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Tax Law Update

April 20, 2012


For additional information, please contact:

Colman J. Burke

Peter J. Connors

Stephen J. Jackson
+33 1 5353 8111

John Narducci

George G. Wolf

James M. Larkin

Stephen C. Lessard



Proposed Treasury Regulations Implementing the Foreign Account Tax Compliance Act ("FATCA")line

On February 8, 2012, the Internal Revenue Service ("IRS") announced the release of proposed regulations (the "Proposed Regulations") for the next phase of implementing reporting and withholding provisions of the HIRE Act (commonly known as the Foreign Account Tax Compliance Act, or FATCA, provisions) that target noncompliance by U.S. taxpayers using foreign accounts. Concurrently with the issuance of the Proposed Regulations, the United States, France, Germany, Italy, Spain, and the United Kingdom issued a joint statement outlining a potential intergovernmental framework for FATCA. Under the framework, much of the information required by FATCA would be collected directly by foreign governments and shared with the United States pursuant to existing bilateral tax treaties. Such an approach, if adopted, could eliminate withholding obligations and the requirement to enter into a separate disclosure compliance agreement for foreign financial institutions ("FFIs") organized in partner countries.

In support of this approach, Treasury released final regulations on April 17, 2012, that require the reporting of U.S. bank deposit interest paid to nonresident aliens. These final regulations will facilitate intergovernmental cooperation on FATCA implementation by better enabling the IRS, in appropriate circumstances, to reciprocate by exchanging information with foreign governments for tax administration purposes. The preamble to the final regulations notes that a foreign jurisdiction’s willingness to share information with the IRS to combat offshore tax evasion by U.S. taxpayers depends, in large part, on the ability of the IRS to exchange information that will assist that jurisdiction in combating offshore tax evasion by its own residents. The reporting requirement under the final regulations is effective for payments of U.S.-source deposit interest made on or after January 1, 2013, and is separate from reporting requirements imposed under the FATCA regime. Information sharing under the regulations is limited to countries with which the United States has a tax information exchange agreement (a "TIEA"), implying that Treasury may not enter into a FATCA intergovernmental agreement with a country that does not have in effect a TIEA. The IRS released Revenue Procedure 2012-24 with the final regulations, which includes a list of countries with which the United States has TIEAs.

Additionally, other countries have already begun to adopt laws similar to FATCA. For example, legislation passed by the French Parliament in July 2011 imposes far-reaching tax and disclosure obligations on trusts that have a connection to France.

FATCA imposes a new 30% withholding tax on (i) U.S. source fixed or determinable annual or periodic income that is described in applicable U.S. Treasury Regulations (e.g., interest, dividends, rents, salaries, wages), and (ii) gross proceeds from the disposition of any property of a type that can produce any of the foregoing types of income or profits. In order to avoid this withholding tax, a foreign financial institution ("FFI") will need either to become a so-called "participating FFI" by entering into a disclosure compliance agreement with the IRS or otherwise to meet certain requirements set out in the Proposed Regulations to qualify as a so-called "deemed-compliant FFI." Any FFI that (a) is not a deemed-compliant FFI and (b) fails to qualify as a participating FFI will be subject to the 30% withholding tax beginning January 1, 2014.

Since FATCA’s enactment in March 2010, the IRS has issued several rounds of guidance and the proposed implementing rules are evolving considerably as the Treasury and the IRS continue to consider comments received from various stakeholders. However, the Proposed Regulations have been much anticipated by taxpayers that may be affected by the FATCA withholding tax regime and they provide a clearer insight into the possible contours of final regulations to be adopted, as well as some welcome relief in certain areas. This alert addresses the following key provisions of the Proposed Regulations and certain operational considerations:

    1. Effective dates: FATCA reporting and withholding will be required on withholdable payments (other than gross proceeds) starting in 2014, and on gross proceeds starting in 2015. For passthru payments, participating FFIs will be required to withhold on withholdable payments starting in 2014, and on all other passthru payments starting in 2017.

    2. Grandfathered obligations: FATCA reporting and withholding will not apply to a payment under any "obligation" (as defined in the Proposed Regulations) outstanding on January 1, 2013, or to the gross proceeds from any disposition of such an obligation. The Proposed Regulations clarify that the term "obligation" includes a line of credit or a revolving credit facility.

    3. Deemed compliant entities: The categories of deemed-compliant FFIs described in the Proposed Regulations are broader than the categories of deemed-compliant FFIs described in prior guidance.

    4. Coordination of withholding regimes: The Proposed Regulations provide for the coordination of FATCA with other existing U.S. federal withholding tax regimes and propose the use of modified IRS Forms W-8 and W-9 for certain certification requirements under FATCA.

    5. Definition of "financial account": The Proposed Regulations refine the definition of a "financial account" (in the case of an FFI, an account with respect to which FATCA applies) to focus on traditional bank accounts, brokerage accounts, 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.

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