FATCA e-alert - Issue 2012-02 

High-level review of proposed FATCA regulations  

On February 8, 2012, the Treasury Department and IRS released proposed regulations (REG-121647-10) under the Foreign Account Tax Compliance Act (FATCA). These greatly anticipated regulations provide guidance concerning information reporting by foreign financial institutions (FFIs) for U.S. accounts, and withholding on certain payments made to foreign financial institutions and other foreign entities.

Since FATCA's enactment in March 2010, the IRS issued guidance in Notices 2010-60, 2011-34, and 2011-53. According to the preamble to the proposed regulations, the previous guidance contained in the early IRS notices has been incorporated, but new guidance is provided on topics that were not addressed in the FATCA-related notices. A high-level review of certain provisions in the 389-page proposed regulations under FATCA follows.

Intergovernmental Approach

The FATCA rules introduce information reporting requirements for FFIs pertaining to 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's 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 institutions 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 automatic exchanged….".

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 the same.

Transition rules for affiliates with legal prohibitions on compliance

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 time.

Additional categories of deemed-compliant FFIs

In the guidance notices, 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 deemed compliant FFIs (DCFFIs) such as 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 threshold. 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 insurance policies. Finally, the proposed rules extend the reliance on existing AML and KYC procedures for pre-existing account identification.

Guidance on procedures required to verify compliance

A 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. account.

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 nonretirement savings accounts. In addition, as indicated in preliminary guidance, the definition of a financial account also includes an insurance contract with a cash value.

Extension of the transition period on passthru payments

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.

The proposed regulations provide additional transition relief related to reporting withholding. Notice 2011-53 provided that the first reporting requirement under FATCA would take place in 2014 (for U.S. accounts maintained in 2013). In addition, it provided that the required 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. In the proposed rules, reporting will be phased in for the information that is required to be reported as follows:

•  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.

For Your Reference

The proposed regulations can be accessed by clicking here : REG-121647-10.pdf (826 KB)

The U.S. Treasury Department's release regarding the intergovernmental approach to FATCA implementation can be accessed by clicking here : Treasury-IRS-FATCA-Joint-Statement.pdf (63.4 KB)

For further information, please do not hesitate to contact us.