Monday, July 09, 2012

American Bankers Assoc. Seeks FATCA Exemption for US Banks Acting as Trustee for Foreign Trusts

The American Bankers Association urged the IRS to exempt foreign trusts with US corporate fiduciaries, such as banks and thrifts, acting as trustee from the definition of foreign financial institution under FATCA. In a letter to the IRS, the ABA noted that the proposed regulations implementing FATCA make a number of references to foreign trusts that imply their designation as a foreign financial institutions without making any explicit statements to this effect. 

According to the ABA, this lack of clarity has led to considerable confusion about the treatment of foreign trusts and the responsibilities of the U.S. banks and trust companies that act as trustee for these trusts. For a number of reasons, the ABA strongly believes these foreign trusts should not be treated as foreign financial institutions but rather should be considered non-financial foreign entities.
Foreign trusts do not hold themselves out as engaged in the business of investing, reinvesting or trading in securities, partnership interests, commodities, noted the ABA, and are more akin to a non-financial foreign entity than a foreign financial institution.

The intentions and goals of FATCA may still be satisfied if foreign trusts with U.S. corporate trustees are designated non-financial foreign entities.  In these circumstances, the U.S. corporate trustee already possesses and reports to the IRS the information about the foreign trust’s U.S. beneficiaries.  The domestic bank or trust company submits this information to the Service in Form 3520-A or, in some circumstances, Form 1040-NR.  

Thus, the IRS is currently receiving information about payments made to U.S. beneficiaries by these foreign trusts.  No new opportunity for tax evasion is made available in this scenario, emphasized the ABA.  Treating a foreign trust with a U.S. corporate trustee as a foreign financial institution would only result in unnecessary duplicative reporting to the Service and unnecessary FFI Agreements with the Service entered into by the U.S. corporate trustee on behalf of the foreign trust.