The Internal Revenue Service’s decision to modify the timelines for withholding agents and foreign banks to comply with the stiff new due diligence requirements under the Foreign Account Tax Compliance Act is providing them, as well as taxpayers and preparers, with some welcome relief.
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FATCA was included as part of the HIRE Act of 2010 and requires foreign financial institutions, including hedge funds, to report to the Internal Revenue Service on the foreign holdings of U.S. taxpayers or else face large penalties. The requirements have provoked an outcry abroad, particularly from dual citizens and expatriates, in addition to the financial institutions that are expected to comply. Some foreign banks reportedly have been reluctant to do business with U.S. customers, and some expats have even renounced their U.S. citizenship.
Late last month, the IRS announced that it has delayed the timelines for withholding agents and foreign banks in completing the due diligence requirements (see IRS Modifies FATCA Timelines). Foreign financial institutions will have until Jan. 1, 2017 to start withholding taxes from U.S. taxpayers’ investment gains and until Jan. 1, 2014, to put in place the reporting requirements mandated by FATCA.
Mike Laveman, a tax partner in EisnerAmper’s financial services practice who works with hedge funds and private equity firms, sees the delay as a positive for his clients. “The most important effect of the announcement is that we now have alignment of new account and due diligence procedures for withholding agents such as U.S.-based funds, foreign financial institutions, and entities that may fall under the purview of the intergovernmental agreements being worked on,” he said. “Before this announcement, all three have had a different set of rules, which has led to a lot of confusion as to how and when to implement FATCA. These new rules essentially give everyone a little more time to create a FATCA process. In addition, the announcement pushed off withholding taxes from the gross proceeds from the sale of U.S. securities two years. This is significant because most of the dollars generated from FATCA would likely come from this, as opposed to dividend and interest income.”
However, Laveman cautioned that the delay does not mean FATCA registration won’t take place in 2013. It only means the pressure is off to do it immediately at the beginning of 2014.
When the IRS and the Treasury Department issued the proposed regulations in February, they heard grumbling from many quarters about the requirements they had contemplated (see IRS and Treasury Propose New FATCA Requirements). On top of that, they simultaneously issued a joint statement with the United Kingdom, France, Germany, Italy and Spain on an intergovernmental approach to implementing FATCA and improving international tax compliance, which would mean sharing U.S. taxpayers’ information with foreign tax authorities. That didn’t fly with some members of Congress. Banks and their accountants were also puzzled.
“Originally when the proposed regs came out at the same time as the concept of these intergovernmental agreements, when you look at some of the timing requirements between the two, there were a lot of inconsistencies,” said Laveman. “For example, U.S. withholding agents, such as a U.S. bank or a U.S. fund, had different rules for opening account procedures than a foreign institution would, versus someone that would be covered under the intergovernmental agreements. Because there’s been so much push to this concept of intergovernmental agreements, I think what happened was rather than releasing a lot of the final regulations on FATCA, I think the IRS is letting some of these intergovernmental agreements work out a little bit, and they needed to push back a lot of the implementation points, anywhere ranging from six months to one year.”
For many of Laveman’s clients, the delay has been a huge relief. “Many of these clients who are facing FATCA are also facing all sorts of other regulatory concerns, like Dodd-Frank,” he pointed out. “I think there’s going to be less push to have to register your fund or entity as soon as the final regs come out. Essentially you had to be registered by June 30. In most cases, you really have an extra six months, if not longer. So I think it’s giving organizations more time to develop systems, to think about what entities they have to register, and it’s definitely a welcome relief to not only the banks and investment funds out there, but also the service providers like us that are going to assist our clients with this.”
While the timing is one aspect of the IRS reprieve, the other significant aspect is the type of withholding taxes, Laveman observed. “Originally FATCA would impose withholding on interest, dividends and gross proceeds from the sale of U.S. securities,” he added. “The gross proceeds on the sales of securities was the one that most investment funds and banks were concerned about, because there are big dollars involved in that. That was set to take place on Jan. 1, 2015. They actually pushed that back two additional years to Jan. 1, 2017. So I think that’s taking a lot of the bite out of FATCA. Once people register and withholding takes place, the big piece on gross proceeds from sales of U.S. securities is delayed an additional two years. That also is very, very significant.”
The IRS has also expanded the rules governing the types of obligations that were exempt under FATCA, and that too was fairly significant, in Laveman’s view.
However, he warned that banks and taxpayers should not assume from the IRS announcement that the FATCA requirements have been postponed indefinitely. Withholding agents and financial institutions need to start planning now for how they will eventually need to comply with FATCA, and not simply push off thinking about FATCA for another year, he cautioned.
The IRS will be busy readying the final requirements in the meantime, according to officials who have spoken at recent conferences. “The IRS claims that the final regulations, the final forms and a final FFI agreement, which is the agreement that these institutions will sign, will be done by the end of this year,” said Laveman. “Then the question is how soon do you register? I think we have some additional time to register, but certainly once all those final rules come out, banks and investment funds are going to have to come up with a plan pretty quickly to figure out how they’re going to tackle FATCA. People were about to start doing it now. I really have seen a lot of movement in the last few weeks on FATCA. I think what we have now is a six-month window of taking a deep breath a little bit and moving forward. They don’t plan on pushing this back any further. Everything they’re saying indicates that they’re going to come out with the final rules by the end of the year. I think this is more a matter of getting a little bit of extra time to consider what to do.”