The Treasury Department and the Internal Revenue Service have issued a long-awaited set of final regulations implementing the information reporting and withholding tax provisions of the Foreign Account Tax Compliance Act aimed at combating offshore tax evasion, with far-reaching implications for U.S.-born taxpayers abroad in addition to foreign financial institutions as well as U.S. banks.
The controversial set of regulations known as FATCA was enacted by Congress in 2010 as part of the HIRE Act. The various provisions aim target non-compliance by U.S. taxpayers using foreign accounts by requiring foreign banks, hedge funds and other financial institutions to report on the holdings of U.S. citizens and dual citizens to the Internal Revenue Service, or else face stiff penalties. The issuance of the final regulations marks a key step in establishing a common intergovernmental approach to combating tax evasion.
FATCA has provoked a backlash among many foreign banks, which have balked at providing information on depositors to the IRS. In response, many have closed the accounts of U.S. taxpayers. Many U.S.-born expatriates have also seen the requirements as overreach by the U.S. government. In response to the outcry, the Treasury Department has delayed the regulations and tried to blunt the impact. In addition, it has been signing agreements with several countries in Europe to provide similar information to their tax authorities about the holdings of their citizens in U.S.-based banks.
The Treasury contended that the latest set of regulations provide additional certainty for financial institutions and government counterparts by finalizing the step-by-step process for U.S. account identification, information reporting, and withholding requirements for foreign financial institutions (FFIs), other foreign entities, and U.S. withholding agents.
"These regulations give the Administration a powerful set of tools to combat offshore tax evasion effectively and efficiently," said Treasury Deputy Secretary Neal Wolin in a statement. "The final rules mark a critical milestone in international cooperation on these issues, and they provide important clarity for foreign and U.S. financial institutions."
The final regulations issued today:
• Build on intergovernmental agreements that foster international cooperation. The Treasury Department has collaborated with foreign governments to develop and sign intergovernmental agreements that facilitate the effective and efficient implementation of FATCA by eliminating legal barriers to participation, reducing administrative burdens, and ensuring the participation of all non-exempt financial institutions in a partner jurisdiction. In order to reduce administrative burdens for financial institutions with operations in multiple jurisdictions, the final regulations coordinate the obligations for financial institutions under the regulations and the intergovernmental agreements.
• Phase in the timelines for due diligence, reporting and withholding and align them with the intergovernmental agreements. The final regulations phase in over an extended transition period to provide sufficient time for financial institutions to develop necessary systems. In addition, to avoid confusion and unnecessary duplicative procedures, the final regulations align the regulatory timelines with the timelines prescribed in the intergovernmental agreements.
• Expand and clarify the scope of payments not subject to withholding. To limit market disruption, reduce administrative burdens, and establish certainty, the final regulations provide relief from withholding with respect to certain grandfathered obligations and certain payments made by non-financial entities.
• Refine and clarify the treatment of investment entities. To better align the obligations under FATCA with the risks posed by certain entities, the final regulations: (1) expand and clarify the treatment of certain categories of low-risk institutions, such as governmental entities and retirement funds; (2) provide that certain investment entities may be subject to being reported on by the FFIs with which they hold accounts rather than being required to register as FFIs and report to the IRS; and (3) clarify the types of passive investment entities that must be identified and reported by financial institutions.
• Clarify the compliance and verification obligations of FFIs. The final regulations provide more streamlined registration and compliance procedures for groups of financial institutions, including commonly managed investment funds, and provide additional detail regarding FFIs’ obligations to verify their compliance under FATCA.
"The issuance of the final regulations is welcome news to financial institutions all over the world,” said Barbara Angus, a principal at Ernst & Young. “Institutions need detailed guidance in final form regarding the application of all of the requirements of FATCA in order to be able to move forward with the systems and process changes that will be necessary for compliance with the new regime. The guidance provided with these regulations is one of three critically important elements. The other two are the series of agreements the United States is entering into with other countries to help facilitate the operation and application of the FATCA regime for financial institutions located in these partner countries and the IRS forms and agreements that are needed for the day to day operation of the new rules. Continued progress on these other two fronts will be important, but the issuance of the regulations today is a major advance."
Since the proposed regulations were published on Feb. 15, 2012, the Treasury has collaborated with foreign governments to develop two alternative model intergovernmental agreements that facilitate the effective and efficient implementation of FATCA.
These models serve as the basis for concluding bilateral agreements with interested jurisdictions and help implement the law in a manner that removes domestic legal impediments to compliance, secures wide-spread participation by every non-exempt financial institution in the partner jurisdiction, fulfills FATCA’s policy objectives, and further reduces burdens on FFIs located in partner jurisdictions. Seven countries have already signed or initialed these agreements.
On Thursday, the Treasury announced for the first time that Norway has joined the United Kingdom, Mexico, Denmark, Ireland, Switzerland, and Spain as countries that have signed or initialed model agreements. The Treasury said it is engaged with more than 50 countries and jurisdictions to curtail offshore tax evasion, and more signed agreements are expected to follow in the near future (see U.S. in Talks with 50+ Nations on FATCA Tax Enforcement).
