Global Tax Alert (News from Americas Tax Center) | 13 May 2014

Panama is treated as having an IGA under FATCA

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On 2 May 2 2014, Panama was added to the list of jurisdictions that have reached an “agreement in substance” for the pending Intergovernmental Agreement (IGA) with the United Sates under the Foreign Account Tax Compliance Act (FATCA).

Background

FATCA requires foreign financial institutions (FFIs) to register with the US Internal Revenue Service (IRS), conduct due diligence to identify US accounts (including accounts of certain foreign entities with substantial US owners) and report client data to the IRS, either directly under an agreement with the IRS, or indirectly through their local government under an IGA.

FFIs that do not comply with their FATCA obligations are subject to a 30% withholding tax on certain US source payments made to them by US financial institutions or other types of US withholding agents.

Withholdings under FATCA will generally start on 1 July 2014, and 1 January 2015, for payments to FFIs established in Model 1 IGA jurisdictions. Such withholdings apply unless the withholding agent obtains an FFI's Global Intermediary Identification Number (GIIN) and further confirms that the GIIN appears on the list of FFIs published by the IRS.

FFIs1 (FFIs) established in jurisdictions such as Panama that are in the process of concluding an IGA with the United States that may not be executed by 1 July 2014, when FATCA enters into force were facing a number of concerns and uncertainties regarding FATCA compliance.

As a result, the IRS released Announcement 2014-17 on 2 April 2014,2 aimed at providing certain FATCA relief.3

Implications

The implications of Panama's inclusion on the list of jurisdictions that have reached an “agreement in substance” are as follows:

  • Panama's IGA with the US, albeit not yet signed, will be treated as being in effect until 31 December 2014, the date by which the IGA must be signed in order for its in-effect status to continue without interruption.
  • Panamanian FFIs will not need to enter into direct agreements with the IRS.
  • Panamanian FFIs are now permitted to register on the FATCA registration website as “registered deemed-compliant FFI,” allowing them to certify their FATCA status to withholding agents.
  • Notwithstanding the foregoing, withholding agents are not required to obtain the GIINs of FFIs that are treated as reporting Model 1 FFIs before 1 January 2015. Panamanian FFIs will have until 1 January 2015, to provide a GIIN to withholding agents to establish their FATCA status. Before that, they can confirm their status by informing US withholding agents that they are FFIs in a Model 1 IGA jurisdiction as evidenced by the IRS and Treasury's list of IGAs in effect.

Endnotes

1. The definition of FFIs is extremely broad and includes without limitation:

(i) Depository institutions (e.g., banks)

(ii) Custodial institutions (e.g., mutual funds)

(iii) Investment entities (e.g., hedge funds or private equity funds)

(iv) Certain types of insurance companies that have cash value products or annuities.

2. http://www.irs.gov/pub/irs-drop/a-14-17.pdf.

3. See EY Global Tax Alert, FATCA relief treats additional jurisdictions as having IGAs in effect, extends FFI registration deadline, dated 3 April 2014.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Limited Corp., Panama City
  • Luis Eduardo Ocando
    +507 208 0144
    +luis.ocando@pa.ey.com
  • Bismark Rodriguez
    +507 208 0165
    +bismark.rodriguez@pa.ey.com
  • Isabel Chiri
    +507 208 0100
    isabel.chiri@pa.ey.com
Ernst & Young, S.A., San José, Costa Rica
  • Rafael Sayagués
    +506 2208 9880
    rafael.sayagues@ey.com
  • Alexandre Barbellion
    +506 2208 9841
    alexandre.barbellion@cr.ey.com

EYG no. CM4414