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U.S. Finalizes FATCA Regulations - by Carmela Pallotto 

Global Tax Adviser

 

January 22, 2013

 

Carmela Pallotto
Toronto, Canadian Corporate Tax

 

The U.S. Treasury Department and the IRS have released the final Foreign Account Tax Compliance Act (FATCA) provisions. These regulations finalize the proposed rules with certain changes, including expanding the transition time for foreign financial institutions affected by FATCA, and match those deadlines with intergovernmental agreements. The U.S. Treasury Department also notes that seven countries (other than Canada) have signed an intergovernmental FATCA agreement with the IRS.

Background
The IRS issued proposed regulations implementing FATCA on February 8, 2012. FATCA is intended to help combat offshore tax evasion by U.S. persons. Specifically, FATCA imposes a 30% punitive withholding tax on "withholdable payments" made to non-compliant foreign financial institutions and certain other foreign entities.

 

FATCA regime
According to the U.S. Treasury Department, the final FATCA regulations:

 

  • Coordinate the obligations for financial institutions under the regulations and the intergovernmental agreements to reduce administrative burdens for financial institutions with operations in multiple jurisdictions
  • Phase-in the timelines for due diligence, reporting and withholding and align them with the intergovernmental agreements to provide sufficient time for financial institutions to develop necessary systems
  • Expand and clarify the scope of payments not subject to withholding, providing relief from withholding for certain grandfathered obligations and certain payments made by non-financial entities
  • Refine and clarify the treatment of investment entities by:
    • Expanding and clarifying the treatment of certain low-risk institutions, such as governmental entities and retirement funds
    • Providing that certain investment entities may be subject to being reported on by foreign financial institutions with which they hold accounts, rather than being required to register as foreign financial institutions and report to the IRS themselves
    • Clarifying the types of passive investment entities that financial institutions must identify and report.
  • Clarify the compliance and verification obligations of foreign financial institutions by providing more streamlined registration and compliance procedures for groups of financial institutions, including commonly managed investment funds.

 

Model agreements
The U.S. Treasury Department released two versions of a "model intergovernmental agreement" to establish a framework for reporting by non-U.S. financial institutions of certain financial account information to their respective tax authorities, followed by an automatic exchange of such information under existing bilateral tax treaties or tax information exchange agreements in July 2012.

 

Instead of reporting to the IRS directly, foreign financial institutions in jurisdictions that have signed Model 1 agreements report the required U.S. account information to their respective governments, who then exchange this information with the IRS. Under the Model 2 intergovernmental agreement published in November 2012, a partner jurisdiction agrees to direct its foreign financial institutions to register with the IRS and report the required U.S. account information directly to the IRS. The IRS receives the same quality and quantity of information about U.S. accounts in either case, but these agreements are intended to streamline reporting and remove legal impediments to compliance.

 

According to the U.S. Treasury Department, the following countries have signed or initialed model agreements:

 

  • Norway
  • The United Kingdom
  • Mexico
  • Denmark
  • Ireland
  • Switzerland
  • Spain.

 

For more information, contact your KPMG adviser.

 

 

 

 

 

Information is current to January 22, 2013. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

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