FATCA: the US model that transformed global tax transparency

Reading time: 9 minutes

🏁 Context and why it matters

The fight against international tax evasion did not begin in Europe but in the United States.

In 2010, the US Congress approved the Foreign Account Tax Compliance Act (FATCA) as part of the Hiring Incentives to Restore Employment Act (HIRE Act), transforming banking confidentiality on a global scale.

Since then, financial institutions around the world managing assets linked to US persons have been required to report them to the Internal Revenue Service (IRS), paving the way for the OECD’s Common Reporting Standard (CRS).

🇺🇸 Origin and purpose of FATCA

FATCA was enacted in 2010 with a clear objective: to ensure that US citizens correctly declare and pay taxes on their worldwide income.

Its three main goals are:

• Ensure that US taxpayers pay taxes on their global income.
• Require foreign financial institutions (Foreign Financial Institutions – FFIs) to identify and report account holders with tax links to the United States.
• Reduce the use of opaque jurisdictions or intermediary structures to conceal assets.

📅 Entry into force and phased implementation

Although FATCA was approved in March 2010 as part of the Hiring Incentives to Restore Employment Act (HIRE Act), its implementation was not immediate.
The United States established a transitional period to allow financial institutions worldwide to adapt to the new framework.

The key dates were as follows:

• 2010: FATCA enacted as part of the HIRE Act.
• 2013: publication of the final regulations (Final Regulations, T.D. 9610) by the US Treasury and the IRS.
• 1 July 2014: effective entry into force of the FATCA regime, beginning the identification of accounts and US taxpayers.
• 2015: first year of mandatory reporting to the IRS and start of automatic 30% withholding on non-participating institutions.

💡 In short, although FATCA was enacted in 2010, it became fully operational on 1 July 2014 and, since 2015, has been a cornerstone of the global tax transparency framework.

➤ Learn how Andorra joined this new system of international cooperation in the article Double taxation agreements (DTA) in Andorra.

⚙️ How the FATCA system works

FATCA is based on mandatory cooperation between global financial institutions and the IRS.
Each institution must review its client base to identify account holders with US tax connections.

The IRS is the US tax authority.

This process includes three main stages:

• Due diligence: institutions must identify US persons (by citizenship, green card, or tax residence criteria).
• Reporting: annual transmission of information to the IRS (either directly or, in countries with an IGA, through the local tax authority).

The IGA is a bilateral agreement between the relevant country and the United States.

• Withholding regime: if there is non-compliance or invalid documentation, a 30% withholding tax may apply to certain US-source payments (as the default rule).

❗ Consequences of non-compliance

FATCA is not limited to formal obligations — it also imposes significant financial penalties for institutions that fail to comply.

The main consequences are as follows:

• 30% withholding on US-source income
  Any payment of interest, dividends, or redemptions originating in the United States may be subject to this withholding if the financial institution is not registered or fails to provide the required FATCA documentation.
• ⚠️ Loss of access to the international financial system
  Non-participating banks (non-participating FFIs) are often excluded from transactions with US counterparties or other compliant jurisdictions, severely limiting their operations and global reputation.
• Reputational and compliance risks
  Failure to comply with FATCA can damage an institution’s credibility with regulators and institutional clients, complicating its relationships with correspondent banks.
• Administrative or contractual sanctions
  In some countries, local regulators may impose additional penalties for breaching international transparency standards.

In summary, failing to comply with FATCA means being effectively excluded from the international financial system, which is why most institutions — including those in Andorra — choose to register and report directly to the IRS.

➤ To learn how European countries apply similar measures to prevent tax relocation, read the article Exit tax in the European Union: key rules for the transfer of companies and assets.

📊 Information reported under FATCA

Financial institutions must report annually to the IRS the most relevant information for each account subject to FATCA, including:

• Name, address, and tax identification number (TIN).
• Account number and balance.
• Income generated: interest, dividends, capital gains, and redemptions.

⚠️ One-way flow: the United States receives far more information than it shares. Unlike the CRS (multilateral and reciprocal), FATCA does not achieve full reciprocity and only applies bilaterally with specific countries.

🌍 FATCA agreements (IGA) worldwide

To facilitate implementation and harmonise compliance, the United States developed Intergovernmental Agreements (IGA), which define how information is exchanged between countries and the IRS.

There are two main models:

• Model 1: institutions report to their national tax authority, which then transmits the data to the IRS. This model is bilateral and cooperative.
• Model 2: institutions report directly to the IRS without national intermediation. This model is unilateral in practice, as the information flows only to the United States.

Today, more than 100 jurisdictions have signed or implemented one of these two models.

➤ You can consult the official list of IGA agreements here.

🇦🇩 FATCA in Andorra: direct reporting without IGA

Although it is not a member of the European Union, Andorra actively participates in the international tax cooperation framework initiated by the United States.

However, the Principality has not signed an IGA with the United States, meaning that Andorran financial institutions deal directly with the IRS.

This is known as FATCA Direct Reporting.

📘 Legal basis and practical application

In practice, each Andorran bank complies with FATCA by registering and reporting directly to the IRS, identifying clients with US tax links.
The following forms are used for this purpose:

• W-9: for US citizens or US tax residents.
• W-8BEN / W-8BEN-E: for clients who declare having no US tax links.

⚙️ Effects on Andorra’s financial sector

The implementation of FATCA has had several notable effects on Andorra’s financial system:

• Strengthens the international reputation and credibility of the banking sector.
• Increases compliance and due diligence obligations.
• Allows Andorra to integrate fully into the global transparency network alongside the CRS.

🔍 FATCA vs. CRS: key differences

While FATCA and CRS pursue the same goal — tax transparency — they differ significantly in structure and scope:

• Origin: FATCA is a US initiative; CRS is a multilateral OECD standard.
• Scope: FATCA focuses on US persons and their entities.
• Reciprocity: FATCA is largely one-way; CRS is reciprocal and multilateral.
• Coverage: CRS covers more than 100 jurisdictions, while FATCA relies on bilateral agreements but also affects over 100 countries.

➤ To understand how CRS expanded the FATCA model globally and how it applies in Andorra, read CRS: the global tax transparency standard and its impact on Andorra.

🧩 Conclusion

FATCA marked a turning point in international tax cooperation.

With this law, the United States compelled the global financial system to adopt a new transparency standard that later served as the basis for CRS.

This dominant position is explained by the size and influence of the US financial market — the largest in the world.

By applying both models, Andorra strengthens its commitment to transparency, legal security, and alignment with international best practices.

➤ To learn more about Andorra’s tax structure and its competitive advantages, read Taxation in Andorra: structure, rates and real advantages.

👉 If you have clients or investments with US connections, ELYSIUM Consulting can help you review your situation and ensure full regulatory compliance with total discretion and security. Book your meeting or contact us through our online form.

Last updated: November 2025