Wednesday, February 08, 2012

Proposed Regulations Implementing FATCA Recognize the Challenges

The Treasury Department and the Internal Revenue Service have issued proposed regulations implementing the Foreign Account Tax Compliance Act (FATCA). The regulations lay out a step-by-step process for U.S. account identification, information reporting, and withholding requirements for foreign financial institutions (FFIs), other foreign entities, and U.S. withholding agents. According to IRS Commissioner Doug Shulman, the proposed regulations take into account the implementation challenges of affected financial institutions while allowing for a smooth and timely roll-out of the law. Comments must be received by April 30, 2012.

The proposed regulations implement FATCA’s obligations in stages to minimize burdens and costs consistent with achieving the statute’s compliance objectives. The rules and implementation schedule are also adjusted to allow time for resolving local law limitations to which some FFIs may be subject. FATCA registration will take place through an online system which will become available by Jan. 1, 2013. Foreign financial institutions that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to U.S. investments. The Treasury and IRS pledged to continue to work closely with businesses and foreign governments to implement FATCA effectively.

FATCA was enacted in 2010 by Congress as part of the Hiring Incentives to Restore Employment (HIRE) Act. FATCA requires 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, verify its compliance with its obligations pursuant to the agreement, and ensure that a 30-percent tax on certain payments of U.S. source income is withheld when paid to non-participating FFIs and account holders who are unwilling to provide the required information.

FATCA will effectively compel foreign financial institutions, broadly defined to include banks, hedge funds, investment companies and securities and commodities firms, to enter into an agreement with the IRS requiring them to report annually certain customer information and to withhold and pay to the IRS a 30% withholding tax on customers of those institutions who are US companies or US citizens that have not supplied certain information to the foreign financial institution. Thus, FATCA will compel foreign financial institutions to screen their existing customer database to identify clients that are US companies or individuals who are US persons.