Switzerland has followed the UK in signing an agreement with the US over its controversial Foreign Account Tax Compliance Act (FATCA).
Their agreement looks set to come into force from January 1, 2014, if it clears some local obstacles.
FATCA compels foreign financial institutions (FFIs) to disclose information they may have on US taxpayers. Failure to do so will see a hefty 30% penalty of tax being withheld from the US to the institution involved.
The UK was the first to sign an agreement and now Switzerland has followed a similar route.
Initially, FATCA demanded FFIs to pass financial information about the holdings of US citizens directly to the Internal Revenue Service but various privacy and data protection laws in different countries have prevented direct data transfer.
So now Switzerland, and the UK, will have FFIs register with the IRS but all relevant information will have to be given to their respective governments first.
Final details not released
Then the information will be traded with the US authorities for information of Swiss taxpayers and their American financial details.
The actual details of the Swiss-US agreement are being withheld until it gains the necessary legal approvals.
But US authorities have agreed that certain sectors in the Swiss financial industry should be exempt from FATCA – mainly pension funds, accident and property insurance.
Also collective investment vehicles which are dominated by Swiss clientele will be considered to be already FATCA-compliant, but will only have to register with the IRS.
A spokesman for the Swiss Funds Association welcomed the agreement, adding: “There is now greater legal protection for the financial sector and we are pleased to see that the workload for financial institutions to implement FATCA has been reduced.”
FATCA vote expected
The Swiss-US agreement ensures that US taxpayers who have accounts with Swiss FFIs can be reported individually – if they give their consent.
If the US individual doesn’t give consent then their details would be included in ‘group data’ and sent to the IRS which means their detailed account information will not be exchanged automatically.
However, this could lead to a specific request for the details and it’s this part which is still being negotiated since it will be covered by a new double taxation agreement between the two countries. It is thought that there will be an element of ‘administrative assistance’ being provided.
The agreement has to be ratified by the Swiss Federal Council and Parliament and may even be put to the Swiss people as a referendum vote – which may not be endorsed by the public and bring the agreement to an end.
One thing has been confirmed: FATCA has ended the secrecy enjoyed by those holding Swiss bank accounts.