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:
- 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.
- 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.
- 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.
- 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.
- 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.
Click here to
read the complete
update.
