Wednesday, October 24, 2012

Treasury Responds to US Senators on FATCA Implementation Concerns

In response to a letter of concern from four US Senators, Treasury officials said that Treasury and the IRS are committed to implementing FATCA in a way that eases burdens on financial institutions while still achieving FATCA’s compliance objectives. The letter was sent by Senators Rand Paul (R-KY), Saxby Chambliss (R-GA), Mike Lee (R-UT) and Jim DeMint (R-SC). The Treasury response was signed by Mark Mazur, Assistant Secretary for Tax Policy. In their letter, the Senators questioned the scope and authority of an intergovernmental framework for FATCA compliance featuring an arrangement under which the US is willing to reciprocate in collecting and exchanging information on accounts held in US financial institutions by residents in five EU countries. Treasury assured the Senators that neither the OECD nor the European Union would be a party to any bilateral agreement for FATCA implementation and neither organization would have any say about whether the US concludes a bilateral agreement with a particular country.

Passed as part of the Hiring Incentives to Restore Employment Act (HIRE), FATCA creates a new reporting and taxing regime for foreign financial institutions with U.S. accountholders. FATCA adds a new Chapter 4 to the Internal Revenue Code, essentially requiring foreign financial institutions to identify their customers who are U.S. persons or U.S.-owned foreign entities and then report to the IRS on all payments to, or activity in the accounts of, those persons. The Act broadly defines foreign financial institution to comprise not only foreign banks but also any foreign entity engaged primarily in the business of investing or trading in securities, partnership interests, commodities or any derivative interests therein. According to the Joint Committee on Taxation, investment vehicles such as hedge funds and private equity funds will fall within this definition. Firms meeting the definition must enter into agreements with the IRS and report information annually in order to avoid a new U.S. withholding tax.

The response letter noted that, on February 8, 2012, Treasury and the IRS issued comprehensive proposed regulations, which addressed many of the concerns that had been expressed regarding potential administrative burdens in implementing FATCA. In finalizing the proposed regulations, Treasury and the IRS continue to engage with U.S. and foreign financial institutions in order to implement the statute in a way that appropriately balances its compliance objectives with the burdens imposed.

The Treasury response letter also noted that the law in many jurisdictions would prevent foreign financial institutions from directly reporting to the IRS the information required by FATCA. Thus, under the statute, absent the cooperation of foreign governments, U.S. financial institutions would be required to withhold on payments to foreign financial institutions, and FATCA would fail to achieve its objective of fighting offshore tax evasion through increased information reporting.

The Joint Statement reflects a shared commitment with France, Germany, Italy, Spain, and the United Kingdom to cooperate to address the legal conflicts that might otherwise interfere with the implementation of FATCA. Since issuing the Joint Statement the Treasury Department has worked closely with representatives of those countries to develop a model intergovernmental agreement for the implementation of FATCA, which was released on July 26.

The Model Agreement is intended to be used as the basis for concluding bilateral agreements for the implementation of FATCA on a government-to-government basis, building on a longstanding history of bilateral information exchange. The first bilateral agreement was signed with the United Kingdom on September 12, 2012.

Like the United States, noted Treasury, many foreign governments are trying to address offshore tax evasion by their residents and need information from other jurisdictions to support their efforts. Existing regulations already require U.S. financial institutions to report to the IRS certain information with respect to amounts paid to nonresidents. Treasury reasoned that the US cannot expect foreign governments with shared policy goals and practices regarding transparency and fairness to facilitate the reporting of the information required under FATCA by their financial institutions if the US is unwilling to help address tax evasion under their tax systems.

In Treasury’s view, the most straightforward approach would be to share information, in appropriate circumstances, that pursuant to existing law already must be reported to the IRS about accounts held by their residents in the United States. Accordingly, the Model Agreement includes a reciprocal version, which contemplates information sharing by the US with appropriate jurisdictions.

Section 6103(k)(4) of the Internal Revenue Code authorizes the IRS to share information it collects with a foreign government, but only if the United States has in effect an income tax treaty or tax information exchange agreement with the foreign jurisdiction. Therefore, the Treasury Department assured the Senators that it would only enter into the reciprocal version of the Model Agreement with jurisdictions with which the United States has in effect such an agreement.

Moreover, among those jurisdictions, the reciprocal version will be used only with foreign governments that the Treasury Department and the IRS have determined have robust protections and practices in place to ensure that exchanged information will remain confidential and will be used solely for tax purposes. The information that the United States would agree to exchange under the reciprocal version of the Model Agreement differs in scope from the information that foreign governments would agree to provide to the IRS.

In fact, noted the Treasury official, the information specified to be exchanged by the IRS under the reciprocal version of the Model Agreement is limited to the information that U.S. financial institutions will be required under existing regulations to report to the IRS about nonresident accounts for 2013. While the reciprocal version of the Model Agreement includes a policy commitment to pursue equivalent levels of reciprocal automatic exchange in the future, no additional obligations will be imposed on U.S. financial institutions unless and until additional laws or regulations are adopted in the United States.

Treasury and the IRS pledged to continue to work closely with businesses and foreign governments to implement FATCA in a manner that reasonably balances the administrative burdens with the compliance goals. Entering into bilateral intergovernmental agreements based on the Model Agreement will be an important part of achieving that end.

By allowing foreign financial institutions to participate in FATCA by reporting information to their own government (followed by the automatic exchange of the reported information from the foreign government to the IRS), Treasury believes that bilateral  intergovernmental agreements will substantially reduce the potential burdens imposed by FATCA on financial institutions, avoid foreign legal impediments to reporting, and build on existing exchange practices and common international norms for transparency.