The Treasury Department and the Internal Revenue Service released a final package of regulations Thursday to implement the Foreign Account Tax Compliance Act and amend the regulations to align them with existing tax rules.
FATCA was included as part of the HIRE Act of 2010, with the goal of combating offshore tax evasion by requiring foreign financial institutions to report on the holdings of U.S. taxpayers, or else face stiff penalties. The law has provoked considerable resistance from foreign banks and governments, as well as U.S. expatriates and dual citizens abroad, with many foreign banks refusing to do business with U.S. citizens.
The law has also been blamed for a record number of renunciations of U.S. citizenship last year, with approximately 3,000 people renouncing their citizenship in 2013, according to an analysis by CNN Money, compared to 933 in 2012, 1,781 in 2011 and 1,534 in 2010. Before the law was passed in 2010, 231 Americans renounced their citizenship and 742 in 2009. The Republican National Committee passed a resolution last month calling for repeal of the law and plans to make it a political issue in the midterm election campaigns.
After some delays, the Treasury Department and the IRS have nevertheless moved forward on implementing the law, which is supposed to take effect in July, in part by negotiating intergovernmental agreements with foreign governments to have banks in the U.S. report on the holdings of their citizens to their tax authorities. The Treasury and the IRS have also been readying the regulations and technology to allow foreign banks and hedge funds to report on the holdings of U.S. taxpayers to the IRS.
A senior Treasury official who requested anonymity said in a conference call with reporters that they view the regulations released Thursday as the last big step in implementing FATCA. The staff took into account many of the comments and feedback they had received on the proposed regulations. Asked about the increase in citizenship renunciations by Accounting Today, he pointed out that there are a number of reasons why a citizen may decide to renounce their citizenship and expatriate, and there is not necessarily a direct correlation between FATCA and the increase in renunciations in recent years.
The Treasury and the IRS have argued that the laws are necessary to combat offshore tax evasion. They noted that each year, some wealthy individuals evade millions of dollars in taxes through the use of offshore financial accounts that are not reported to the IRS or other tax authorities. In announcing the regulations, they pointed out that international tax evasion is illegal, contributes to the federal debt, and creates inequity within the tax system.
Congress enacted FATCA in 2010 with bipartisan support to target illicit activities, the Treasury and the IRS pointed out, and the provision has since become the global standard for promoting tax transparency. The Organization for Economic Cooperation and Development announced a new global standard last week for automatic exchange of tax information across borders, inspired in part by FATCA (see OECD Sets Standard for Automatic Exchange of Tax Information between Countires).
“Offshore tax evasion undermines confidence in our tax system and deprives the United States of revenues necessary to protect and provide for its citizens,” said Treasury Secretary Jacob J. Lew in a statement. “There is significant momentum to implement FATCA across the globe, and we will continue to work closely with our international partners to combat these illicit activities and raise global tax standards.”
The proposed and temporary regulations released Thursday make additions and clarifications to previously issued FATCA regulations and provide guidance to coordinate FATCA rules with pre-existing due diligence, reporting and withholding requirements under other provisions of the Tax Code.
The regulations include changes requested by the banking industry, as well as changes to make the rules more consistent, and the banks may need some time to absorb all of them. In addition, the IRS has not yet finalized all of the forms.
“You’ve got over 500 pages of regulations,” said Denise M Hintzke, global tax leader at Deloitte Tax LLP’s Foreign Account Tax Compliance Initiative. “People need time to read them and digest them. There are things in here that I’m sure are going to require changes to procedures at the very least. They require changes to systems and processes potentially, and prior to the release of these regs the financial institutions had had been asking for a further extension. I believe that most of the financial institutions probably would like to see a further extension. We’re still waiting for the forms to come out. That’s still another piece that’s needed, but I know that they’re moving toward being ready.”
FATCA seeks to obtain information on accounts held by U.S. taxpayers in other countries. It generally requires U.S. financial institutions to withhold a portion of certain payments made to certain foreign financial institutions that do not agree to identify and report information on U.S. account holders. The withholding regime acts as a backstop to the main focus of FATCA, which is to obtain the information about accounts held by U.S. persons and by certain foreign entities with substantial U.S. owners that is needed to detect and deter offshore tax evasion. To address situations where foreign law would prevent an FFI from reporting the required information directly to the IRS, the Treasury has developed two alternative model intergovernmental agreements, or IGAs. The IGAs facilitate implementation of FATCA information reporting in a manner that removes foreign law impediments to compliance, fulfills the information reporting objectives of chapter 4 of the Tax Code, in an effort to reduce the burden on FFIs located in partner jurisdictions. So far, the U.S. has signed agreements with 22 countries, and many more have either reached agreements in substance that are awaiting signature, or are well along in the process.
Final regulations for FATCA were published in January 2013, approximately a year and a half before FATCA withholding will go into effect on July 1 of this year. Since final regulations were issued, Treasury and the IRS have facilitated their implementation by extending the start of withholding and account due diligence requirements by six-months to July 1, 2014; opening the FATCA portal in August 2013; issuing a final FFI agreement for financial institutions in January 2014; and engaging in active discussions with stakeholders worldwide.
The package of rules released Thursday builds upon this effort and includes amendments and clarifications in response to comments received on the final regulations released in January.
Although FATCA was added to the Tax Code in 2010, financial institutions and other withholding agents have long been required under other sections of the Code to perform due diligence, report and, in certain cases, withhold with respect to certain payments. Specifically, Chapter 61 and section 3406 of the Code address the reporting and backup withholding requirements regarding payments to U.S. persons, while chapter 3 imposes withholding and reporting requirements regarding payments to non-U.S. persons. Thursday’s guidance also coordinates the pre-FATCA regimes under chapter 3, chapter 61, and section 3406 with the requirements under FATCA to integrate these rules, reduce the burden, and conform the due diligence, withholding and reporting rules under these provisions to the extent appropriate in light of the separate objectives of each chapter or section.
The new regulations contain over 50 separate amendments and clarifications to the FATCA regulations issued in January 2013 to provide clarifications and to take into account certain stakeholder suggestions regarding ways to further reduce burdens consistent with the compliance objectives of the statute.
Key amendments and clarifications include several relating to the accommodation of direct reporting to the IRS, rather than to withholding agents, by certain entities regarding their substantial U.S. owners; the treatment of certain special-purpose debt securitization vehicles; the treatment of disregarded entities as branches of foreign financial institutions; the definition of an expanded affiliated group; and transitional rules for collateral arrangements prior to 2017.
The guidance has been submitted to the Office of the Federal Register for publication and is currently pending placement on public display at the OFR and publication in the Federal Register. The Treasury and the IRS cautioned that the version of the regulations released Thursday may vary slightly from the published document if minor editorial changes are made during the OFR review process. The document published in the Federal Register will be the official document.