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Polish financial institutions to be required to report to US tax authorities

On 7 October 2014 the Polish government signed an agreement with the United States to implement FATCA in Poland. The agreement now awaits ratification. It is supposed to enter into force prior to 30 September 2015.

The Foreign Account Tax Compliance Act, or “FATCA” as it is known, is a federal law passed in the United States in 2010 as part of the anti-crisis package. FATCA is designed as a weapon in the battle against tax avoidance by US citizens. Under FATCA, the US Internal Revenue Service is to receive information from foreign financial institutions about accounts of their clients identified as US entities.

Formally, FATCA is an internal law of the United States which requires foreign financial institutions to report selected information about their US clients and their accounts to the IRS. It also imposes sanctions on institutions that fail to comply with FATCA in the form of 30% taxation at the source on payments received from the United States.

The duties of foreign financial institutions under FATCA may be divided into three groups. The first is identification: financial institutions are required to identify US entities among their clients. The second is reporting, meaning that financial institutions must gather certain information about identified US entities and forward it to the IRS. The third is sanctions—the 30% withholding tax on income received from the US by, among others, non-compliant US clients.

The main barrier to complying with the reporting obligations is national regulations governing banking secrecy and data protection. To resolve this problem, the United States proposes conclusion of intergovernmental agreements with specific foreign countries.

How will exchange of information work?

The intergovernmental agreement with Poland provides that information concerning each calendar year will be forwarded automatically between the tax administrations within 9 months after the end of the year. The exchange will include such information as name, address, US tax number, bank account, and balance as of the end of the calendar year. Moreover, under the agreement, Poland undertakes to adjust its internal laws and require all domestic financial institutions to gather and forward the information specified in FATCA.

Who is affected?

The reporting requirements apply not only to banks, but also to brokerages, investment funds and insurance companies. Polish financial institutions have already begun to register with the IRS to obtain a Global Intermediary Identification Number. Most Polish banks have not yet begun identifying which of their clients are US entities, waiting until the relevant domestic regulations are introduced.

The information to be provided by Polish financial institutions under FATCA can already be obtained by the US tax authorities pursuant to a request based on the US-Poland tax treaty or the Convention on Mutual Administrative Assistance in Tax Matters. So what will change? Through the intergovernmental agreement, the US is shifting to Polish financial institutions the burden and costs of identifying US citizens who may potentially be avoiding US taxes. On the other hand, FATCA has become an impetus to closer international cooperation in the battle against tax avoidance. Following the trail blazed by the United States, new models for automatic exchange of information have been drafted by the European Union and the OECD.

Aleksandra Czyż, Tax Practice, Wardyński & Partners