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The Foreign Account Tax Compliance Act, briefly referred to as FATCA, was adopted by the US Congress on March 18, 2010 and came into force on January 1, 2013. This Act requires US citizens and other taxpayers to disclose to the US Internal Revenue Service (IRS) the information about their financial accounts in other countries, and information from foreign financial institutions about such clients. FATCA's primary goal is to combat tax evasion by US taxpayers and increase federal tax revenues.

2. Reasons for FATCA Adoption

Pursuant to US Tax Law all US citizens and those with permanent residence in the United States but living abroad shall have tax liability in the United States for their personal income and shall be obliged to declare and pay taxes on all types of income. According to calculations, the US Treasury loses annual taxes amounting up to $ 100 billion on financial assets transferred abroad, including offshore zones, through tax evasions, or retained in a foreign country where they are earned without being brought to the US. The United States passed a law – FATCA - which calls for financial institutions, where tax evasion is hidden abroad, to be held accountable for acting together with the tax evaders.

3. Basic requirements of FATCA

According to FATCA, persons who are considered US taxpayers shall submit information about their foreign accounts and other financial assets to the IRS together with the US tax return. Foreign financial institutions, including banks, shall provide the US Department of Internal Revenue Service (IRS) with information on US tax payers that opened an account, including their names, tax identification numbers, addresses, account balances, and payments put into/withdrawn from the account. Financial institutions of any country that do not comply with the Act, that is, do not cooperate with the IRS, shall face severe sanctions starting from July 1, 2014. A 30% tax shall be withheld and transferred to the IRS at the source of payment by the financial institution (where the correspondent account is located) from the payments made to them through correspondent accounts at financial institutions in the United States and other countries that have accepted FATCA compliance requirements. As it is known, the United States has real opportunities to impose statutory penalties against any non-cooperating foreign financial institution, as vast majority of the payments in US dollars around the world are made through correspondent accounts in US-based banks.

4. Controversial points regarding the application of FATCA and their solution

The FATCA itself is a controversial Act, and in fact is an attempt by a State to exercise its jurisdiction beyond its normal borders. The entities that are not in the US territory under the domestic law and have no obligation to act according to this legislation that are created and operated entirely under the laws of other countries are imposed an obligation to make report to the USA. There is no provision in any country for any bank to unilaterally, automatically or periodically transmit information or report to a tax authority of a foreign state, in violation of the banking secrecy regulated by its domestic law. The US has acknowledged this challenge and has agreed to sign intergovernmental agreements for the application of FATCA. In this regard, two models of intergovernmental agreements proposed to be concluded with other states were developed by the US Treasury Department and the IRS for application of FATCA.

Model 1

Model 1 provides that the relevant information shall be transmitted to the IRS not directly by the financial institutions of another state, but through the designated authority of that state in a centralized manner. The financial institution shall be registered on the IRS portal. If a financial institution operates as a "Qualified Intermediary" (QI), US-source income paid in favor of financial institutions included in the list of "non-complying" financial institutions shall be subject to 30% tax at the source of payment. This model has two forms called Model 1A IGA and Model 1B IGA. Under the Model 1A IGA Agreements, reciprocal information shall be exchanged between the United States and another state. The US side also provides information on the accounts of other state taxpayers with US financial institutions, while the Model 1B IGA Agreements provide that the information is transmitted only to the United States.

Model 2

According to Model 2 of the Intergovernmental Agreement the financial institutions shall submit the information directly to the IRS by registering on the IRS electronic portal. The main features of this Model are the following:
1. No change shall be made to domestic legislation, but an intergovernmental agreement shall be signed for the implementation of FATCA requirements.
2. The financial institution shall be registered on the IRS portal and operate almost entirely in accordance with the requirements of FATCA.
3. The financial institution shall withhold a 30% tax at the source of payment from US-source income paid in favor of financial institutions included in the list of "non-complying" financial institutions.
4. The financial institution shall require US customers to waive their rights to keep the bank secrecy and close the account in the event of no consent.
5. The financial institution shall transmit information directly to the IRS through its responsible person.

