S. IGA states that the agreement will go into force once Germany has provided written notification to the United States that it has completed the necessary legislative and internal procedures for the agreement to be effective. The Declaration of Understanding comments on this point by stating that the U.S. intends to treat each German financial institution as compliant with the German-U.S. IGA, and, thus, not subject to withholding during the time period when Germany is pursuing the necessary procedures required for the German-U.S. IGA and local legislation to enter into force, no later than 30 September 2015.
Should there be a delay beyond 30 September 2015, for entry into force, any information that should have been reported on 2013 and 2014 accounts in 2015 will be due on 30 September of the year following the entry into force.
This provision alleviates the risk that German financial institutions may be treated as non-compliant and subject to withholding beginning on 1 January 2014, if local guidance is not in place. However, it remains to be seen how this will be applied practically, as it is unclear if the IRS will publish a list of all jurisdictions deemed to be compliant, or if the GIIN will be the primary indicator of compliance for individual financial institutions. Alternatively, FFIs may be required to document and prove residency as well as compliance with respect to their counterparties individually.
Though the implementation guidance for the United Kingdom intends to include the definition of investment entity from the U.S. Treasury Regulations, the German-U.S. IGA made no indication of changing the definition, and currently includes the same definitions for all types of financial institutions, including investment entity, as the Model 1 IGA.
Annex II, which is customized to identify the local entities that present a low risk of being used by U.S. persons to evade U.S. tax, identifies only a limited number of types of financial institutions that may qualify as non-reporting German FIs.
The German-U.S. IGA provides the same categories of exempt beneficial owners as the Model 1 IGA (i.e. governmental entities, central banks, international organizations, and certain pension funds) while adding only a few German-specific institutions related to these four categories.
Under the deemed-compliant category, the German-U.S. IGA generally retains the categories and requirements as provided in the Model 1 IGA, namely, financial institutions with a local client base and certain collective investment vehicles.
Annex II seems to fall short of industry expectations and does not contain significant differences to the general categories provided in the Model 1 IGA for financial institutions that may qualify as non-reporting German FIs. The industry expected German-specific situations to have been addressed directly, including the treatment of special funds (Spezialfonds), among others. The German-U.S. IGA did address contracts with a Housing Savings Institution (Bausparkassen), however this type of specificity was expected more broadly for the German market. The level of detail that the industry previously expected from the German-U.S. IGA will now be expected in the German implementation guidance, namely the BMF Circular.
Impact on Customer Due Diligence Obligations
The due diligence procedures on holders of financial accounts and NPFFIs provided in Annex I of the German-U.S. IGA does not provide any additional definitions or clarifications from the Model 1 IGA, while Annex II does provide some German-specific accounts and products to be excluded from the definition of financial accounts.
Due Diligence Procedures
While the German-U.S. IGA retains the provision that Germany may allow its financial institutions to rely on the due diligence procedures as provided in the U.S. Treasury Regulations in lieu of the procedures provided in Annex I, it does not contain the additional clarification that was provided in the updated version of the Model 1 IGA. This provision clarifies that a FATCA Partner may permit financial institutions to make such election separately for each section of Annex I, and such election could be made with respect to any clearly identified group of such accounts (such as by line of business or the location of where accounts are maintained).
Clarity as to the method of applying the due diligence procedures must now come through the BMF Circular. Further, additional guidance on the requirements and form of the self-certification were eagerly expected with the release of the German-U.S. IGA; however, no such additional information was provided, and the limited guidance related to the self-certification remains the same as previously provided in the Model 1 IGA.
Annex II identifies the following as categories of accounts and products established in Germany and maintained by a German financial institution that shall not be considered financial accounts:
- Certain retirement accounts/pension schemes meeting specified restrictions
- Certain escrow accounts
- Contracts with certain Housing Savings Institutions
Exempting such accounts from the scope of the IGA results in these account holders not being subject to customer due diligence by the FFI nor are they subject to reporting.
Impact on Reporting Obligations
Under the German-U.S. IGA, financial institutions located in Germany, including any German branches of non-German financial institutions, must obtain and report account holder information annually in a manner similar to what is required under the Model 1 IGA. This reporting will be performed through local channels to the German Competent Authority, which is identified in the German-U.S. IGA as the Federal Ministry of Finance or the agency to which it has delegated its powers, who will then exchange the information with the IRS.
The initial exchange date of 30 September 2015, has been retained, along with the requirement that such reporting must include information related to both calendar years 2013 and 2014.
