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IRS Issues Proposed Regulations on FATCA
Practical Law Legal Update 2-517-9464 (Approx. 5 pages)
IRS Issues Proposed Regulations on FATCA
by PLC Corporate & Securities and PLC Finance
| Published on 09 Feb 2012 • USA (National/Federal) |
The IRS issued proposed regulations addressing withholding and information reporting requirements under the Foreign Account Tax Compliance Act (FATCA).
On February 8, 2012, the IRS and Treasury Department issued proposed Treasury regulations (Proposed Regulations) addressing withholding and information reporting requirements imposed under the Foreign Account Tax Compliance Act (FATCA) enacted as part of the Hiring Incentives to Restore Employment Act of 2010 along with an accompanying press release. In addition, the Treasury Department released a joint statement from the US, France, Germany, Italy, Spain and the UK outlining a possible:
- Intergovernmental approach to implementing FATCA.
- Automatic information exchange program between the US, France, Germany, Italy, Spain and the UK.
FATCA imposes a 30% US withholding tax on withholdable payments made to certain foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs) that do not meet specific information reporting requirements. Withholdable payments include:
- US-source interest, dividends, rents, royalties and compensation.
- Gross proceeds from the sale, redemption, repurchase or other disposition of any property of a type that produces US-source interest or dividends.
The purpose of FATCA is not to collect the 30% US withholding tax. Instead, it is to force foreign entities (over which the US does not generally have jurisdiction) to report information to the IRS about their account holders and owners, including whether they have any US account holders or owners. The FATCA withholding tax operates to compel FFIs and NFFEs to disclose information to the IRS about US persons who may be hiding untaxed income offshore.
The IRS previously issued guidance under FATCA in a series of notices (IRS Notice 2010-60, IRS Notice 2011-34 and IRS Notice 2011-53) (FATCA Notices). For more information about the FATCA Notices, see Article, Implications of Foreign Account Tax Compliance Act (FATCA).
The Proposed Regulations incorporate guidance in the FATCA Notices and also make significant changes to this guidance, including:
- Changing the grandfathering date from March 18, 2012 to January 1, 2013 on outstanding obligations. Under the Proposed Regulations, FATCA withholding is not required on payments made under (or the gross proceeds from) an "obligation" outstanding on January 1, 2013. An obligation includes a:
- debt instrument;
- line of credit or revolving credit facility; and
- derivatives transaction entered into between counterparties under an ISDA master agreement.
Importantly, equity and debt that is treated as equity for US tax purposes do not qualify as obligations under the grandfathering rule. - Providing additional categories of deemed-compliant FFIs including:
- certain banks and investment funds conducting business only with local clients;
- certain mutual funds, charities and pension funds; and
- certain members of a participating FFI's affiliated group.
- Modifying the due diligence procedures for identifying US accounts of FFIs, including the procedures for reviewing preexisting accounts.
- Extending the transition period for information reporting for participating FFIs. Reporting on income will begin in 2016 (for the 2015 calendar year) and reporting on gross proceeds will begin in 2017 (for the 2016 calendar year).
- Delaying the start date for withholding on "foreign passthru payments" by two years (until January 1, 2017).
- Providing that responsible FFI officers must certify that the FFI has complied with the terms of the FFI agreement.
- Providing transitional rules for affiliates of participating FFIs.
- Refining the definition of "financial account."
Except for foreign passthru payments, the Proposed Regulations do not change the date to begin FATCA withholding. Generally FATCA withholding begins on:
- January 1, 2014 for US-source payments of interest, dividends, rents and royalties made to non-participating FFIs and non-compliant NFFEs.
- January 1, 2015 for payments to non-participating FFIs and non-compliant NFFEs of gross proceeds from the sale of any equity or debt instrument of a US issuer.
The Proposed Regulations are not effective until finalized. Comments on the Proposed Regulations are being accepted until April 30, 2012 and a hearing is scheduled for May 15, 2012.
The Treasury Department and the IRS also intend to issue additional FATCA guidance on issues not covered by the Proposed Regulations (for example, on the administration of foreign passthru payment withholding) and to publish a draft model FFI agreement in early 2012 and a final model FFI agreement in the fall of 2012.