“On February 8th, 2012, the IRS released the latest and long-awaited proposed regulations. On the same day, the US Treasury released a joint statement with the governments of the UK, France, Germany, Italy, and Spain announcing an intergovernmental framework for FATCA implementation and tax compliance.
Below, please find a summary of the key aspects of the new proposed regulations, the joint statement, plus a few comments on the potential implications.
FATCA in a Nutshell
Under FATCA, foreign entities are classified in two groups: (i) foreign financial institutions (“FFIs”), and (ii) non-financial foreign entities (“NFFEs”). A 30% withholding tax is imposed on “withholdable payments” to FFIs, unless the FFI enters into an agreement with the IRS to directly report information about financial accounts held by U.S. taxpayers, or foreign entities in which U.S. taxpayers hold a substantial ownership interest. The withholding tax is implemented via a group of enlisted U.S. ‘withholding agents´; in general, a select group of large commercial banks in America.
The rule may also affect entities and accounts that are held by foreign taxpayers (i.e. non-U.S. taxpayers) if they receive US sourced income or hold US investments (stocks or securities).
A “withholdable payment” can be (i) passive investment income from sources within the US, such as dividends, interest, rents, etc; and (ii) any gross proceeds from the sale of any property that could produce passive investment income from sources within the US. By “grossproceeds” it is understood that 30% will be imposed on the entire proceeds of the sale, even if such property was sold at a loss.
The Intergovernmental “FATCA Partner Framework”
Probably the most prominent note on the proposed regulations was a joint statement issued by the US Treasury together with the governments of the UK, France, Germany, Italy and Spain, in which they as entire countries enter into a “FATCA Partner” agreement. A copy of the joint statement is attached.
Under this agreement, instead of information collection and delivery being arranged between individual FFIs and the IRS, the information gathering and sharing will be effectuated at the national level. In other words, governments who enter the intergovernmental system – the so-called “FATCA Partners” – will domestically collect all client information from the financial institutions in their jurisdictions and automatically forward it to the IRS.
In exchange, FFI´s in those jurisdictions will have a lower burden for implementation of FATCA. Furthermore, the U.S. has promised to reciprocate by automatically sending their FATCA Partners the information of accounts of FATCA Partner taxpayers held with financial institutions in the US.
A World of ‘Good FFIs´ and ‘Bad FFIs´…
The trend seems to foreshadow that in order to avoid withholding taxes, FFIs will become a Participating Foreign Financial Institution (PFFI) either by (1) individually signing the agreement with the IRS, or (2) being domiciled in a jurisdiction that becomes a FATCA Partner.
Accounts held with a PFFI should (subject to audit and operational error risks) be able to avoid the 30% withholding tax. To be exempt from withholding, a PFFI must commit to a number of rules. In particular, a PFFI will be obliged to:
• obtain information on all accountholders to determine which accounts are US accounts, •report information on US accounts, • comply with required due diligence/verification procedures and certify completion of such procedures,
comply with IRS information requests,
• attempt to obtain a privacy waiver if applicable bank secrecy or other information disclosure limitations exist, or close the US account, and •
deduct and withhold a 30% tax on any pass-through payments to ‘recalcitrant accountholders´ (e.g. those not willing to give up client confidentiality) or to other FFI´s that are not PFFI´s.” ……..