As reported in Tax Notes, on June 11, 2013, the Japanese and U.S. tax administrations issued a "statement" setting out a type Model 2 intergovernmental cooperation framework for implementing the U.S. Foreign Account Tax Compliance Act ("FACTA"), under which Japanese financial institutions will report directly to the United States. This is the second FACTA IGA Model 2 agreement the U.S. has entered into with another government with the first being with Switzerland which was signed last February.
In contrast to the IGA with Switzerland, the Japanese arrangement differs from the Swiss agreement and the seven Model 1 FATCA intergovernmental agreements the U.S. has signed so far (with Denmark, Germany, Ireland, Mexico, Norway, Spain, and the United Kingdom). The nuance here is that the Japan-U.S. arrangement appears to have been carefully drafted to avoid being called an "agreement". Instead, the verbiage used is that of a "Statement of Mutual Cooperation and Understanding Between the U.S. Department of the Treasury and the Authorities of Japan to Improve International Tax Compliance and to Facilitate Implementation of FATCA." The recital refers to Treasury and the "Authorities of Japan" (comprising Japan's Ministry of Finance, the National Tax Agency, and the Japanese Supervisory Authorities, the latter comprising four separate Japanese ministries) as Participants, rather than as Parties, and states that "the Participants confirm the following," rather than "the Parties agree as follows" as stated in the other signed IGAs. The Japan-U.S. statement also uses the words "may" or "should" instead of "shall."
As a practical matter, the Japan-U.S.A. "statement of mutual cooperation and understanding" will function in large part in the same manner as the Model 2 IGA issued in November, 2012. Still, Japan's Annex I appears to follow the model Annex I released in May 9. Japan's Annex II reflects the listing-based approach that was being used by Treasury in IGA negotiations before it unveiled a new model Annex II in May that contains a rules-based approach. Treasury officials have said that for future IGA negotiations, Annex II will generally no longer be customizable . See final FATCA regulations (T.D. 9610 ), released January 17, 2013.
Under Section 3 of the memorandum, a reporting Japanese (FFI) financial institution which meets the requirements under Subparagraph 2(a)(ii), i.e., the FFI registers with the U.S., conducts due diligence, reports on an annual basis and exchanges information with the U.S. Competent Authority the requested information within 6 months of the date of such request, then the U.S. will not require the Japanese FFI to make a withholding under Sections 1471 or 1472 of the Internal Revenue Code.
Where the conditions related to the information exchange are not satisfied, Section 3(2)(b) of the Memorandum provides that the U.S. competent authority may, after the 6 month period for which the request for information was made, determine that there is significant noncompliance from a Japanese financial institution. The U.S. competent authority may treat that financial institution as a nonparticipating financial institution beginning three months after the date on which a determination of significant noncompliance has been made. The financial institution's status as nonparticipating will end on the date the requested information is given to the U.S. competent authority. Where the requested information is not exchanged, the Japanese FFI must treat the account as subject to the required 30% withholding beginning on the date that is six months after the information request was made. Withholding will end on the date the requested information is given to the U.S. competent authority. Therefore, the Japanese institution will be treated as nonparticipating. This is an important distinction in the Japanese IGA and at this time is somewhat unique.
The effective date of the U.S.-Japan FACTA conformity memorandum is set at June 11, 2013. The only other FACTA agreement signed which has a fixed effective date is Mexico's IGA which is entered into force on January 1.
Due to the novelty, breadth of coverage, and overall importance of the Japan-U.S. FATCA memorandum of understanding, it is reproduced here.
