The securities and banking industries have asked for an additional
extension of the phased-in timeline for the Foreign Account Tax Compliance Act
(FATCA). In a letter to the Treasury and IRS, SIFMA and the American Bankers
Association, as well as the Institute of
International Bankers, said that a number of significant gaps in guidance
remain, as well as numerous unanswered implementation questions that must be
addressed by the IRS. While banks and securities firms are working diligently
to implement FATCA, noted the letter, without
the Final Guidance firms cannot complete their implementation plans, finalize
budgets, prepare needed written procedures, hire and train internal personnel,
educate clients, and develop and test the systems changes required for
compliance with FATCA. The industry
associations believe that it would be appropriate to extend further certain
milestone dates in order to help ensure a smooth transition to the FATCA regime
and minimize the prospects of over withholding and, more broadly, the potential
for significant disruption to the financial markets.
Passed in 2010 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 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.
SIFMA and ABA ABA
request an additional six-month
extension for withholding that is scheduled to take place beginning on July 1,
2014, so that withholding begins with payments made after December 31, 2014. In
addition, the definition of a grandfathered obligation, including associated
collateral, should be extended to obligations outstanding as of January 1,
2015.
Similarly, they request an
additional six-month extension for withholding documentation set to expire on
June 30, 2014, so that such documentation would expire on December 31, 2014.
Since information reporting and withholding systems are based on the calendar
year, the banking and securities industries have a strong preference for
January 1 effective dates. The mid-year effective date for withholding and due
diligence procedures, as well as the mid-year expiration date for Forms W-8,
presents an additional and unexpected challenge for FATCA implementation teams.
Draft Form W-8BEN-E is a highly complex 8-page form that will require
significant employee training on how to validate the form, said the
associations. Banks and securities firms, as requesters of withholding
certificates, will play an integral part in the education of their non-U.S.
clients and will need time to educate clients on the completion and use of the
new Form W-8 series once the forms and instructions are issued in final
form.
They also request that FATCA
reporting for 2014 (via Form 8966) should apply only to accounts designated by
a participating foreign financial institution as held by a U.S. citizen or
resident on December 31, 2014, and identifiable via electronic search. In
addition, reporting for calendar year 2014 should be delayed one year so that
reporting for calendar years 2014 and 2015 would be provided by March 31, 2016.
Under this approach, firms would be permitted to voluntarily report earlier in
order to test the reporting systems. All other FATCA-related reporting
requirements7 should be postponed to be effective for
payments made beginning in calendar year 2015.
IGAs. SIFMA and the ABA also emphasized that
FATCA implementation has been further impacted by the lengthy process of
negotiating IGAs between Treasury and foreign governments. Not only will global
financial institutions doing business in IGA jurisdictions be required to
implement certain aspects of FATCA under IRS regulations, said the groups, they
will also be required to comply with varying IGA requirements in the approximately
80 jurisdictions expected to enter into IGAs.
Moreover, of the ten IGAs
that have been executed to date, only the United Kingdom has issued
comprehensive guidance for implementation. While it is helpful that signed IGAs
can be recognized as being in effect, banks and securities firms still are
faced with the prospect of being required to program their systems for the
FATCA regulations and then having to subsequently reprogram these systems and
revise their procedures on a country-by-country basis as IGAs are implemented
and local guidance is released. Therefore, the associations believe that
additional time is needed for the Treasury and foreign jurisdictions to
conclude the new IGAs and enable financial institutions operating in those
countries to implement FATCA just once.