Last July, the Treasury published its first model intergovernmental agreement (Model 1 IGA). Instead of reporting to the IRS directly, FFIs in jurisdictions that have signed Model 1 IGAs report the information about U.S. accounts required by FACTA to their respective governments who then exchange this information with the IRS.
The Treasury has also developed a second model intergovernmental agreement (Model 2 IGA) published on Nov. 14, 2012. A partner jurisdiction signing an agreement based on the Model 2 IGA agrees to direct its FFIs to register with the IRS and report the information about U.S. accounts required by FATCA directly to the IRS.
The agreements do not offer an exemption from FATCA for any jurisdiction but instead offer a framework for information sharing pursuant to existing bilateral income tax treaties. Under both models, all financial institutions in a partner jurisdiction that are not otherwise excepted or exempt must report the information about U.S. accounts required by FATCA. Therefore, the IRS receives the same quality and quantity of information about U.S. accounts from FFIs in jurisdictions with IGAs as it receives from FFIs applying the final regulations elsewhere, but these agreements help streamline reporting and remove legal impediments to compliance.
FATCA was enacted in 2010 by Congress as part of the Hiring Incentives to Restore Employment (HIRE) Act. FATCA requires FFIs to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.
In order to avoid withholding under FATCA, a participating FFI will have to enter into an agreement with the IRS to identify U.S. accounts, report certain information to the IRS regarding U.S. accounts, and withhold a 30 percent tax on certain U.S.-connected payments to non-participating FFIs and account holders who are unwilling to provide the required information.
Registration will take place through an online system. FFIs that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to U.S. investments.
The Treasury Department and the IRS said they would continue to work closely with businesses and foreign governments to implement FATCA effectively. Updates and further information on FATCA can be found by visiting the FATCA page at Treasury.gov or IRS.gov.
9 Comments
Clearly Just Me has some kind of bone to pick with the IRS. The problem with fines is that they do not descriminate, except in some very specific instances, between people trying to ameliorate any past filing deficiencies and John Gotti. True the fines for failing to file the necessary forms for reporting offshore accounts are enourmous but the fines for those who wish to comply are really huge as well. You know you could have failed to report a couple of hundred dollars in interest income from England and be crushed even after you've entered into an agreement with the IRS. And it's likely you paid taxes on the income as well. So it's not being untaxed. The penalties are so draconian that they encourage people not to comply. Look, criminals are not likely to comply anyway so the people you wind up punishing are those who are trying to be honest.
I think lower penalties would increase compliance. If you do run into someone who's trying to beat the IRS by using foreign accounts, then throw the book at them. They're not entering into IRS agreements anytime soon anyway. Someone who is, well look they're sharing way above and beyond what the average tax payer does with the IRS. And they deserve some leeway. Having large penalties doesn't create an incentive for compliance. Look at the war on drugs if you don't believe me.
Posted by: pcone2 | January 29, 2013 2:05 PM
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As a practical matter, it can be days or even weeks before regulations are printed or posted to the appropriate web sites. Until then. let's please put all these conspiracy-type theories on hold and take a deep breath.
Posted by: CuriousDave | January 19, 2013 9:31 PM
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Regarding that statement in the Press Release about Norway. They they go again, putting their positive spin on it, so you think this is a done deal. It is almost there, but not finished yet.
Based on a software translation of the Norwegian text, Here is what their press has to say.
1) It appears that the IGA has NOT been signed (see last sentence of translation).
2) The unsigned/ proposed IGA requires the US to deliver data on Norwegian taxpayers' accounts in the US.
"The signed FATCA agreement helps the Norwegian tax authorities
Ministry of Finance on behalf of the Norwegian government signed a deal with U.S. authorities based on FATCA legislation. The agreement means that Norwegian financial institutions reported accounts belonging Americans dirk true to the Norwegian authorities who forwarded it to the IRS in the U.S. For the Norwegian tax authorities, the agreement that they will automatically receive information on all accounts Norwegian taxpayers in U.S. financial institutions.
The following press release was issued by the Ministry of Finance 01/16/2013:
"Agreement with the United States to automatically exchange information about account issues of financial institutions - FATCA
The Ministry of Finance has agreed with U.S. authorities on an agreement between the IRS automatically reporting the account conditions in financial institutions. The agreement builds on the U.S. FATCA legislation (Foreign Account Tax Compliance Act). The agreement will facilitate the reporting obligation for Norwegian financial institutions.
FATCA is a U.S. international law imposes foreign financial institutions to report financial information about individuals (physical persons, companies and other entities) that is taxable in the United States directly to the U.S. government. Financial institutions that choose not to report information under FATCA, after the U.S. rules will be fined 30 percent withholding tax on payments from the U.S..
Once agreement on the implementation of FATCA is signed between Norway and the United States, the reporting obligation for financial institutions easier by allowing them to send the information to the Norwegian authorities who will communicate them to the appropriate U.S. authority. The agreement means that Norwegian institutions will not be subject to withholding tax.
