The Internal Revenue Service has issued a notice extending the time under which certain transitional rules for the Foreign Account Tax Compliance Act, or FATCA, will apply.
FATCA was included as part of the HIRE Act of 2010 and requires foreign financial institutions to report on the assets of U.S. taxpayers to the IRS, or else face stiff penalties of up to 30 percent on their income from U.S. sources. The law has provoked controversy abroad, and the Treasury Department has delayed a number of the requirements to give banks time to adjust while also negotiating a series of intergovernmental agreements with tax authorities in foreign countries, most of which allow them to act as intermediaries before the information is given to the IRS.
Notice 2015-66, issued Friday, announces that the Treasury and the IRS intend to amend regulations under Sections 1471-1474 of the Tax Code to extend the time that certain FATCA transitional rules will apply. Specifically, the amendments will extend the date for when withholding on gross proceeds and foreign pass-through payments will begin; the use of limited branches and limited foreign financial institutions, or FFIs; and the deadline for a sponsoring entity to register its sponsored entities and re-document such entities with withholding agents.
In addition, in order to reduce compliance burdens on withholding agents that hold collateral as a secured party, the notice announces that Treasury and the IRS intend to amend the regulations under chapter 4 to modify the rules for grandfathered obligations in relation to collateral.
The transitional rules provided in the notice aim to facilitate an orderly transition for withholding agents and FFIs regarding FATCA compliance and respond to comments regarding how the phase-out of transitional rules may affect information reporting and withholding systems.
The notice also provides additional time for withholding agents and FFIs to modify their systems in stages as necessary to address the phase-out of the transitional rules above, consistent with the information reporting and compliance objectives of FATCA.
Finally, the notice also provides information on the exchange of information by Model 1 IGA jurisdictions with respect to 2014. Under the Model 1 intergovernmental agreement, which is the more typical kind, foreign financial institutions report the account information to their own countries’ tax authorities, which then pass the information to the IRS. Under the Model 2 IGA, the foreign banks report the information directly to the IRS.
“Generally, it is certainly good to see that some of the impending transition dates have been pushed back,” said Ernst & Young’s global IRW markets leader John Staples in a statement. “However, withholding agents need to realize that the relief is limited and a substantial amount of pressure remains on foreign governments to finalize their FATCA-IGA implementation and indirectly, compliance with the emerging CRS regime. The financial community is also bound to welcome the change in the grandfathering rules that relate to collateral.”
“While the delay in withholding on gross proceeds is extremely welcome, the due diligence period for pre-existing accounts was not extended and still ends on June 30, 2016,” said Deborah Pflieger - principal and director of information reporting and withholding services at EY. “So, withholding agents must remain focused on re-documenting their accountholders. Also, the further delay of any potential withholding on pass-thru payments is a great relief.”
FATCA isn’t the only new way foreign account information is being shared among different countries’ tax authorities. The Organization for Economic Cooperation and Development has been pushing for a Common Reporting Standard to address the issue of offshore tax evasion by creating a globally coordinated, consistent approach to the disclosure of financial accounts held by non-residents and the automatic exchange of that information by governments. The OECD standard builds upon FATCA, which obligates foreign financial institutions to provide the U.S. government with information about accounts held by U.S. taxpayers. In total, almost 100 jurisdictions have committed to implement the CRS by Jan. 1, 2017.
With a Jan. 1, 2016 effective date looming for 50 “early adopter” jurisdictions set to enact the Common Reporting Standard for reporting financial account information, 61 percent of respondents to a KPMG survey of executives at financial institutions worldwide say the CRS will impact more of their accounts than FATCA. In addition, 55 percent say compliance with the new standard will require more resources.
“Even for financial institutions that have a good handle on their FATCA obligations, complying with the CRS model will be a monumental task because of a greater volume of data that needs to be reported,” said Michael Plowgian, a principal in the International Tax practice of KPMG LLP and a former senior advisor at the OECD and attorney advisor with the Office of the International Tax Counsel at the U.S. Department of the Treasury.
Plowgian noted that differences between FATCA and the CRS mean that most financial institutions will need to undertake significant changes to their customer onboarding, due diligence and reporting procedures and systems.
In KPMG’s survey of 138 high-level tax and compliance professionals, 44 percent of those polled say their ability to meet onboarding objectives by their target date will depend on guidance they receive beforehand, while some 71 percent believe, or are unclear if, CRS obligations will conflict with local privacy laws. Only 30 percent said their organizations have taken significant steps toward implementing the CRS.
“The CRS will clearly disrupt business as usual, but non-compliance could lead to significant consequences both financially and reputationally,” Plowgian said in a statement Friday. “While awaiting binding guidance, companies should assess their in-house operations that will be impacted by CRS-related changes including technology systems, operational processes and management controls. Early preparation will be critical to help smooth some of the bumps on the road to compliance.”
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