In 2010, Congress enacted FATCA. In general, FATCA requires foreign financial institutions (FFIs) to identify and report certain information regarding U.S. accountholders. Failure to enter into such an agreement would subject an FFI to a 30% U.S. withholding tax on certain payments made to the FFI by a U.S. withholding agent (U.S. banks). FATCA also provides rules that apply to non-financial foreign entities ("NFFEs"). However, the compliance burdens of FATCA are much greater for FFIs than for NFFEs.
An FFI that enters into an agreement with the Treasury to become a participating FFI (i.e., a PFFI – and thus, not subject to the 30% withholding), will be required under the agreement to identify specified U.S. account holders and report to the Treasury certain information with respect to "financial accounts" held by such U.S. persons or "U.S.-owned foreign entities" ("U.S. accounts").
The ABA supports legislation that will ensure that all U.S. citizens and residents pay their fair share of taxes, and thus, prevent loss of millions of dollars by the U.S. because of taxpayers that engage in illegal use of offshore accounts to hide taxable income. However, we believe that FATCA is so broad in scope and application that it pulls in entities and activities that are not the intended target of the legislation.
Treasury and the IRS issued final regulations on January 17, 2013. Click here
to view a summary of the final regulations prepared by the law firm of GreenbergTruarig.
The final regulations, which are a huge improvement on the proposed regulations, provide clarity on several important issues – many of which were raised as major concerns in the two comment letters that the ABA wrote to the Treasury/IRS in response to request for comments on FATCA. The For instance, the regulations clarify the rules regarding grandfathered obligations, clarify the scope of payments that could be subject to withholding under FATCA, modify the due diligence requirements for FFIs and clarify the rules regarding entities that would be treated as deemed compliant FFIs for purposes of FATCA.
As part of the process of making FATCA implementation and compliance less onerous for foreign entities, the U.S. Treasury has negotiated intergovernmental agreements (IGAs) with some foreign jurisdictions. These IGAs provide a framework for the government-to-government implementation of FATCA and therefore, are essentially tailored to reflect agreements between the U.S. and a partner country. There are currently 2 IGA models. Under the regulations, the regulations would generally not apply to FFIs that are in compliance with FATCA under Model 1 IGA model, whereas, FFIs that operate under the Model 2 IGA would still be subject to the regulations.
We continue to await the issuance of IRS forms and agreements that are required for FATCA compliance as well as guidance on the FFI registration process. Everything must be in place by July 1, 2013 for compliance due date of 1/1/2014.