The Australian Government has signed an intergovernmental agreement with the United States Government to improve compliance with the Foreign Account Tax Compliance Act , a new US anti-avoidance tax law taking effect in July.FATCA is aimed at stopping tax abuses by US citizens holdings overseas bank and investment accounts. Financial institutions outside the US that operate accounts held by US taxpayers, or in which US taxpayers hold a substantial interest, will have to report details of these accounts to the US Internal Revenue Service.A "financial institution" under the Act can be a bank, insurance company, broker, investment manager or custodian. FATCA has been on the drawing board for the past couple of years and has been criticised for being too intrusive, too complex and too costly to administer.One of FATCA's complexities is that it requires financial institutions to go behind the corporate veil and find out whether a company or trust is owned or controlled by US citizens. Treasurer Joe Hockey said in a media release yesterday that the intergovernmental agreement would reduce both the administrative burden and costs by simplifying due diligence requirements.FATCA has the potential to put financial institutions in positions of conflict because reporting to the IRS may result in breaches of client agreements, local privacy laws, anti-discrimination law and data protection rules. The inter-governmental agreement is aimed at overcoming these problems. Under the agreement financial institutions will report relevant details to the Australian Taxation Office, which will pass it on the IRS. The ATO has power to require that information be supplied to it, and would not breach any laws by passing it on.The agreement is also designed to streamline reporting requirements.The US will apply sanctions to non-compliant foreign institutions. The sanction takes the form of a 30 per cent withholding tax on US-sourced payments to those institutions.Yesterday, Treasury issued draft legislation to give effect to Australia's obligations under the agreement. It has called for submissions on the draft.Under the terms of the agreement the US Government will treat Australian financial institutions as compliant from July 1, pending the passage of the legislation and implementation of the agreement in 2015.