The Foreign Account Tax Compliance Act (FATCA) was enacted by the United States Congress in March 2010 and became effective on January 1, 2013. It is intended to assist US efforts to improve international compliance with US tax laws and will impose certain due diligence and reporting obligations on foreign (non-US) financial institutions which hold financial accounts for US customers. Under the new law, foreign financial institutions will provide to the U.S. tax administration automatic information about their US customers’ financial accounts.
On 26 July 2012, the U.S. Department of the Treasury published a Model Inter Governmental Agreement which will form the basis of bilateral IGAs with jurisdictions that wish to adopt this alternative means for their financial institutions to comply with FATCA while minimizing compliance burdens.
Italy joined the U.S. with a groups of other countries in a Joint Statement announcing that Italy will enter into and use the reciprocal agreement with the United States to implement FATCA and enact a system of reciprocal automatic exchange of information pursuant to which:
– Italian banks and financial institutions will provide the US tax administration with information about Italian banking and financial accounts held by U.S. customers with Italian banks in Italy,
– U.S. banks and financial institutions will provide Italy’s tax authorities with information about US banking and financial accounts and investments held by Italian customers with US banks in the United States.
The Model IGA follows the U.S. Department of the Treasury and Internal Revenue Service’s release of proposed FATCA regulations, and the simultaneous announcement of an intergovernmental alternative to FATCA implementation, on 8 February 2012.
On January 17, 2013 the Treasury Department and the Internal Revenue Services issued the set of Final Regulations implementing the information reporting and back up withholding tax provisions of FATCA, with far reaching implications for U.S. taxpayers with Italian bank and financial accounts, as well as Italian taxpayers with US bank and financial accounts, in addition to foreign financial institutions as well as US banks as explained above.
It is now out of question that FATCA will be fully implemented, and as soon as the reciprocal IGA is signed, the new system of automatic and reciprocal exchange of information between Italy and the United States pursuant to FATCA will be in place.
As a result, Italian taxpayers with banking and financial accounts with US banks would have to make sure that: 1) those accounts are properly reported on Model RW of their Italian tax return, 2) any income arising from those accounts is properly declared and subjected to tax in Italy, 3) Italian tax on foreign investments deposited on those accounts is regularly and timely paid.
Conversely, US taxpayers with Italian banking and financial accounts would have to make sure that 1) they report their Italian accounts on the US foreign bank account report ("FBAR") due within June 30 each year, as well as on form 8938, and 2) any income arising from their Italian accounts is properly reported and taxed in the United States.
As a result of FATCA and implementing IGAs, international tax reporting and compliance is now mandatory and no longer optional, considering that tax authorities will have automatic access to relevant information to use for their audits and enforcement activities.