UK and International Tax news
IRS Issue Proposed Regulations For The Implementation Of FATCA
Monday 13th February 2012
Further to our International Tax News item of 9 August 2011, the IRS has now issued proposed regulations [IR 2012-15] in a 388 page document for the next major phase of implementing the requirements of the Foreign Account Tax Compliance Act (FATCA).
The new law targets non compliance by US taxpayers through foreign accounts and requires FFIs to report to the IRS information about financial accounts held by US taxpayers, or by foreign entities in which US 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 US accounts,
- report certain information to the IRS regarding US accounts, and
- withhold tax at 30% on certain payments to non-participating FFIs and account holders who are unwilling to provide the required information.
FFIs who do not enter into an agreement with the IRS will be subject to withholding on certain types of payments, including US source interest and dividends, gross proceeds from the disposal of US securities, and passthru payments.
Registration will take place through an online system which will become available by 1 January 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 US investments.
The US Treasury and IRS have confirmed that they will continue to work closely with businesses and foreign governments to implement FATCA effectively. In particular, a joint statement from the US, France, Germany, Italy, Spain and the UK [FATCA partners] has also been published and this announces an intergovernmental approach to improving international tax compliance and the implementation of FATCA.
The FATCA partners have raised a number of issues with regard to the implementation of FATCA by FFIs established in these partner countries which may not be able to comply with the reporting, withholding and account closure requirements because of legal restrictions. Therefore, the referred intergovernmental approach to FATCA implementation is to consider these legal impediments to compliance, simplify practical implementation, and reduce FFI costs.
The policy objective of FATCA is actually to achieve reporting rather than to collect withholding tax, the partner countries have agreed to explore a common approach to FATCA implementation through domestic reporting and reciprocal automatic exchange and based on existing bilateral tax treaties, and the US will also reciprocate in collecting and exchanging on an automatic basis information on accounts held in US financial institutions by residents of the FATCA partners.
The US and each FATCA partner country would enter into an agreement which, subject to certain terms and conditions, the FATCA partner would agree to:
(a) pursue the necessary implementing legislation to require FFIs in its jurisdiction to collect and report to the authorities of the FATCA partner the required information;
(b) enable FFIs established in the FATCA partner (other than FFIs that are excepted pursuant to the agreement or in US guidance) to apply the necessary diligence to identify US accounts; and
(c) transfer to the US, on an automatic basis, the information reported by the FFIs.
In consideration of this, the US would agree to eliminate the obligation of each FFI established in the FATCA partner to enter into a separate comprehensive FFI agreement directly with the IRS, provided that each FFI is registered with the IRS or is excepted from registration pursuant to the agreement or IRS guidance. In addition, FFIs established in the FATCA partner would be permitted to comply with their reporting obligations under FATCA by reporting information to the FATCA partner rather than reporting it directly to the IRS.
There would be the elimination of US withholding under FATCA on payments to FFIs established in the FATCA partner (i.e., by identifying all FFIs in the FATCA partner as participating FFIs or deemed-compliant FFIs, as appropriate).
The identification of FFIs established in the FATCA partner that would be treated, consistent with IRS guidelines, as deemed compliant or presenting a low risk of tax evasion.
In addition, as a result of the agreement with the FATCA partner described above, FFIs established in the FATCA partner would not be required to terminate the account of a recalcitrant account holder, nor impose passthru payment withholding on payments to recalcitrant account holders, or impose passthru payment withholding on payments to other FFIs organised in the FATCA treaty partner or in another jurisdiction with which the US has a FATCA implementation agreement.
The FATCA partners are to commit to develop a practical and effective alternative approach to achieve the policy objectives of passthru payment withholding that minimises burden. In addition they are committed to working with other FATCA partners, the OECD, and where appropriate the EU, on adapting FATCA in the medium term to a common model for automatic exchange of information, including the development of reporting and due diligence standards.
If you would like further details on the proposed regulations and the joint statement, please contact Keith Rushen on +44 (0)20 7486 2378.Contact Us