The IRS recently released long-awaited proposed Regulations providing additional guidance on the implementation of the Foreign Account Tax Compliance Act (“FATCA”), which was passed by Congress in March 2010. The 388 pages of guidance provide additional detail on the rules that will apply to foreign financial institutions as they work to comply with the burdensome requirements of FATCA.

The FATCA rules, which generally take effect after December 31, 2012, provide for withholding taxes to help enforce new reporting requirements on foreign accounts and assets owned by U.S. persons. Under the rules, a withholding agent (generally a U.S. financial institution) must withhold 30% of any U.S.-source income payment made to foreign financial institutions that do not enter into an agreement with the IRS to provide information on their U.S. account holders annually. Foreign financial institutions that do enter into an agreement with the IRS must withhold on payments made to those institutions that do not enter into an agreement, and on payments made to account holders that have not provided documentation showing whether they are a U.S. person.

In 2010 and 2011, the IRS issued three notices that provided preliminary guidance on the new FATCA rules. These notices clarified foreign financial institutions’ responsibilities in carrying out the FATCA rules, what information had to be reported to the IRS by participating institutions, due diligence procedures for searching for U.S. accounts, and provided for a phased implementation of the FATCA rules as foreign financial institutions struggled to implement internal changes that would enable them to comply with the FATCA rules.

The proposed Regulations provide additional guidance, generally relaxing the stringent FATCA requirements to reduce the administrative burdens facing foreign financial institutions. The guidance eases the requirements associated with identifying U.S. accounts, expands the categories of institutions that are deemed to comply with the FATCA rules without entering an agreement, and phasing in reporting and withholding requirements over an extended period.

In addition to the proposed Regulations, the IRS also announced an alternative, intergovernmental approach to the FATCA goals. The U.S., UK, France, Germany, Italy, and Spain issued a joint statement outlining the proposed approach. Foreign financial institutions located in the partner country would report the information required under FATCA to their government, which would then provide the information to the IRS. The U.S. would also commit to reciprocity in collecting and reporting information to the partner countries. The U.S. is in talks with other countries to enter into similar agreements.

While the preliminary guidance and the proposed Regulations continue to ease the administrative burden placed on foreign financial institutions by FATCA, the law’s requirements are still tremendous. While practitioners agree that the IRS has been listening to comments raised by the financial industry, they think that the IRS has not gone far enough to address the industry’s concerns.

Since the IRS’ international tax crackdown began in 2008, foreign financial institutions have begun to shun U.S. clients. This trend was greatly accelerated by the announcement of FATCA. Foreign financial institutions are forced to decide whether the business they receive from U.S. clients is worth the extremely high costs necessary to overhaul their internal systems to comply with FATCA (estimated at up to $100 million or more for large banks). A number of foreign banks have stopped working with U.S. clients or curtailed the services they provide to U.S. customers. These banks include (but are not limited to): Bank Hapoalim, Bank Zweiplus, Basler Kantonalbank, Clariden Leu, Commerzbank, Credit Suisse, Deutsche Bank, HSBC, HypoVereinsbank, LGT, Liechtensteinische Landesbank, Mirabaud & Cie., Mizrahi Tefahot, Raiffeisen Switzerland, UBS, and Zuercher Kantonalbank. Additional foreign financial institutions will undoubtedly decide to restrict or eliminate their U.S. relationships in the future due to the costs of FATCA.

If you have any questions related to the FATCA rules or the above article, please contact Grant Miller at gmiller@thewolfgroup.com.

 

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