Back in 2015 I pointed out to attendees at our training courses that there were strings attached to the status of ‘in substance’. I observed that the principle, if I were to take a purely commercial view of it, appeared to a face-saving measure for the IRS if there were just not enough jurisdictions actually signed up to the intergovernmental agreement framework with the IRS in 2014 and 2015.

The IRS said at the time, although quite quietly, that it would publish the number of jurisdictions that were either signed or in ‘substantive discussions’ and allow financial firms resident in jurisdictions in the latter category to plan and act ‘as if’ the IGA was in place – so called ‘in substance’. However, part of being in that category was the presumption that those substantive discussions would actually end up with an IGA being signed. The language was that these jurisdictions would make sufficient progress both with the IRS and with putting domestic law in place, that an eventual IGA signature was likely.

Announcement 2016-27, issued late last week, is essentially raising the warning flag for a number of jurisdictions where that has not happened and sending a signal to everyone else that just because you have ‘in substance’ status, does not mean you can carry on your merry way without something happening. In this case, the main issue is that an IGA market has no withholding on recalcitrant account holders (i.e. individuals and entities). So, the IRS is giving a significant benefit to financial firms in ‘in substance’ jurisdictions and they expect a similar return in the form of an IGA sooner rather than later.

The announcement is pretty lenient, I have to say. It indicates that the IRS is going to take a new look at the list of ‘in substance’ IGAs on 1st January 2017 i.e. in about five months. Given that the ‘in substance’ badge was invented in 2014, you can’t really say they haven’t given the world enough time.

What’s going to happen?

If your government is still on that ‘in substance’ list in 2017, the US is going to want a ‘detailed explanation’ of why it hasn’t signed an IGA and a plan of how and when they intend to get there. The assessment by the US of whether this plan is sufficient is encapsulated in the words ‘firm resolve’ which essentially means that this will be a case by case basis assessment.

Now, all of this is at the governmental level and doesn’t concern financial firms (you) right? Wrong. As most firms in IGA markets have already found and made policy on, having a counterparty in a non IGA jurisdiction, this may not directly affect your business, but the way all this regulation is being connected leads to a fear of risk. We’re already seeing many firms being forced into QI status in Chapter 3 for nothing more than commercial risk reasons. Similarly, in Chapter 4, no-one wants to touch any firm that doesn’t have a GIIN. This announcement is likely to expand the reach of that risk aversion. So, if you’re seen to have a GIIN but are in an ‘in substance’ jurisdiction, you may find counterparty relationships that much harder.

The Good News

The good news from Announcement 2016-27 is that, while the US may not be happy with your government, they aren’t going to fine you for non-compliance provided you send the prior year’s reporting data by the following September 30th after the IGA is signed. The message that the ‘in substance’ jurisdictions got was essentially that while the discussions were deemed to be going on, the financial firms in those jurisdictions were meant to be preparing in good faith for a transfer of data about reportable accounts. So, all these FFIs should in theory be well prepared and ready to move the information as soon as ‘in substance’ is replaced with ‘signed’.

But the message is clear and should be heard, particularly by financial firms in ‘in substance’ jurisdictions. Your government needs to get its act together because if they don’t, you could end up having to sign an FFI Agreement directly with the IRS, obtaining waivers of data protection so you can send the data, registering to use the IDES data delivery system – all of which you will be pretty unprepared for. So, if you are unlucky enough to be in an ‘in substance’ jurisdiction, you should start pressuring your government to act so you can protect your status and avoid some rather nasty consequences.

Messy? You have no idea!

In a rather worrying parallel, there has been a noticeable increase in the number of jurisdictions that are issuing deferral notices under IGAs, meaning that the expected data transfer is not going to happen, usually because the relevant infrastructure is not in place. Recent changes by the IRS to the security protection in IDES have not helped. On top of all this, the heat is starting to increase in and between many other jurisdictions due to the looming AEoI deadlines next year. It would seem that while everyone has understood the principles involved, both in FATCA and AEoI (collectively ‘GATCA’), the regulators are not providing enough of a stable regulatory environment for their partners to work in, and there are entirely foreseeable delays in getting the relevant legal structures in place in time – all of which leaves financial firms not being quite sure what to do, or when. Many of the jurisdictions that are ‘in substance’ are relatively small, so it is understandable that they would struggle. They’ll struggle with AEoI too, so it is hard to see how the framework of GATCA is not going to be as messy as FATCA was between 2013 and 2015.

Who are the ‘in substance’ jurisdictions?

The ‘in substance’ jurisdictions are: Anguilla, Antigua & Barbuda, Armenia, Bahrain, Cabo Verde, China, Dominica, Dominican Republic, Greece, Greenland, Grenada, Guyana, Haiti, Indonesia, Iraq, Kazakhstan, Macao, Malaysia, Montengro, Nicaragua, Paraguay, Peru, Saudi Arabia, Serbia, Seychelles, Taiwan, Trinidad & Tobago, Tunisia, Turkmenistan and Ukraine.

Read Announcement 2016-27

Announcement 2016-27 can be found at the IRS web site and is in the GATCA Resource Library.

If you would like to know more about the GATCA Resource Library, please visit gatca.info or contact [email protected].