Wednesday, February 8, 2012

Treasury, IRS Issue Proposed Regulations for FATCA Implementation

WASHINGTON — The Treasury Department and the Internal Revenue Service today issued proposed regulations for the next major phase of implementing the Foreign Account Tax Compliance Act (FATCA).

Enacted by Congress in 2010, the law targets non-compliance by U.S. taxpayers using foreign accounts.

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.

“FATCA strengthens U.S. efforts to combat offshore noncompliance. In doing so, we understand it creates a significant undertaking for financial institutions." said IRS Commissioner Doug Shulman. "Today's proposed regulations reflect our commitment to take into account the implementation challenges of affected financial institutions while allowing for a smooth and timely roll-out of the law."

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 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.

Registration will take place through an online system which will become available by Jan. 1, 2013. FFIs 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.

Treasury and IRS will continue to work closely with businesses and foreign governments to implement FATCA effectively. Updates and further information on FATCA can be found by visiting the FATCA page on this website.

Written or electronic comments must be received by April 30, 2012. Requests to speak and outlines of topics to be discussed at the public hearing scheduled for May 15, 2012, at 10 a.m. must be received by May 1, 2012.


  1. Modifications to Preliminary FATCA Guidance in Notices
    The proposed regs' significant modifications and additions to the guidance in the FATCA Notices include the following:
    More obligations grandfathered. To facilitate implementation of the FATCA rules, the proposed regs would exclude from the definition of withholdable payment and passthru payment any payment made under an obligation outstanding on Jan. 1, 2013, and any gross proceeds from the disposition of such an obligation.
    Transitional rules for affiliates with legal prohibitions on compliance. Notice 2011-34, says IRS intends to require that each FFI that is a member of an expanded affiliated group must be a participating FFI or deemed-compliant FFI in order for any FFI in the expanded affiliated group to become a participating FFI. Recognizing that some jurisdictions have laws prohibiting an FFI's compliance with certain of the FATCA requirements, the proposed regs would provide a two-year transition, until Jan. 1, 2016, for the full implementation of this requirement.
    Additional categories of deemed-compliant FFIs. The proposed regs would expand the guidance in Notice 2011-34, and provide additional categories of deemed-compliant institutions. The expansion of categories of deemed-compliant institutions is intended to focus the application of FATCA on financial institutions providing services to the global investment community and reduce or eliminate burdens on truly local entities and other entities for which entering into an FFI agreement is not necessary to carry out FATCA.
    Liberalized due diligence procedures for account identification. Notice 2010-60, and Notice 2011-34, provided guidance on the due diligence participating FFIs would be required to perform to identify their U.S. accounts. The due diligence in the proposed regs would rely primarily on electronic reviews of preexisting accounts.
    Verifying compliance. The proposed regs, modifying and supplementing the guidance in Notice 2010-60 and Notice 2011-34, would provide that responsible FFI officers would be expected to certify that the FFI has complied with the terms of the FFI agreement. Verification of such compliance through third-party audits would not be mandated. If an FFI complies with the obligations in an FFI agreement, it would not be held strictly liable for failure to identify a U.S. account.
    Definition of financial account. The proposed regs would refine the definition of financial accounts to focus on traditional bank, brokerage, money market accounts, and interests in investment vehicles, and to exclude most debt and equity securities issued by banks and brokerage firms, subject to an anti-abuse rule.
    Extended transition period for scope of information reporting. To provide more time for systems adjustments necessary to be able to report income and gross proceeds, the proposed regs would provide that reporting on income will be phased in beginning in 2016 (with respect to the 2015 calendar year), and reporting on gross proceeds will begin in 2017 (with respect to the 2016 calendar year). In addition, FFIs would be able to elect to report information either in the currency in which the account is maintained or in U.S. dollars.
    Passthru payments. The proposed regs would provide that withholding is not required with respect to foreign passthru payments before Jan. 1, 2017. Instead, until withholding applies, to reduce incentives for nonparticipating FFIs to use participating FFIs to block the application of the FATCA rules, the proposed regs would require participating FFIs to report annually to IRS the aggregate amount of certain payments made to each nonparticipating FFI. IRS requests comments on approaches to reduce burden, for example, by providing a de minimis exception, a simplified computational approach or safe harbor rules to determine an FFI's passthru payment percentage.

  2. Expanded Transitional Relief

    The previous guidance provided for phased implementation of reporting by FFIs of information with respect to US accounts. The Proposed Regulations expand and modify the phased implementation timeframe.

    • In 2014 (for the 2013 calendar year), only the name, address, TIN, account number and account balance must be reported. The Proposed Regulations extend this phase-in period and would require reporting on income beginning in 2016 (for the 2015 calendar year) and reporting on gross proceeds beginning in 2017 (for the 2016 calendar year).

    • The Proposed Regulations provide that withholding will not be required on foreign passthru payments until January 1, 2017; however, participating FFIs will be required to annually report the aggregate amount of certain payments to each nonparticipating FFI.

    • Although the statute requires that every member of an FFI’s expanded affiliated group also be a participating FFI, the Proposed Regulations allow a two-year transition period, until January 1, 2016, during which time a participating FFI may have affiliates or branches in jurisdictions that prohibit reporting to the IRS provided that such affiliates or branches agree to perform due diligence to identify US accounts, retain certain records, and not open new accounts that would be US accounts or accounts for nonparticipating FFIs. Such affiliates would be treated separately for US withholding tax purposes and would be required to identify themselves as nonparticipating FFIs.

    • The statute provided that no withholding would be required with respect to payments under any obligation (e.g., debt, life insurance, annuities and derivative contracts) outstanding on March 18, 2012 (“Grandfathered Obligations”). The Proposed Regulations have expanded the scope of this exemption, and would not require withholding with respect to payments under any obligation outstanding on January 1, 2013.