As with other IGAs that have been released, the German-U.S. IGA does not provide dates by which German FIs must report to the German Authority. We expect these dates to be provided in subsequent German BMF Circular. No clarification has been provided around the term “payments” with respect to the transitional reporting to nonparticipating financial institutions. The term used in the German version of the German-U.S. IGA has a very broad meaning, and could potentially include all payments, and may not be limited to “income-type” payments. The expectation is that additional clarity and confirmation will be provided by the BMF in the coming weeks as to what types of payments should be included in this reporting.
The German-U.S. IGA and its accompanying Declaration of Understanding both reference Art. 26 of the US / German Treaty Convention for the Avoidance of Double Taxation, under which information obtained by the respective other party must, in principle, only be used for tax proceedings. In particular, this should preclude the IRS from sharing information with the Securities and Exchange Commission, or other such regulatory agency, for supervisory law enforcement against the respective financial institutions. Nonetheless, given that U.S. law also contains rigid rules with respect to the giving of advice to U.S. persons (being defined with reference to U.S. residency under the 1940 Investment Adviser Act / Regulation S), it may, in many cases, continue to be recommended to review “U.S. clients” and the permissibility of existing service offerings to them from various tax, legal and commercial aspects.
Impact on Withholding
The withholding obligations for German financial institutions are the same as those obligations provided in the Model 1 IGA.
For financial institutions other than those identified below, when making withholdable payments to nonparticipating FIs, in lieu of withholding, they must provide information required for withholding and reporting to occur directly to any immediate payor of such payment.
Though the German-U.S. IGA expresses the commitment of the governments to continue efforts to develop a practical approach to achieve the policy objectives of foreign passthru payments and gross proceeds withholding, no additional indication was given on how this will be achieved. It does state, however, that prior to 31 December 2016, the governments will consult in good faith to amend the German-U.S. IGA as necessary to reflect the progress on certain commitments made in the Agreement, including foreign passthru payments and gross proceeds withholding.
Financial institutions qualifying as certain withholding agents for other U.S. tax purposes (i.e. withholding qualified intermediaries, withholding foreign partnerships, and withholding foreign trusts) will be required to withhold 30% on any U.S. source withholdable payments paid to any non-participating financial institution. What is included in the concept of “payments” still requires further clarity by the Ministry of Finance (see above).
It remains unclear as of when and in what format the additional reporting obligations in Art. 4 no. 1 e) of the IGA become due. In case this would be in line with the start date for withholding (i.e. 1 January 2014) certain reporting obligations will already have to be in place in 2014 and additional guidance is urgently needed.
Though the guidance provided in the German-U.S. IGA may fall short of industry expectations, the Declaration of Understanding that was released does provide some much needed clarification related to how financial institutions will be treated if local law is not enacted by 1 January 2014. The most immediate requirement from a statutory deadline perspective remains to be registration, with the Declaration of
Understanding confirming that Reporting FIs will be required to register with the IRS and obtain a GIIN. The question still remains: Will the GIIN become an industry standard for withholding purposes, thus driving even those entities without a registration requirement to want to register?
Further details addressing remaining issues and areas of uncertainty are now expected to be provided in the expected BMF Circular. A first draft of such implementation guidance is expected in the coming months, and subsequent to the release of any such guidance, we will be provide further analysis in future Newsbriefs.
For more information related to FATCA, please visit our website at http://www.pwc.com/us/fatca.
Included below are links to the Press Release, the German-U.S. IGA, and the accompanying Declaration of Understanding.
Links to Documents in English:
- Press Release from the German Ministry of Finance
- Agreement between the Federal Republic of Germany and the United States of America to Improve International Tax Compliance and with respect to the United States Information and Reporting Provisions Commonly Known as the Foreign Account Tax Compliance Act
- Declaration of Understanding Regarding the Agreement between the Federal Republic of Germany and the United States of America to Improve International Tax Compliance and with respect to the United States Information and Reporting Provisions Commonly Known as the Foreign Account Tax Compliance Act
Links to Documents in German:
- Abkommen zwischen der Bundesrepublik Deutschland und den Vereinigten Staaten von Amerika zur Förderung der Steuerehrlichkeit bei internationalen Sachverhalten und hinsichtlich der als Gesetz über die Steuerehrlichkeit bezüglich Auslandskonten bekannten US-amerikanischen Informations- und Meldebestimmungen
- Einvernehmenserklärung zum Abkommen zwischen der Bundesrepublik Deutschland und den Vereinigten Staaten von Amerika zur Förderung der Steuerehrlichkeit bei internationalen Sachverhalten und hinsichtlich der als Gesetz über die Steuerehrlichkeit bezüglich Auslandskonten bekannten US-amerikanischen Informations-und Meldebestimmungen