While the Treasury Department has delayed the withholding and account due diligence requirements of the Foreign Account Tax Compliance Act until July 1, 2014, it is still getting ready for the rollout.
The Treasury announced the six-month delay in the controversial law’s requirements last week (see Treasury Delays FATCA Withholding Requirement). FATCA was included as part of the HIRE Act of 2010, and was originally supposed to take effect this year, requiring foreign financial institutions to report on the holdings of U.S. taxpayers to the Internal Revenue Service or face stiff penalties.
This is the second delay as the U.S. government tries to work out intergovernmental agreements with other countries by agreeing to share information about their taxpayers with them. But the legal status of the agreements is not clear as the Treasury has not been submitting them to the Senate for ratification, as it has traditionally done with tax treaties.
The Treasury was supposed to roll out a portal on July 15 where foreign financial institutions could register and submit information, but that date has been pushed back to August 19 to give banks more time to begin testing the process and entering information.
However, in preparation for the rollout, the IRS has redesigned and updated the FATCA Web pages, the IRS said in an email Friday. Additions include a new landing page for U.S. financial institutions that addresses their FATCA responsibilities. Another new page provides information for governments interested in the intergovernmental agreements. A link for the FATCA registration Web site will be added in August, the IRS noted, once the registration system opens.
Mary Kopczynski, chief executive of the New York-based consulting firm 8of9 Consulting, has been helping banks and other financial institutions get ready for FATCA, and she has seen many problems arise as they try to set up their technology to comply with the demanding new regulations.
“There have been so many problems. Oh, how many can I count,” she said Tuesday. “We’ll start with the fact that the regulators themselves are not super clear on what they want. It’s a little bit hard to comply with an imaginary thing. I think a lot of these delays that have been coming from the regulators are because they realize that they don’t have their stuff together to know exactly what they really want. There are a lot of technicality issues and housekeeping. What seems to be very basic information is actually quite difficult to achieve. A lot of the global investment banks are truly global and they have hundreds if not thousands of legal entities all around the world.”
The intergovernmental agreements that the Treasury has been signing can be both a help and a hindrance in getting the law to work.
“One of the things that other countries can do when they sign onto a treaty is agree to everything but one detail,” said Kopczynski. “From a compliance standpoint, just because somebody signs an IGA doesn’t mean you’re free and clear. You still have to read the IGA and see that Denmark has this one special rule, and the Cayman Islands has this other special rule. So you have to figure out how you’re going to build the technology that’s going to remember all these special rules on a global level.”
The delay gives some relief, Kopczynski acknowledged, especially over time as more countries sign IGAs.
“From an international law perspective, what the IRS has done is pretty brazen,” said Kopczynski. “They have managed to get a whole bunch of countries around the world to comply with our laws that normally countries around the world have no obligation to comply with, but it is the United States having the capability of flexing its muscles in a way that is surprising how impactful it’s been. I was shocked that Switzerland has signed on to a particular version of the IGA because they are very particular about secrecy laws and what they disclose to people. But I think from a practical perspective the IRS also realized they only have like a dozen countries that have signed on, and there are lots more countries than 12 in the world. Some of these global financial institutions are moving money into every single country around the world.”
Banks were mostly relieved about the delay giving them more time to get ready, although many of them have been putting plans in place to show that they were at least trying to prepare their systems for FATCA. “This time, the difference is that they finally have gotten far enough into the execution of their plans that they’re freaking out,” said Kopczynski.
The delay has reduced the pressure, for a few months at least. “Everybody is breathing a huge sigh of relief, thinking, ‘OK, we might be able to get that done in six months.’ In a way, it was a very welcome and very smart move,” said Kopczynski. “This is not an easy thing that people are expected to do, but I wouldn’t say that it made everybody relaxed.”
The extra six months probably won’t be sufficient time for the banks to get totally ready for FATCA. “One of the big areas that the IRS has been quiet on is special purpose entities,” said Kopczynski. “They’re special shell corporations that were multiplying like wildfire in the 90s and the 2000s before the crash. There are a lot of these legacy entities that still exist. There’s a huge chance that the IRS is going to grant relief on those particular entities, and everybody’s waiting for it because that is going to be the hardest and most complex piece to even begin to try to unravel. There is definitely expectation that is going to come down the line.”
Another obstacle is that some lawmakers in Congress are opposed to the U.S. sharing tax data with foreign governments. Sen. Rand Paul, R-Ken., has proposed repealing provisions of FATCA that he contends violate the privacy of U.S. citizens (see Rand Paul Introduces Bill to Repeal Parts of FATCA). Rep. Bill Posey, R-Fla., recently sent a letter to Treasury Secretary Jack Lew calling for a moratorium on FATCA enforcement and on the negotiation of intergovernmental agreements (see Congressman Calls for Moratorium on FATCA Enforcement).
“It’s certainly a huge intercoordination of data,” said Kopczynski. “There are pros and cons. People are opposed to the United States being the world police, but from my perspective, money is so global and so interwoven anyway. Even if you are considered an ‘American bank,’ you may have offices in every country in the world and money moving around every country in the world.”