On 2 December 2014, Cyprus signed a Model 1 Intergovernmental Agreement (IGA) with the US government on the implementation of the Foreign Accounts Tax Compliance Act (FATCA).
FATCA is a United States federal law that was enacted to “detect, deter and discourage” offshore tax evasion and tax abuse by requiring US persons, either physical or corporate entities, with 10% shareholding or more, to report their foreign financial accounts.
The provisions of this IGA that Cyprus signed with the US government, require local institutions that are qualified as FFIs (Foreign Financial Institutions), to register with the IRS (Internal Revenue Service), by the end of this year and get a GIIN (Global Intermediary Identification Number). Then, each FFI will have to report to the Cyprus Tax Administration at specified times, information on the financial accounts of their US clients. Such information will then be forwarded by the Cyprus Tax Administration to the US IRS.
The first reporting by the FFIs (local institutions) to the Cyprus Tax Administration is expected to be in June 2015, while the first reporting to the US IRS by the Cyprus Tax Administration in September 2015.
Failure to report the required information and to provide the appropriate documentation will result in 30% FATCA withholding tax on the respective (unreported) income (not until 2017).
FATCA compliance requires rapid changes in the FFI’s internal systems and procedures regarding products and customers, bringing into inter-play tax, legal and compliance functions together. As a result the new, as well as the existing, customers of an FFI are directly affected.
FATCA’s effective implementation by Cyprus financial institutions and Tax Authorities will facilitate in combating offshore tax fraud and establish them as tax transparent.