In February 2012, the Internal Revenue Service proposed regulations regarding the implementation of the Foreign Account Tax Compliance Act (FATCA), a statute that was included in the Hiring Incentives to Restore Employment (HIRE) Act of 2010 as a revenue raiser.
FATCA introduces a reporting regime that will require a foreign financial institution (FFI) to enter into a disclosure agreement with the IRS or, generally, starting on Jan. 1, 2013, face automatic withholding of 30 percent of U.S. source income. U.S. source income for FATCA purposes includes not only dividend and interest, but also gross proceeds from the sale of assets that can produce U.S. source income.
In response to the many comment letters that it’s received, as well as in recognition of practical challenges that FFIs face when implementing FATCA, on Oct. 24, 2012, the IRS issued an announcement (2012-42) that pushes back several FATCA deadlines:
Agreement. The deadline for FFIs to enter into an agreement with the IRS has been moved back from June 30 to Dec. 31, 2013. Once an FFI has entered into an agreement with the IRS, it will be considered a participating FFI (PFFI); the earliest effective date for an FFI agreement will be Jan. 1, 2014 (instead of July 1, 2013).
Account opening procedures. PFFIs, deemed compliant FFIs and withholding agents will have to comply with new account opening procedures under FATCA starting Jan. 1, 2014 (instead of Jan. 1, 2013), and all accounts opened prior to that date will be considered pre-existing accounts for FATCA purposes;
Due diligence completion. In terms of completing due diligence on pre-existing obligations, withholding agents who aren’t PFFIs will have until June 30, 2014 to document payees that are prima facie FFIs and until Dec. 31, 2015 for documenting payees that aren’t considered prima facie FFIs;
High-value accounts documentation. A PFFI must obtain the appropriate documentation to identify pre-existing individual accounts that are considered high-value accounts (accounts with a value of U.S.$ 1 million or more) by Dec. 31, 2014. A PFFI must obtain such documentation for accounts that aren’t considered high value by Dec. 31, 2015;
Withholding. FATCA withholding on gross proceeds from the sale of assets that can produce U.S. source income has been pushed back and will only include disposition of such assets occurring after Dec. 31, 2016.
To illustrate the new FATCA implementation deadlines, the IRS has added the ”Implementing Deadlines” below, to its announcement 2012-42.
Agreements Under Negotiation
In a related development, the U.S. Department of Treasury announced on Nov. 8, 2012 that it’s engaging with more than 50 jurisdictions around the world to conclude intergovernmental agreements to implement FATCA.
The Treasury Department published two model intergovernmental agreements (Model I and II) for implementing FATCA, and these models will serve as the basis for concluding bilateral agreements with interested jurisdictions.
Once an intergovernmental FATCA agreement under Model I has been concluded, an FFI based in a country that has entered into this agreement no longer has to enter into an individual agreement with the IRS. Rather if an FFI is based in a FATCA partner jurisdiction, covered by an intergovernmental agreement, it can collect and report all required FATCA information to its home country government, which in its turn will automatically exchange this information with the IRS. Under these intergovernmental agreements, there will be similar exchange of information between the IRS and its respective FATCA partner countries for its taxpayers. The main difference of a Model II FATCA agreement is that information reporting by the FFIs of that FATCA partner jurisdiction is done directly to the IRS.
To date, the Treasury Department has concluded Model I FATCA agreements with the United Kingdom, Denmark and Mexico. FATCA agreements are being finalized with the following countries: Canada, Finland, France, Germany, Guernsey, Ireland, Isle of Man, Italy, Japan, Jersey, Norway, Spain, Switzerland and The Netherlands.
In addition to the above countries, the Treasury Department is actively engaged in a dialogue towards concluding an intergovernmental agreement with the following countries: Argentina, Australia, Belgium, Cayman Islands, Cyprus, Estonia, Hungary, Israel, Korea, Liechtenstein, Malaysia, Malta, New Zealand, Slovakia, Singapore and Sweden.
Finally, the Treasury Department confirmed that it is exploring options for intergovernmental engagement with the following countries: Bermuda, Brazil, British Virgin Islands, Chile, Czech Republic, Gibraltar, India, Lebanon, Luxembourg, Romania, Russia, Seychelles, St Maarten, Slovenia and South Africa.