For the Norwegian tax authorities, the agreement that they will automatically receive information on all accounts Norwegian taxpayers in U.S. financial institutions.
The aim of signature of the Agreement as early as possible in 2013, and the text will be published. ""
http://norskokoforum.no/no/forside/artikler/Den+inngåtte+FATCA-avtalen+hjelper+norske+skattemyndigheter.9UFRjIZt.ips
Posted by: Just Me | January 18, 2013 3:55 AM
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Just checked the Federal Register for January 17, 2013 and the FATCA Final Regulations are not there. Until they are published in the Federal Register, they are NOT final. I smell a rat.
Posted by: thurbo | January 18, 2013 2:21 AM
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BTW, Barbara Angus, a principal at Ernst & Young. What a shill! They stand to make BIG BUCKs from FATCA, so of course they would use such blatantly self serving worlds like "The issuance of the final regulations is welcome news"
Find me one FFI that is thrilled that they now have the path to capitulation and huge compliance cost? Welcome it? Absolute nonsense.
They should just tell the FATCA Compliance Complex (FCC) to shut up with their marketing messages, quit giving them money, and pour it into lobbying to kill this monster instead. Better ROI than the rat hole they will be pouring money down to feed the FCC, with nothing to show for the effort.
Posted by: Just Me | January 17, 2013 11:37 PM
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BTW, these so called IGA agreements that Treasury says they have, are still not showing on their Web site...
Maybe they are keeping the list somewhere else?
http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA-Archive.aspx
As of 1/17/2013 all they show are Mexico, Denmark and the UK.
So where exactly is....Norway,Ireland,Switzerland,and Spain.
To initial something is a far cry to actually signing up and really means little. I think they are trying to put the best face on a faltering effort that claimed they would have ~16-17 by years end, as I understand it.
And most importantly, where is the King Pins of Germany and France and Italy? Where? It has been almost a year now since Treasury trumpeted the "Partnership" that included them. So why haven't they got their IGA signed. Troubles with reciprocity??
Posted by: Just Me | January 17, 2013 11:29 PM
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Went looking for these regs in the Federal Register. Did you find them? It doesn't appear that the final regs were not actually published in the Federal Register today which means they are not actually "final?" According to sources they will not actually go in the Register until January 28th which means there are still steps left in the approval process?
If that is true all of the today's hoopla was basically a PR exercise on the part of Treasury not the actual release of the "real" "legal" final regs. It will interesting to see if they end up in tomorrow's Federal Register. If not the Treasury folks pulled another fast one.
So try checking in the morning.
Posted by: Just Me | January 17, 2013 10:29 PM
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So, you went with the Treasury Characterization of this fiasco?
How about: Treasury issues final FATCA regulations to 'tag and report' all US persons residing around the globe.
Treasury issues final FATCA regulations to unilaterally impose its will and taxation system on the whole wide world.
Those would be just as accurate. I could make up endless ones more accurate than what the Treasury put out.
I certainly hope those IGAs they talk about will be the Achilles Heel of this nonsense. Of the original 5 "Coalition of the willing" members, (Partners they called them), only the UK poddle has signed up. Where is Germany, France, Italy and Spain? Initially or saying they will is not the same as doing it.
In spite of what they say, these are NOT bilateral agreements. They are one way unilateral CRAM DOWNs with only some adjustments to deemed compliant or exempted institutions allowed in the annexes. Try changing some of the language in the boiler plate of the agreement, and you will quickly find out how bi-lateral they are. Why repeat this mischaracterization of what they are?
When enough business and the Domestic Financial Institutions realize that the "Reciprocity" in these IGAs is aimed right back at the homeland with the costs and complexity of FATCA landing on our domestic shores, maybe they will wake up from their slumber and oppose it.
Or Maybe when the countries stupid enough to sign these IGA agreements (cram downs) actually read and understand article 6, they will realize they are NOT getting full reciprocity, they are getting a "wish and a promise that Treasury will try."
Here is the EXACT language.
1. Reciprocity. The Government of the United States acknowledges the need to achieve equivalent levels of reciprocal automatic information exchange with the United Kingdom. The Government of the United States is committed to further improve transparency and enhance the exchange relationship with the United Kingdom ""by pursuing the adoption of regulations and advocating and supporting relevant legislation"" to achieve such equivalent levels of reciprocal automatic exchange.
So, if and when Congress decides they love the idea of a domestic FATCA, or DATCA, then they will have to vote on it. Any guesses how they will vote?
Maybe you should read the Posey Legislation which passed in the House in 2012, but died in the Senate. Not a lot of sentiment for this DATCA, I do not think...
http://posey.house.gov/news/documentsingle.aspx?DocumentID=304786
Time will tell what will happen, and if effective opposition will finally awaken and quit paying attention to the FATCA Compliance Complex who are the co-enablers with the IRS of this disaster.
Posted by: Just Me | January 17, 2013 9:03 PM
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Does anybody have feedback how financial transactions of Nevada, Delaware, Florida and other LLC's will be reported if the owner of the business is not known?
Posted by: Charly | January 17, 2013 8:12 PM
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