"Statement of Mutual Cooperation and Understanding between the U.S. Department of the Treasury and the Authorities of Japan to Improve International Tax Compliance and to Facilitate Implementation of FATCA
Whereas, the United States of America ("United States") and Japan have a longstanding and close relationship with respect to mutual assistance in tax matters and desire to improve international tax compliance by further building on that relationship;
Whereas, Article 26 of the Convention Between the Government of the United States of America and the Government of Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income, signed on November 6, 2003, at Washington, DC (the "Convention") authorizes exchange of information for tax purposes;
Whereas, the United States enacted provisions commonly known as the Foreign Account Tax Compliance Act ("FATCA"), which introduce a reporting regime for financial institutions with respect to certain accounts;
Whereas, the Authorities of Japan, as defined in subparagraph 1(e) of Section 1 of this Statement, are supportive of the underlying policy goals of FATCA to improve tax compliance;
Whereas, FATCA has raised a number of issues, including that Japanese financial institutions may not be able to comply with certain aspects of FATCA due to domestic legal impediments;
Whereas, intergovernmental cooperation to facilitate FATCA implementation would address these issues and reduce burdens for Japanese financial institutions;
Whereas, the U.S. Department of the Treasury and the Authorities of Japan (each, a "Participant") desire to implement an arrangement to provide for cooperation to facilitate the implementation of FATCA based on direct reporting by Japanese financial institutions to the U.S. Internal Revenue Service, supplemented by the exchange of information upon request pursuant to the Convention and subject to the confidentiality and other protections provided for therein, including the provisions limiting the use of the information exchanged under the Convention;
Now, therefore, the Participants confirm the following:
For purposes of this Statement, and any annexes thereto ("Statement"), the following terms have the meanings described below:
(a) The term "United States" means the United States of America, and, when used in a geographical sense, means the territory of the United States of America, including the States thereof, but does not include the U.S. Territories. Any reference to a "State" of the United States includes the District of Columbia.
(b) The term "U.S. Territory" means American Samoa, the Commonwealth of the Northern Mariana Islands, Guam, the Commonwealth of Puerto Rico, or the U.S. Virgin Islands.
(c) The term "IRS" means the U.S. Internal Revenue Service.
(d) The term "Japan," when used in a geographical sense, means the territory of Japan.
(e) The term "Authorities of Japan" means the following:
1) The Ministry of Finance of Japan
2) The National Tax Agency of Japan
3) "Japanese Supervisory Authorities," which means the following:
(A) The Financial Services Agency of Japan (FSA),
(B) The Ministry of Economy, Trade and Industry of Japan,
(C) The Ministry of Agriculture, Forestry and Fisheries of Japan, and
(D) The Ministry of Health, Labour and Welfare of Japan
(f) The term "Partner Jurisdiction" means a jurisdiction that has in effect an agreement with the United States to facilitate the implementation of FATCA. The IRS intends to publish a list identifying all Partner Jurisdictions.
(g) The term "Competent Authority" means:
1) in the case of the United States, the Secretary of the Treasury or his delegate; and
2) in the case of Japan, the Minister of Finance or his authorized representative.
(h) The term "Financial Institution" means a Custodial Institution, a Depository Institution, an Investment Entity, or a Specified Insurance Company.
(i) The term "Foreign Reportable Amount" means, in accordance with relevant U.S. Treasury Regulations, a payment of fixed or determinable annual or periodical income that would be a withholdable payment if it were from sources within the United States.
(j) The term "Custodial Institution" means any Entity that holds, as a substantial portion of its business, financial assets for the account of others. An Entity holds financial assets for the account of others as a substantial portion of its business if the Entity's gross income attributable to the holding of financial assets and related financial services equals or exceeds 20 percent of the Entity's gross income during the shorter of: (i) the three-year period that ends on December 31 (or the final day of a non-calendar year accounting period) prior to the year in which the determination is being made; or (ii) the period during which the Entity has been in existence.
(k) The term "Depository Institution" means any Entity that accepts deposits in the ordinary course of a banking or similar business.
(l) The term "Investment Entity" means any Entity that conducts as a business (or is managed by an Entity that conducts as a business) one or more of the following activities or operations for or on behalf of a customer:
1) trading in money market instruments (cheques, bills, certificates of deposit, derivatives, etc.); foreign exchange; exchange, interest rate and index instruments; transferable securities; or commodity futures trading;
2) individual and collective portfolio management; or
3) otherwise investing, administering, or managing funds or money on behalf of other persons.
This subparagraph 1(l) is to be interpreted in a manner consistent with similar language in the...