IGA Model 2 – Intergovernmental Agreement (FFI-direct-to-IRS)

The Intergovernmental Agreement (IGA) Model 2 is a bilateral arrangement between the United States and a partner country in which financial institutions of the partner country fulfill their FATCA reporting obligations directly to the IRS – unlike Model 1, where reporting passes through the domestic tax authority. The intergovernmental agreement creates the legal foundation (e.g., removal of banking secrecy or data protection barriers) that enables local FFIs to perform this direct reporting.

Model 2 is significantly less prevalent than Model 1. It was primarily adopted by countries that wished to quickly remove legal obstacles to FATCA compliance without first enacting comprehensive domestic implementing legislation. Notable Model 2 countries include Japan, Switzerland, Bermuda, Chile, Hong Kong, Macau, and Taiwan.

Since FFIs under Model 2 continue to interact directly with the IRS, the operational implementation resembles FATCA direct compliance (non-IGA regime) more closely than the Model 1 approach. FFIs require an active GIIN and typically enter into a Foreign Financial Institution Agreement (FFI Agreement) with the IRS.

Similar to Model 1 (with sub-variants 1A and 1B), Model 2 also exists in reciprocal and non-reciprocal variants. Under the reciprocal variant, the United States commits to providing certain account information held by US financial institutions to the partner country. In practice, however, most Model 2 IGAs contain only limited or no reciprocity provisions, as partner countries primarily sought to establish the legal basis for direct reporting to the IRS.

IGA Model 2 emerged in parallel with Model 1 during the early development phases of the IGA structure from 2011 onwards. It was designed as an alternative for countries where centralized national data collection and onward transmission to a foreign tax authority was politically or legally impractical, but where governmental authorization for direct reporting by private institutions was feasible.

Japan was one of the earliest and most significant signatories of a Model 2 IGA (June 2013). Additional Model 2 countries include Bermuda, Chile, Hong Kong, Macau, and Taiwan. Switzerland signed a Model 2 IGA on February 14, 2013, enabling direct reporting by Swiss banks to the IRS where Swiss banking secrecy had been lifted. In practice, Swiss banks obtained client consent to enable direct reporting, making implementation complex.

Over time, several Model 2 countries shifted to Model 1 arrangements or harmonized their structures with the OECD CRS, which is based on Model 1 principles. Currently, approximately 12 to 15 jurisdictions maintain a pure Model 2 approach.

IGA Model 2 applies to financial institutions resident in the partner country that manage US accounts or US-source income. As with Model 1, there are exemptions for Non-Reporting Financial Institutions and Deemed Compliant FFIs.

• FFIs under Model 2 must be registered with the IRS and hold a GIIN.
• They enter into an FFI Agreement directly with the IRS and report annually via Form 8966 (FATCA Report) directly to the IRS.
• The intergovernmental agreement removes legal barriers (e.g., data protection, banking secrecy) so that direct reporting is legally permissible.
• Accounts of recalcitrant account holders (customers who do not consent) are reported to the IRS in aggregated form; the US may then submit information requests through mutual administrative assistance.

Core requirements under IGA Model 2:

• Registration and GIIN: Mandatory registration on the IRS FATCA Registration Portal; obtaining a Global Intermediary Identification Number.
• FFI Agreement: Conclusion of an FFI Agreement with the IRS (similar to non-IGA FFIs).
• Due Diligence: Carrying out FATCA due diligence procedures to identify US accounts (application of US indicia tests).
• Direct Reporting to IRS: Annual reporting of account data directly to the IRS without routing through the national tax authority.
• Withholding: Withhold and remit 30% tax on payments to non-compliant FFIs and recalcitrant account holders.
• Aggregate Reporting: Non-consenting account holders are reported to the IRS in aggregate form; individual details can be requested via mutual administrative assistance.

3 corrections:
- Contradiction between IGA-M1 and IGA-M2 regarding Switzerland
- FATCA reporting form is Form 8966, not 1042-S
- Switzerland has not switched to Model 1
5 clarifications.
1 note.