Proposed FATCA regs. take comprehensive approach to foreign financial institution reporting


The IRS on Wednesday issued proposed regulations providing rules on information reporting by foreign financial institutions (FFIs) and withholding on certain payments to FFIs and other foreign entities (REG-121647-10).


Under the Foreign Account Tax Compliance Act of 2009 (FATCA), part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010, P.L. 111-147, FFIs (any financial institution that is a foreign entity) must provide information to the IRS about their U.S. accounts. The rules also require certain nonfinancial foreign entities (NFFEs) to provide information on their substantial U.S. owners to withholding agents. Under these rules, foreign financial institutions must enter into agreements with the IRS and thus become participating FFIs. There is a withholding tax on payments to FFIs and NFFEs that fail to comply with the rules. 


On Wednesday, Treasury also issued a joint statement from the United States, France, Germany, Italy, Spain and the United Kingdom announcing that they are exploring a cooperative approach to combatting international tax evasion. The statement said that the United States is “willing to reciprocate in collecting and exchanging” information about accounts held in U.S. financial institutions by residents of France, Germany, Italy, Spain and the United Kingdom.


Proposed Regulations


The 389-page proposed regulations are designed to implement a step-by-step process for U.S. account identification, information reporting, and withholding requirements for FFIs, other foreign entities, and U.S. withholding agents. They include the following provisions:


Grandfathered obligations. The HIRE Act provided that no withholding was required from any payment under any obligation outstanding on March 18, 2012, or from the gross proceeds from disposing of the obligation. The proposed rules extend the grandfathered obligations to obligations outstanding on Jan. 1, 2013, and the gross proceeds from such obligations.


Eased initial reporting requirements on members of affiliated FFIs. FATCA applies to participating FFIs and, except to the extent the IRS exempts them, to other FFIs of an expanded affiliated group. Because some jurisdictions have laws that prohibit compliance with the requirements of FATCA, the proposed regulations give a two-year transition period, until Jan. 1, 2016, to fully implement this requirement. During this period, an FFI affiliate in a jurisdiction that prohibits withholding or reporting as these rules require will not prevent other FFIs in the same group from entering into FFI agreements, as long as the other FFIs agree to perform due diligence to identify U.S. accounts and meet other requirements.


Deemed-compliant FFIs are expanded. The definitions of deemed-compliant FFIs are expanded to include additional categories, thereby reducing burdens on truly local entities and other entities the rules should not apply to. The IRS says this will allow the focus of FATCA compliance activities to be on higher risk institutions that provide global investment services.


Modified procedures for identifying U.S. accounts. The proposed rules permit participating FFIs to use electronic reviews to identify U.S. accounts for pre-existing accounts up to $1 million. Manual review is required for existing accounts over $1 million, except, in certain circumstances, electronic searches are permitted for those as well. Pre-existing accounts below $50,000 (or $250,000 for certain insurance contracts) are not subject to the rules. New accounts are permitted to be opened using the FFI’s existing customer intake procedures.


Procedures to Verify Compliance. Officers of a participating FFI will be expected to certify that the FFI has complied with the agreement, but no audit is required. If the FFI complies with the agreement, it will not be held strictly liable for failing to identify a U.S. account.


Financial accounts do not include most securities. The proposed regulations refine the definition of financial accounts to focus on traditional bank, brokerage, and money market accounts, and interests in investment vehicles, but exclude most debt and equity securities issued by banks and brokerage firms.


Some information reporting is postponed. Under Notice 2011-53, only identifying information and account balances are required to be reported in 2014 for the 2013 calendar year. The proposed regulations add the requirement that income be reported beginning in 2016 for the 2015 calendar year, followed by gross proceeds in 2017 for the 2016 calendar year. The information may be reported in the account’s currency or in U.S. dollars.


Withholding on passthrough payments is postponed. Under Notice 2011-53, participating FFIs were required to withhold on payments made to nonparticipating FFIs beginning on Jan. 1, 2015. The proposed regulations postpone this withholding until Jan. 1, 2017, but also require participating FFIs to nonetheless report annually the aggregate amount of payments made to nonparticipating FFIs.


Effective date. The proposed regulations will generally be effective when they are published as final in the Federal Register. The IRS has asked that comments on the proposed regulations be submitted by April 30.


Sally P. Schreiber ( ) is a JofA senior editor.


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