The Inland Revenue Department of the Republic of Cyprus is expected to sign the Model 1 InterGovernmental Agreement ("IGA") with the US Treasury in accordance with the provisions of the Foreign Account Tax Compliance Act (FATCA).
FATCA is a US tax legislation that was enacted in March 2010 in order to impede the non-tax compliance by US taxpayers holding foreign bank accounts and/or substantial interests in foreign entities. It essentially aims to ensure full reporting of foreign financial assets held by US taxpayers. The regulations pursuant to FATCA have a global reach and will impact virtually all multi-national organizations operating across every industry. For the implementation of FATCA the US has collaborated with other governments to develop two model IGAs which contemplate that a partner government will require all foreign financial institutions ("FFIs") located in its jurisdiction (that are not otherwise exempt) to identify and report information about US bank accounts.
Cyprus will enter into Model 1 IGA that requires FFIs located in Cyprus such as Cyprus based banks, custodians, brokers, investment funds, and insurance companies to report all FATCA related information to the Inland Revenue in Cyprus which will in turn report the information to the IRS of the US. More specifically, the participating FFI must perform the appropriate due diligence procedures in order to determine which of the bank accounts it maintains are:
- US accounts,
- Accounts held by recalcitrant account holders, meaning those who failed to provide sufficient information to determine whether they are US persons or whether they are substantially owned by US persons
- Accounts held by non-participating FFIs, or
- Non-US accounts.
FFIs will also be obliged to withhold and pay to the IRS tax equal to 30% with regards to payments that relate to US sourced income and are made to an account that is held by a recalcitrant account holder or a non-participating FFI. It also important to note that the penalties for non-compliance with FATCA will include the imposition of a 30% withholding tax on any incoming payments relating to US-sourced income. It is therefore anticipated that financial institutions will have to conform to the new compliance realities and undergo extensive internal research on their clients' accounts to identify US citizens and determine their tax status.
An FFI covered by a Model 1 IGA will not need to sign an FFI agreement, but it will need to register on the IRS's FATCA Registration Portal or file Form 8957. The Cyprus Inland Revenue Department has filed all the required information to the US government for the sign-up of the agreement and according to the officials in the department, the agreement is expected to be finalised within a month. To this extent, FFIs will have to register with the IRS by the end of the year (31 December 2014). Further to the above, it is noted that Model 1 IGAs are reciprocal, requiring the US to provide certain information about residents of the US in exchange for the information provided by the other jurisdiction.
To date the US has signed IGAs with 26 jurisdictions and has reached agreements in substance or is in advanced discussions with many others in order to achieve effective cross-border tax information reporting, an objective which is also aligned with the European Commission's policy to combat tax evasion.
From a Cypriot perspective this will greatly enhance the profile of Cyprus as a transparent International Business Centre.
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