The latest FATCA news is that Argentina has signed a Model 1A IGA with the US. While Argentina is not yet listed at the IRS website as having an IGA in place, we can expect it to appear soon.

So, what happens next?

Well, as with most IGA jurisdictions, the Argentine government will now have to enact domestic legislation to translate the obligation from the IGA into domestic law. We understand that this will probably happen quite quickly. Prior to the IGA being signed, as a non-IGA jurisdiction, Argentine financial institutions would have been either Participating FFIs (P-FFI) or non-participating FFIs. P-FFIs signed the FFI Agreement, which lays down the commercial contractual rules for due diligence, reporting directly to the IRS and certifications of compliance.

What does this mean for Argentine financial institutions?

We understand that 2023 will be a transitionary year. So, Argentine financial institutions that are already P-FFIs will need to change their Chapter 4 status to Reporting Model 1 IGA. It is not clear whether they will have to revoke their GIINs and apply for new ones. Reporting in 2023 will still be to the IRS. Reporting of US account holders in 2024 will be to the Argentine tax administration who will then share that information with the IRS via the International Data Exchange System portal (IDES).

Financial institutions that had not signed the FFI Agreement to be P-FFIs will need to review their status to see if they are eligible for any exemptions when the IGA is translated into domestic law. If not they will be required, under Argentine law, to register for a GIIN and prepare for the due diligence and reporting obligations as Reporting Model 1 FFIs.

Either way, the work needed by Argentine financial institutions under the new IGA regime will be substantial and the Argentine tax administration will be looking over their shoulders to make sure that there is no non-compliance. The IGAs have a mutual administrative assistance article that allows for the IRS to raise concerns with the Argentine authorities if they think, or have evidence, that there is a financial institution that is in “substantial non-compliance” with its obligations. So, beware, if such problems arise, the enforcement discussions you have will be with your local regulator not some distant IRS agent.

Reciprocity

Model 1A IGAs are reciprocal. This means that the IRS must share information with the Argentine government about Argentine investors holding accounts at US financial institutions. The IRS is currently doing this by sending copies of 1042-S information returns. This subject has created some animated discussion because the information on a 1042-S is not the same as that being shared with the US. 1042-S data is about income. The FATCA reports are about account values i.e. wealth not income. In addition, if the Argentine institution submitting 1042-S returns to the IRS is a qualified intermediary, then these returns will be pooled. They will therefore not identify the Argentine investor’s account data.

Effect on CEDEARs

CEDEARs are a popular financial instrument in Argentina. They are similar to a reverse ADR, with certain exceptions, notably that they are freely convertible to the underlying US security, and they pay in US dollars. CEDEAR Issuers, typically brokers, buy US securities in their street name, then create and sell a CEDEAR to their customers to represent the underlying US security. As such, in our opinion, these are equity linked instruments (ELIs) and are subject to Section 871(m) regulation because dividend payments on the CEDEAR are dividend equivalent payments (DEPs). This includes withholding and reporting wherever the delta is greater than 0.8. The delta is a measure of the difference in price volatility between the ELI and the underlying US security and for CEDEARs its usually 1. Anecdotally, many US investors buy CEDEARs to circumvent Argentina’s strict currency rules and gain a better exchange rate. An Argentine investor receiving a dividend on a CEDEAR should expect to receive a 1042-S information return from their broker to report payments under income codes 40 or 56. As noted above, this information will eventually be provided back to the Argentine tax administration by the IRS as part of its commitment to anti-tax evasion.

Its not clear whether this information reporting is happening today, because many of the CEDEAR Issuers believe that they are the beneficial owner of the US securities which means that all reporting stops with them and no contingent payment to their CEDEAR holders is reported on. In reality, as the wording on a W-8BENE makes clear, the certification of beneficial ownership is in regard to the income from the asset, not the ownership of the asset itself. As there is a connection between the CEDEAR and a US security, in our humble opinion, Argentine CEDEAR Issuers are NOT the beneficial owners of the income from the us securities they are buying – because they make DEPs to underlying clients when the US security pays out.

In conclusion, the signing of an IGA may seem a rather inconsequential and administrative change. In fact, it shines a spotlight on compliance for Argentine financial institutions and brings them under increased scrutiny from their domestic regulators, while the IRS will equally be looking at the Argentine financial ecosystem to make sure that its tax regulations are not being flouted.