5. FATCA activities that Azerbaijan has implemented so far About the FATCA Order of the Cabinet of Ministers of the Republic of Azerbaijan

For the purpose of FATCA application by the Decree # 103s of the Cabinet of Ministers of the Republic of Azerbaijan dated April 22, 2014, conclusion of an intergovernmental agreement between the US Government and the Government of the Republic of Azerbaijan was considered acceptable to improve international tax compliance on the Model 1A IGA, which is approved by the US Treasury Department and provides reciprocal information exchange between the competent authorities of the Contracting States, and to implement the Foreign Account Tax Compliance Act (FATCA). Under this Order, the State Tax Service under the Ministry of Economy of the Republic of Azerbaijan was appointed an authorized body for the exchange of information on the basis of the Intergovernmental Agreement. This Order also established a Committee to coordinate the text of the draft Intergovernmental Agreement.

About the FATCA Order of the Cabinet of Ministers of the Republic of Azerbaijan

An intergovernmental agreement was drafted, and a Note # 5/11-874/03/14 of the Ministry of Foreign Affairs of May 2, 2014 was sent to the US Embassy in Azerbaijan about the intention of our country to sign the Intergovernmental Agreement and to start negotiations. On May 02, 2014, the Intergovernmental Agreement was sent by the State Tax Service under the Ministry of Economy to the Embassy of the United States and to Bob Stack, Treasury Deputy Assistant Secretary for International Tax Affairs. The Ministry of Foreign Affairs received the Note # 472/2014 from the US Embassy in our country on May 6, 2014. The Note said that the United States considered it appropriate to sign an Intergovernmental Agreement with our country.
Subsequently, the Republic of Azerbaijan was included in the list of partner countries by the United States on May 16, 2014 (http://www.treasury.gov/resource-center/tax-policy/treaties/pages/fatca-archive.aspx). With the inclusion of the Republic of Azerbaijan in the list of partner countries, the deadline for registration of financial institutions of Azerbaijan on FATCA portal has been extended until December 31, 2014. However, it was done on condition that the Intergovernmental Agreement would be signed by that date. This means that the threat of large amount of sanctions on Azerbaijani financial institutions has been eliminated and legal basis has been established for their registration on the FATCA portal. The extension of the deadline by December 31, 2014 allowed financial institutions to be technically prepared for this process.

About Making FATCA related Changes in the Legislation

In 2014 with the aim of FATCA implementation in Azerbaijan following documents were submitted. Draft Law of the Republic of Azerbaijan "On Amendments to the Tax Code of the Republic of Azerbaijan", Draft Law of the Republic of Azerbaijan “On Amendments to the Law of the Republic of Azerbaijan “On Insurance Activities”, Draft Law of the Republic of Azerbaijan “On Amendments to the Law of the Republic of Azerbaijan “On Personal Data” and Draft Law of the Republic of Azerbaijan “On Amendments to the Law of the Republic of Azerbaijan “On Banks” were prepared and submitted accordingly by the Committee established under the Order 103s of the Cabinet of Ministers of the Republic of Azerbaijan dated April 22.

6. Other countries in respect to FATCA

Information on countries that have signed the agreements with the United States is available at http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA-Archive.aspx

7. International Agreements on FATCA

Agreement between the Government of the Republic of Azerbaijan and the Government of the United States of America to Improve International Tax Compliance and to Implement FATCA

Due diligence obligations for identifying and reporting on U.S. reportable accounts and on payments to certain nonparticipating financial institutions

(Annex I) (Annex II)

Agreement between the Government of the Republic of Azerbaijan and the Government of the United States of America to Improve International Tax Compliance and to Implement FATCA

Due diligence obligations for identifying and reporting on U.S. reportable accounts and on payments to certain nonparticipating financial institutions (Annex I) (Annex II)

User Instructions for Financial Institutions to Register on Official Website of the US Internal Revenue Service in respect to FATCA implementation

Reference on co-operatives companies in respective countries