The Internal Revenue Service and the Treasury Department have released an eagerly anticipated set of proposed regulations for implementing the Foreign Account Tax Compliance Act.
The law, known as FATCA, was included as part of the HIRE Act of 2010 and has generated consternation abroad, as it requires foreign financial institutions to report to the U.S. government on the holdings of U.S. taxpayers (see Canadian Finance Minister Criticizes U.S. Tax Crackdown). Last December, the IRS was forced to offer some relief from the onerous requirements for expatriates and dual citizens (see IRS Offers Some Relief for Expats and Dual Citizens).
The newly proposed regulations that were issued Wednesday lay out a step-by-step process for U.S. account identification, information reporting, and withholding requirements for foreign financial institutions, known as FFIs, along with other foreign entities and U.S. withholding agents.
“FATCA strengthens U.S. efforts to combat offshore noncompliance,” said IRS Commissioner Doug Shulman in a statement. “In doing so, we understand it creates a significant undertaking for financial institutions. Today’s proposed regulations reflect our commitment to take into account the implementation challenges of affected financial institutions while allowing for a smooth and timely roll-out of the law.”
The proposed regulations implement FATCA’s obligations in stages, in an effort by the IRS and the Treasury to minimize the burdens and costs consistent with achieving the statute’s compliance objectives.
The rules and implementation schedule have also been adjusted to allow time for resolving local law limitations to which some FFIs may be subject.
FATCA was enacted in 2010 by Congress as part of the Hiring Incentives to Restore Employment, or 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 being withheld upon 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; verify its compliance with its obligations pursuant to the agreement; and ensure that a 30 percent tax on certain payments of U.S. source income is withheld when paid to non-participating FFIs and account holders who are unwilling to provide the required information.
Registration will take place through an online system that will become available by Jan. 1, 2013. 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 IRS and Treasury Department warned.
The Treasury 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 on the IRS Web site.
The U.S., along with the United Kingdom, France, Germany, Italy and Spain issued a joint statement on an intergovernmental approach to implementing FATCA and improving international tax compliance. That indicates to Michael Mundaca, a former Assistant Treasury Secretary for Tax Policy and currently the co-director of the Americas Tax Center at Ernst & Young, that the U.S. is getting more countries on board with the policy.
"The joint statement indicates Treasury has gotten buy-in from some significant trading partner, including the U.K., a significant financial center, to implement FATCA through a standardized government-to-government agreement," said Mundaca. "I imagine Treasury will push other governments to adopt this model. It will be interesting to see how Switzerland and some other financial centers react."
Laurie Hatten-Boyd, a principal with KPMG’s Washington National Tax Practice, and a former official with the IRS Office of Associate Chief Counsel (International), believes the proposed regulations will go a long way toward satisfying some of the criticisms and complaints about the FATCA requirements. “From what I’ve seen so far, it certainly sends a clear picture that the Treasury and the IRS have seriously listened to the concerns of industry, and made efforts to the best of their ability while doing their jobs of protecting the U.S. fisc,” she said.
The Treasury and the IRS are offering the opportunity for written or electronic comments on the proposed regulations. They must be received by April 30, 2012.
One area where Hatten-Boyd anticipates there to be some resistance to the proposed regulations in the comments will be with the reporting requirements. “Although there are some transitional, phased-in requirements, at the end of the day they still want the full-blown reporting,” she said. “I think the pushback there would be that’s not what’s required of U.S. payors under the current domestic rules. If this is all about tax evasion, don’t you really just need the name, address, TIN and income paid, and you can match that up to a tax return? Why do you need the account balances and transfers from the account, and that type of information?”
Michael Silva, an international tax partner with DLA Piper’s Miami office, believes the tax treaty represents a rare, generational change in how the U.S. treats the privacy of tax information for U.S. and foreign nationals. He noted that for the first time, there is an exemption for local banking secrecy laws, allowing banks to cooperate with revenue agencies.
“One of the difficulties with FATCA is that the offshore banks said that we can’t comply with it if you’re asking us to divulge information that our laws say needs to be private,” said Silva. “The solution to that is that the Treasury months ago took this concern seriously and started communicating with its tax treaty partners to say, ‘How about you join up with us in a collaboration and have your banks report their private confidential information, for example in Spain and Italy, to you as the local tax revenue authority, and you will be able to do that under local laws and keep your banks compliant with their local secrecy laws.' Thereafter it will be one government tax authority communicating with another government tax authority, under the old established treaty exchange agreements. That’s why you saw the joint statement coming out today between our long-established treaty authorities.”
The focus of the joint statement is on Western Europe, and notable by their absence from the agreement are Mexico, Switzerland and China, he noted. “Some of the Latin American banks, especially in Brazil, are going to be concerned that they’re subject to the same burdens,” said Silva. “The ultimate goal of the IRS achieving more transparency in exchanging information with our treaty partners is not likely to be accomplished in Latin America simply because we don’t have tax treaties that allow for that, so they’re going to have to resort to the only option, which is to enter into an FFI agreement with the IRS.”
While Canada is not included in the joint statement, Silva believes there are ongoing discussions and the Canadian Bankers Association is studying the issue and will provide a comment on the proposed regulations. “Canada is unique because we already provide them certain automatic or spontaneous information exchanges on Canadians that have bank deposits in the United States,” Silva pointed out. “We already collect that information and share it with them in ways that we don’t do with Mexico or other countries.”
Silva expects the Swiss were consulted in the discussions, but were also not yet prepared to join in with the statement. “That’s a primary financial center in Zurich and Geneva that needs to be incorporated into the ultimate FATCA rules,” he said.
A public hearing on the proposed regulations has been scheduled for May 15, 2012 at 10 a.m. Requests to speak at the hearing and outlines of topics to be discussed must be received by May 1, 2012. Submissions can be sent to:
Internal Revenue Service
PO Box 7604
Ben Franklin Station, Washington, D.C. 20044
Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-121647-10), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C., or sent electronically via the Federal eRulemaking Portal at www.regulations.gov (IRS REG-121647-10).