Foreign financial institutions will face tax withholding penalties on Tuesday, July 1 if they have not begun to make efforts to comply with the Foreign Account Tax Compliance Act, or FATCA.

FATCA, which was included as part of the HIRE Act of 2010, requires foreign financial institutions, or FFIs, to report on the holdings of U.S. citizens to the Internal Revenue Service, or else face stiff penalties of up to a 30 percent withholding tax on payments of U.S. source income (see Offshore Crackdown Kicks Off with 30% Tax Penalties for Banks).

“FATCA is set to launch tomorrow with strong international support, marking a significant step in furthering the administration’s goal of narrowing the tax gap and cracking down on tax evasion by having accounts of U.S. persons around the world reported to the IRS,” said a senior Treasury official who spoke on condition of anonymity, during a conference call with reporters on Monday. “We now have FATCA agreements treated as in effect with nearly 90 jurisdictions around the world, which is a remarkable achievement, and we have around 80,000 foreign financial institutions that have registered with the IRS to perform the required due diligence when folks open their accounts and report information, either through their governments or directly to the IRS about the U.S. account holders in their financial institutions. We will continue to work with our international partners in our efforts to crack down on international tax evasion and create a more fair and transparent global tax system.”

Accounting Today asked about complaints that companies are still able to skirt the FATCA requirements by setting up shell corporations in the U.S. without declaring the beneficial owners of them. The senior Treasury official noted that the Obama administration has a budget proposal to provide for such reporting but acknowledged that the FATCA requirements don’t currently apply to U.S. banks. “Under FATCA, under certain circumstances foreign banks have to identify the owners of entities that hold passive assets,” he said. “The reason for that is, if those people are U.S., it could be a way of holding assets. The United States, of course, is not subject literally to FATCA so we don’t provide exactly what has to be provided by other foreign financial institutions to us. The [Obama] administration has a budget proposal that would make FATCA what we call ‘reciprocal,’ that is to say, we would be giving the same information that we’re getting from other jurisdictions and in that space there is a proposal for United States financial institutions to learn about the owners of entities that hold passive assets and report them to our reciprocal-type jurisdictions.”

Indeed, the U.S. has been negotiating a series of intergovernmental agreements with other countries to ease FATCA implementation, allowing for a mutual exchange of information. The G-20 finance ministers, in a summit earlier this in Australia, also endorsed a FATCA-like global reporting standard for sharing of account information among tax authorities in different nations, the senior Treasury official pointed out. However, some influential lawmakers in the U.S., including Sen. Rand Paul, R-Ken., have called for repeal of FATCA, saying it violates the banking privacy protections of U.S. citizens and banks.

Nevertheless, despite the delays, FATCA has been moving forward, although the IRS announced last month that it will not be enforcing it for 2014 and 2015 against foreign banks and other financial institutions that have made a good faith effort to implement FATCA, regarding those years as a transition period (see IRS Eases FATCA Enforcement for 2014 and 2015).

That could bring relief to many foreign banks and hedge funds that are still struggling to get their systems ready and identity their U.S. clients. CFOs from the U.S. and other parts of North America are also unprepared for the new law. A recent survey by Deloitte of CFOs in North America found that 92 percent of companies do not have processes in place to meet the July 1 deadline.  Only 8 percent of CFOs reported that they have processes in place to make the necessary withholdings as of July 1, and only 9 percent that their companies have figured out how FATCA affects their non-U.S. employee plans. Overall, 14 percent have completed the classification effort, while 23 percent report that the process is underway.

“Not all companies will be ready by the July 1 deadline, which is evident in the Deloitte CFO Signals survey findings,” said Denise Hintzke, global tax leader of Deloitte Tax’s Foreign Account Tax Compliance Initiative. “Some reasons for this are that FATCA has a complicated rule set, deadlines continue to get moved by the Treasury, and some organizations are not being as proactive as they can be. CFOs and their tax departments should consider working together to develop an actionable plan to address FATCA and mitigate the risks of non-compliance.”

Mary Kopczynski, chief executive of 8of9 Consulting, a New York-based firm that assists banks with FATCA compliance, recommended that accountants who are assisting foreign financial institutions should confirm the client is already registered and appears on the Global Intermediary Identification Number, or GIIN, list in the IRS's FATCA Foreign Financial Institution (FFI) List Search and Download Tool. 

“If they are not, be sure you know exactly why they are exempt from registering,” she advised. “I would also recommend that if they haven’t already, accountants should familiarize themselves with the W-8BENE form and the instructions that just came out.”

Kopczynski has been seeing businesses scrambling at the last minute to make sure they are in compliance before the July 1 deadline, along with some last-minute intergovernmental agreements, or IGAs.

“In terms of what I’m experiencing on the ground, there is lots of last-minute panic over certain businesses and whether they’re in scope, whether they have interests and dividends, etc.,” she said. “As they say, the devil is in the details, and when it comes to FATCA there are a lot of details. From IT revisions to international cross-border issues to secrecy laws to the changing landscape of IGAs, it is not an easy go-live.”

Kopczynski noted that there have been two tentative intergovernmental agreements with Saudi Arabia and China on FATCA with the U.S. Treasury, adding that those are “a huge relief around the globe.”