The Treasury Department and the Internal Revenue Service have released a document containing proposed guidance for foreign financial institutions as the next step in implementing the Foreign Account Tax Compliance Act in an effort to combat offshore tax evasion.

FATCA, which was included as part of the HIRE Act of 2010, requires foreign financial institutions to provide information to the IRS on the holdings of U.S. taxpayers or else face stiff penalties. The controversial law has stirred controversy both in the U.S. and abroad, with foreign governments accusing the U.S. of overreach and warning against violations of their own banking secrecy laws. In response, the Treasury has delayed implementation of the law while negotiating intergovernmental agreements with a number of foreign countries. The Treasury has so far signed nine IGAs with other nations and reached 16 agreements in substance, it said Tuesday, and is in the process of negotiating with many other jurisdictions.

Notice 2013-69, which is the next step in implementation, previews proposed guidance and provides a draft agreement for participating foreign financial institutions directly engaging in agreements with the IRS and those reporting through what has become known as a “Model 2” intergovernmental agreement. The document, which was released Tuesday, aims to provide FFIs with advance notice prior to the beginning of FATCA withholding and account due diligence requirements on July 1, 2014.  The FFI agreement will be finalized by Dec. 31, 2013, according to the IRS and the Treasury Department. 

“The agreement and forthcoming guidance have been designed to minimize administrative burdens and related costs for foreign financial institutions and withholding agents,” said Deputy Assistant Secretary for International Tax Affairs Robert B. Stack in a statement.  “Today’s preview demonstrates the Administration’s commitment to ensuring full global cooperation and a smooth implementation.” 

Congress enacted FATCA in 2010 as a way to identify U.S. citizens using foreign accounts to evade their U.S. tax responsibilities. The law requires U.S. financial institutions to withhold a portion of payments made to FFIs that do not agree to identify and report information on U.S. account holders.

The Treasury noted that it has taken a global approach to the exchange of tax information in its implementation of FATCA.  To address situations where foreign law would prevent an FFI from complying with the terms of an FFI agreement, the Treasury has developed two alternative model IGAs.  Under Model 1, FFIs report to their respective governments who then relay that information to the IRS. Under Model 2, FFIs report directly to the IRS to the extent that the account holder consents or such reporting is otherwise legally permitted, and such direct reporting is supplemented by information exchange between governments with respect to non-consenting accounts. 

Tuesday’s notice provides guidance to FFIs entering into agreements directly with the IRS, and to those reporting through a Model 2 IGA.  The notice incorporates updates to certain due diligence, withholding, and other reporting requirements, and includes a draft FFI agreement.  The draft FFI agreement will be finalized by December 31, 2013.  Treasury and the IRS will continue to provide more detailed guidance on FATCA implementation as necessary.

The Treasury said the regulations were designed to appropriately balance the scope of entities and accounts subject to FATCA with due diligence requirements, while also phasing in the related obligations over several years.  For example, the final regulations exempt all preexisting accounts held by individuals with $50,000 or less from review.  For similar accounts with less than $1 million, an FFI is only required to search the account information that is electronically available.  In many cases, FFIs are permitted to rely on information that they already must collect for local anti-money laundering and know-your-customer rules. 

Many of the cost-saving simplifications came as a result of comments received from affected financial institutions and foreign governments, which helped the Treasury and the IRS to tailor the rules to achieve the policy objectives of the statute without, according to them, imposing undue burdens or costs. 

The withholding requirements will begin next July and the first report of FATCA information is due in 2015, but the IRS FATCA registration Web site is already open so that FFIs can begin testing the registration process and entering information.

For the draft notice and FFI agreement, click here.  For updates and further information on the IRS FATCA page, click here.

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