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FATCA Update for Canadian Financial Institutions 

Global Tax Adviser

February 14, 2012

 

Mark Smith
National Leader, Financial Services

 

Carlene Hornby
Vancouver, Canadian Corporate Tax

 

Tony Swiderski
Vancouver, U.S. Corporate Tax

The IRS issued proposed regulations implementing the Foreign Account Tax Compliance Act (FATCA) on February 8, 2012. The proposed regulations implementing the Foreign Account Tax Compliance Act (FATCA) on February 8, 2012. The proposed regulations raise thresholds and extend implementation periods and are generally favourable for taxpayers compared to previously issued guidance. However, one significant change which allows foreign entities to report through their own governments is not currently available to Canadian financial institutions (FI).

The new regulations will be discussed in two upcoming KPMG U.S. webcasts through KPMG Institutes, “Facing FATCA—Overview and Business Implications of the Proposed Regulations” on February 15, 2012 and “FATCA Proposed Regulations Discussed with the IRS” on February 23, 2012. For more information on registering for these webcasts, see below.

 

Background
The Hiring Incentives to Restore Employment (HIRE) Act, which includes FATCA provisions intended to prevent offshore tax abuses by U.S. persons, was enacted on March 18, 2010. The proposed regulations modify previous guidance published in a series of Notices released since the enactment.

 

The FATCA provisions include a withholding regime that imposes a 30% withholding tax on any withholdable payment, including certain gross proceeds, made to foreign FIs, unless they adhere to certain disclosure requirements concerning U.S. persons. The legislation is so broad that it potentially overrides U.S. treaty obligations and taxes certain traditionally tax-exempt income (e.g., portfolio interest, short-term original issue discount and sales proceeds) at the maximum withholding rate of 30%. Further, hedge funds, private equity funds and insurance companies may be considered foreign FIs under the new regime.

 

Absent any action by the U.S. Treasury Department and the IRS, the FATCA withholding tax is generally effective for withholdable payments made after December 31, 2012, with certain grandfathering provisions for debt obligations that are outstanding on or before March 18, 2012.

 

Government-to-government reporting
The most significant change in the proposed regulations involves the government using reciprocal agreements with foreign governments to achieve the goals of FATCA, rather than through the foreign FIs directly reporting to the IRS. It’s expected that government-to-government reporting, in addition to overcoming certain legal impediments to complying with FATCA in foreign jurisdictions, would be simpler and less costly to implement.

 

Canada is not included on the list of countries allowed to use government-to-government reporting, which includes France, Germany, Italy, Spain and the United Kingdom.

 

Other topics addressed in the proposed regulations that were not included in previous guidance include:

 

  • An expanded scope of “grandfathered obligations”
  • Transitional rules for affiliates with legal prohibition on compliance
  • Additional categories of deemed-compliance for foreign FIs
  • 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 pass-through payments.

 

Canadian FIs — Preparing for the worst while hoping for the best
Canadian FIs will likely benefit if the United States and Canada can come to an agreement on government-to-government reporting. This might provide Canadian FIs with clearer guidelines drafted with the Canadian legal and business environment in mind. An agreement would also help to level the playing field between Canadian FIs and their European counterparts.

 

In the meantime, Canadian FIs should begin developing the systems necessary to gather the required information if they haven’t already done so.  Even if Canada and the United States come to a government-to-government agreement on foreign account reporting, the information on accounts held by U.S. persons will still likely be required.

 

FATCA resources and guidance
Continuously updated guidance and interpretation is available through KPMG’s FATCA web page, and KPMG is hosting two upcoming webcasts that will focus on the newly published proposed regulations.

 

KPMG U.S. TaxWatch webcasts
“Facing FATCA — Overview and Business Implications of the Proposed Regulations” will be held on February 15, 2012 at 11:00 am (EST). In this 60-minute webcast, KPMG professionals will discuss the highlights of the proposed rules, and how they could potentially affect entities. In addition, the discussion will provide a framework of the potential business implications that financial institutions may face as they implement the regulations.

 

Register here for the “Facing FATCA—Overview and Business Implications of the Proposed Regulations” webcast.

 

“FATCA Proposed Regulations Discussed with the IRS” will be held on February 23, 2012 at 11:00 am (EST). In this 60-minute webcast, KPMG professionals, including Laurie Hatten-Boyd, will discuss the proposed regulations with Tara Ferris and John Sweeney, attorneys from IRS Chief Counsel’s Office, members of the IRS FATCA Working Team and participating drafters of the proposed regulations.

 

Topics discussed will include:

 

  •  Key provisions of the regulations
  •  What we can expect next
  •  Deadline for taxpayer comments.

 

Register here for the “FATCA Proposed Regulations Discussed with the IRS” webcast.

 

We can help
Your KPMG adviser can help you decide whether you have reporting obligations under these U.S. rules and can help you fulfill these obligations if necessary.

 

For more information, contact your regular KPMG adviser or Mary Filippelli at marklsmith@kpmg.ca or 416-777-8686 or Carlene Hornby at chornby@kpmg.ca or 604-691-3097.

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