IRS Issues Guidance to Foreign Banks on FATCA Compliance

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The Treasury Department and the Internal Revenue Service issued a notice Thursday announcing plans to phase in the requirements of the Foreign Account Tax Compliance Act and explaining how foreign financial institutions can comply with the U.S. law.

The new law targets noncompliance by U.S. taxpayers through foreign accounts. Under the notice’s phased implementation approach, foreign financial institutions and U.S. withholding agents are given adequate time to build the systems needed to fully comply with FATCA. 

"FATCA is an important development in U.S. efforts to combat offshore noncompliance,” said IRS Commissioner Doug Shulman in a statement. “At the same time, the IRS recognizes that implementing FATCA is a major undertaking for financial institutions. Today's notice is a reflection of our serious commitment to implementation of the statute, but also a serious commitment to listen to the implementation challenges of affected financial institutions and make appropriate adjustments to ensure a smooth and timely roll-out."

FATCA was enacted in 2010 as part of the Hiring Incentives to Restore Employment Act, or HIRE Act. FATCA requires foreign financial institutions, or 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, and withhold a 30-percent tax on certain payments to non-participating FFIs and account holders who are unwilling to provide the required information.

FFIs that do not enter into an agreement with the IRS will be subject to withholding on certain types of payments, including U.S. source interest and dividends, gross proceeds from the disposition of U.S. securities, and pass-through payments.

Notice 2011-53, issued Thursday by the Treasury Department and the IRS, provides a workable timeline for FFIs and U.S. withholding agents to implement the various requirements of FATCA. Specifically, the notice phases in the implementation of FATCA in the following manner: An FFI must enter an agreement with the IRS by June 30, 2013, to ensure that it will be identified as a participating FFI in sufficient time to allow withholding agents to refrain from withholding beginning on Jan. 1, 2014.

Withholding on U.S. source dividends and interest paid to non-participating FFIs will begin on Jan. 1, 2014, and withholding on all withholdable payments (including on gross proceeds) will be fully phased in on Jan. 1, 2015.

Due diligence requirements for identifying new and pre-existing U.S. accounts (including certain high-risk accounts) will begin in 2013. Reporting requirements will begin in 2014.

For purposes of the IRS Notice, high-risk accounts include private banking accounts with a balance that is equal to or greater than $500,000.

The Treasury and the IRS said they would continue to work closely with businesses and foreign governments to implement FATCA effectively.

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