The Treasury Department and IRS today released for
publication in the Federal Register proposed
as guidance concerning information reporting by foreign
financial institutions for U.S. accounts, and withholding on
certain payments made to foreign financial institutions and
other foreign entities under the Foreign Account Tax
Compliance Act (FATCA).
The following discussion provides an overview of initial
impressions of certain provisions in the 389-page proposed
regulations under FATCA.
The proposed regulations are scheduled to be published in
the Federal Register on Wednesday, February 15,
The FATCA rules introduce information reporting
requirements for foreign financial institutions (FFIs) for
certain accounts. These rules have raised a number of issues
for FFIs established in certain countries (including France,
Germany, Italy, Spain and the United Kingdom)—for example,
that FFIs established in these countries may not be able to
comply with the reporting, withholding, and account closure
requirements because of legal restrictions.
The FATCA proposed regulations introduce a new concept of
government-to-government reporting. As noted in a related U.S.
Treasury Department release* an intergovernmental approach to
FATCA implementation would address the legal impediments to
compliance, simplify practical implementation, and reduce FFI
costs. The United States would reciprocate by collecting and
exchanging information on accounts held in U.S. financial
institution by residents of these countries. Thus, the United
States and France, Germany, Italy, Spain and the United
Kingdom have agreed to “explore a common approach to FATCA
implementation through domestic reporting and reciprocal
*Joint Statement from the United States,
France, Germany, Italy, Spain and the United Kingdom Regarding
an Intergovernmental Approach to Improving International Tax
Compliance and Implementing FATCA (February 8, 2012)
Other guidance included in today’s proposed regulations
Since FATCA’s enactment in March 2010, the IRS issued
several rounds of guidance (namely Notice 2010-60, Notice
2011-34 and Notice 2011-53). According to the preamble,
today’s proposed regulations incorporate the guidance
contained in these IRS notices, but also provide guidance on
topics that were not addressed in the FATCA-related notices,
- An expanded scope of “grandfathered obligations”
- Transitional rules for affiliates with legal prohibition
- Additional categories of deemed-compliance FFIs
- Modification of due diligence procedures for the
identification of accounts
- Guidance on procedures required to verify compliance
- Refinement of the definition of financial account
- Extension of the transition period for the scope of
information reporting and withholding on passthru payments
Expanded scope of grandfathered obligations
Pursuant to the statute, a withholding agent would not be
required to impose FATCA’s penal withholding on any payments,
including the gross proceeds from any disposition, related to
an obligation that was outstanding on March 18, 2012.
The proposed regulations extend this relief by excluding,
from the definition of withholdable or passthru payment, any
payment made under an obligation outstanding on January 1,
2013. For purposes of this relief, the definition of an
obligation set forth in earlier guidance remains substantially
Transition rules for affiliates with legal prohibitions on
Earlier guidance had indicated that each FFI member within
an expanded affiliated group must be either a participating
FFI (PFFI) or a deemed-compliant FFI (DCFFI).
In the proposed regulations, Treasury and the IRS recognize
that this is not possible for certain FFIs organized in
jurisdictions with laws that prevent an FFI to fully comply
with the withholding and reporting requirements of FATCA. To
that end, the rules adopt a two-year transition period, until
January 1, 2016, for FFIs in such jurisdictions to become
compliant with the initial rule. In the interim period, such
FFIs must, among other requirements, agree to perform the
account identification procedures to identify U.S. accounts.
It is important to note that these FFIs will be subject to
the penal withholding on withholdable payments during this
Additional categories of deemed-compliant FFIs
In preliminary guidance, Treasury and the IRS described
certain entities that it believed could be treated as deemed
compliant (meaning they would not have to enter into a formal
“FFI Agreement”). However, the listed requirements to
ascertain such status were so restrictive that few, if any,
entities could actually take advantage of this status.
In the proposed regulations, Treasury and the IRS have now
expanded the categories of entities that would be considered
deemed compliant as well as loosened some of the requirements
that were previously set forth. In addition, under the
proposed rules, several types of entities that fall within the
deemed compliant category will no longer be required to adhere
to the formal registration process and, instead, will be
permitted to self-certify this status. These modifications
could be very useful to many potential DCFFIs (e.g., certain
group retirement plans).
Modification of due diligence procedures for the
identification of accounts
The proposed regulations have completely eliminated the
heightened scrutiny for accounts that previously fell within
the broad definition of “private banking.” Instead, the
heightened scrutiny is based solely on a $1 million dollar
Significantly, the requisite paper search for U.S. indicia
for these accounts has also been scaled back to include only
more recent account data (as opposed to a search of every
paper document on file).
In addition, the de minimus threshold has been increased to
$250,000 for entity accounts, as well as for the cash value of
Finally, the proposed rules extend the reliance on existing
AML and KYC procedures for pre-existing account
identification. Tax professionals believe that these
modifications would be welcomed and demonstrate that Treasury
and the IRS are listening to the voice of industry.
Guidance on procedures required to verify compliance
Another welcomed provision for FFIs is found in the rules
relating to verification of compliance with the FFI Agreement.
Unlike the qualified intermediary (QI) regime that requires
QIs to hire an external auditor twice in every six year
agreement term to conduct a compliance review, the proposed
regulations provide that FFI Agreement verification would be
accomplished through internal reviews and certifications.
In addition, the proposed rules provide that any FFI that
adheres to the requirements set forth in the FFI Agreement
will not be strictly liable when it fails to identify a U.S.
Refinement of the definition of financial account
The proposed regulations refine the statutory definition of
a “financial account”—depository account, custodial account,
or debt or equity interest in an FFI, other than those that
are regularly traded—by focusing on the traditional meaning of
these accounts and excluding certain retirement savings
accounts and other tax favored non-retirement savings
accounts. In addition, as indicated in preliminary guidance,
the definition of a financial account also includes an
insurance contact with a cash value.
Extension of the transition period for the scope of
information reporting and withholding on passthru
Finally, the proposed regulations provide additional
transition relief related to reporting and withholding.
Notice 2011-53 provided that the first reporting
requirement under FACTA would take place in 2014 (for U.S.
accounts maintained in 2013). In addition, it provided that
the requisite withholding on any passthru payments, that is
not a withholdable payment, made by a PFFI to a recalcitrant
account holder or NPFFI would take place no earlier than
January 1, 2015.
For reporting, the proposed rules phase in the information
that is required to be reported over a period of years. In
2014 and 2015 (for accounts maintained in 2013 and 2014), the
information will be limited to name, address, TIN, account
number, and account balance information. The following year,
any income paid to the account must also be reported. Finally,
in 2017, all of the above information, as well as gross
proceeds paid to the account, would also be required.
This phased-in approach with respect to the reporting
requirements was in direct response to commentators that had
voiced concerns regarding necessary system changes for the
reporting of income and proceeds.
To date, the requirement for an FFI to impose withholding
on passthru payments has been one of the most debated and
contentious areas of the new regime. Given the complexity and
legal questions surrounding this requirement, Treasury and the
IRS have decided to further delay the issue by providing that
this withholding would not be required on any foreign passthru
payments (the portion of a passthru payment that is not a
withholdable payment) before January 1, 2017.
For more information about the FATCA proposed regulations,
contact a tax professional with KPMG:
General information: Laurie Hatten-Boyd
Banking: Mark Price,
Mark Naretti, Carl Cooper, Mindy Schmidt
Insurance companies: Craig Pichette, Fred Campbell-Mohn,
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