If you’re tuned into the tax industry, you might have already seen that Switzerland is moving from being a Model 2 IGA to a Model 1 IGA. Switzerland has been enforcing Model 2 IGA since June 30^th 2014, which means their reporting financial institutions must report directly to the IRS using the ITS International Data Exchange System (IDES). So what does that mean?

Moving to Model 1

The documents for the new Model 1 IGA have already been signed, and you can now find Switzerland’s Model 1 IGA text is now available at the IRS web site. Switzerland isn’t the first to make this transition. In fact it’s very similar to recent events in Argentina, which transitioned from a non-IGA to a Model 1 IGA not long ago. This new Model 1 IGA follows the IRS Template Model, meaning it changes the reporting obligation for financial institutions and requires reciprocal reporting by the IRS to Switzerland.

Once the new IGA is in force, reporting Swiss financial institutions will be required to report their US accounts to their domestic Swiss tax administrations, who will in turn report all Swiss financial data to the IRS via IDES. That means that the Federal Department of Finance (FDF) of the Swiss Confederation will also need to implement the technology needed to acquire FATCA reports from Swiss financial institutions, aggregate the data into a .xml format, compress and encrypt the file, apply a digital certificate to it and submit it to the IDES portal.

At the moment, we think it’s likely that the Swiss will use their AEOI portal to collect FATCA information alongside CRS reports.

Reciprocity

The reciprocity component of Model 1 IGAs is something that’s been a matter of concern for some time. Many have complained to the IRS that, despite the clause, no reciprocity has really been generated. Others have noted that all the IRS has done is return 1042-S information returns to the relevant competent authority. Which, as others have noted, is not reciprocal.

In Switzerland’s new IGA, reciprocity is clearly defined in Article 2(2)(b). It states that the information to be shared by the US with the Swiss is:

• Name, address and Swiss TIN of any Swiss resident account
• Account number
• Name of the reporting US financial institution
• Gross interest paid to depository accounts
• Gross dividends paid to custodial accounts
• Gross amount of other US income paid or credited to the account

Nowadays when a new jurisdiction enters into IGAs with the US, they typically translate the main text of the IGA (the portion that affects financial institutions, like due diligence and reporting obligations) into domestic legislation. This is so that financial institutions are directly subject to domestic legislation as well as their Know Your Customer (KYC) regulation. In order to be truly reciprocal, the US government would have to enact US legislation to force US financial institutions to collect information, perform due diligence and report accounts of Swiss residents to the IRS. The IRS in turn would have the obligation of aggregating these reports from all US reporting financial institutions and submitting this to the FDF.

The nearest equivalent that Switzerland has to the IDES platform is the Swiss AEOI portal. Because CRS and FATCA are both xml-based reporting systems, the Swiss may choose, like the UK and others have, to expand their CRS reporting platform to encompass FATCA reporting too. However, like the UK AEOI portal, the FDF portal’s primary function is to receive reports from Swiss financial institutions. FSF would need to open up their portal to the US government for file delivery if they wanted to achieve the same thing as IDES.

The same logic of course applies to any jurisdiction that the US has a Model 1 reciprocal IGA with.

The Big Problem

Of course, it doesn’t always work that way. To date, what we’ve seen is the IRs providing 1042-S data that has been submitted by some QIs and some NQIs back to the partner jurisdiction, claiming that this meets the reciprocity standard. There are two big problems with this assertion.

The first (and biggest) problem with this approach is that the qualified intermediaries generally report on a pooled basis. So the information about the specific account holder is missing. Only non-disclosing, non-qualified intermediaries (ND-NQI) and qualified intermediaries with indirect account holders would be providing specific beneficial owner level information to the IRS. At the time of writing, Switzerland has 443 qualified intermediaries whose reports would be pooled. This includes some of the largest Swiss financial institutions. In the new Swiss IGA the US does recognise this issue in Article 6(1), so hopefully this will be addressed quickly and efficiently.

The second problem is that all of the accounts reported on the 1042-S are not US accounts held by Swiss residents. They’re generally non-US accounts held by Swiss residents somewhere in the payment chain outside the US – typically a Swiss broker. Even those accounts that are reported at the beneficial owner level represent accounts that are held at the intermediary level. The account number doesn’t represent an account of that beneficial owner at a US financial institution. Instead, the chain of payment is typically through omnibus accounts, and the account number cited is that of the beneficial owner at its intermediary financial institution.

So with this latest change, the Swiss (who ironically triggered the whole of FATCA in the first place back in 2010) may be the first circumstance to properly highlight the lack of appropriate US domestic legislation to give effect to the principle of reciprocity embedded in their IGA.

If that wasn’t enough, another issue comes in the form of GIIN registration. Article 4(1)(b) of the new IGA requires Swiss financial institutions to register for a GIIN. 7,591 Swiss financial firms already have GIINs, but their registration process will have been done under the Model 2 IGA. If the experience of Argentina is anything to go by, all Swiss financial institutions with existing GIINs might have to update their current GIINs to Model 2 GIINs.

Finally, the handover between Model 2 and Model 1 obligations is dealt with in Article 4 (6)(a)-(b) of the new IGA. IT effectively means that the FDF doesn’t have to implement its reporting for any year in which Participating FFIs (P-FFIs) reported similar information under the Model 2 IGA. So, while the change is important, there will probably be at least a year before any Swiss financial institution will have to move over to domestic reporting from its current IDES reporting. In the meantime if you’re a Swiss financial institution and need any support in getting ready for it, or want some advice on the various IGAs, just get in touch with one of our experts to arrange your free consultation.