Foreign Account Tax Compliance Act (FATCA)
Switzerland and the US signed a new FATCA Agreement in Bern on 27 June 2024. Swiss banks currently share information directly with the US tax authority (this is known as Model 2), but automatic exchange of information will in future take place via the Federal Tax administration, which will in turn receive tax information from the US. The changeover is expected to take place in 2027.
The Foreign Account Tax Compliance Act (FATCA) is a US tax law introduced ten years ago that enforces the country’s right to tax its citizens anywhere in the world. Along with other countries, Switzerland has concluded an intergovernmental agreement with the US to facilitate the implementation of FATCA: the FATCA Agreement. This agreement forms the basis of the Swiss FATCA Act, which entered into force in 2014.
FATCA is directed at financial institutions around the globe and requires them to provide the US tax authorities annually with information regarding all accounts held by US taxpayers. It is enforced using a 30% withholding tax penalty on all income earned from US securities. The FATCA Agreement currently in force is based on what is known as Model 2, under which Swiss financial institutions provide the US tax authority, the Internal Revenue Service (IRS), directly with the information that is subject to reporting with the consent of the customers concerned. Where a customer does not give consent, an anonymised, aggregated report containing certain information is provided. The IRS can use this aggregated report to seek disclosure of specific customer and account information, for example by means of a request for administrative assistance, if this is provided for under the double taxation agreement between Switzerland and the US.
Change in model planned for 2027
The international operating conditions for banks have changed dramatically since the FATCA Agreement was negotiated. In particular, over 100 states (including Switzerland) have now committed to automatic exchange of information (AEOI). Model 2 thus appears outdated. With this in mind, the Federal Council conducted successful negotiations with the US on changing to a reciprocal FATCA Agreement under Model 1.
One result of this change will be that certain account information will flow in both directions, i.e. not just from Switzerland to the US, but also from the US to Switzerland. This will create increased legal certainty for Swiss banks because reports under Model 1 will be submitted to the Federal Tax Administration (FTA) rather than directly to the IRS as they are now. In addition, other duties that place a heavy burden on the banks, such as regular FATCA certification, will no longer apply. On balance, the changeover to Model 1 can be expected to cut costs for the banks, particularly as regards the duplications with AEOI.
What happens now?
Implementing the FATCA Agreement requires amendments to national law, which must be voted on by the Swiss Parliament. We expect a consultation for this purpose at the end of 2024.
FATCA Qualification Committee
The FATCA Qualification Committee was formed to institutionalise dialogue between the tax authorities and the financial sector with regard to the joint implementation of FATCA. It assesses questions on interpretation that arise in connection with applying the FATCA Agreement and standardises how the Agreement is put into practice. Since neither Switzerland nor the banks are free to interpret the FATCA Agreement as they see fit, the relevant US authorities are consulted whenever necessary. We expect that the FATCA Qualification Committee will continue to play a role in the upcoming legislative process.