Is FATCA Keeping You Up at Night?

Posted by Kelley Lear on Feb 14, 2012 | 0 comments

Is FATCA Keeping You Up at Night?

Throughout the conferences I attended last year, I heard a lot of presentations and discussions tailored towards tax department challenges, financial reporting, tax reporting and compliance concerns.  Most talks were titled “Emerging Trends” in a particular area, or “Income Tax Challenges”, “Tax Accounting Concerns” and other such nomenclature.  There were also lots of questions to conference participants trying to illicit what folks’ biggest concerns were for 2011 and 2012.  As you can imagine, I definitely heard a lot of heated discussion.  Interestingly enough, quite a few folks were even savvy enough to answer the question with FATCA.  In fact, I heard several tax pros say that they have had plenty of time to plan for and implement changes to mitigate risks on the new Uncertain Tax Positions (UTP) compliance this past year, as well as on their other tax accounting challenges (good for them!).  However, one of the items really keeping some of them up at night was determining which way FATCA was going to go, and what that would mean for them in terms of reporting, withholding and/or general compliance and risks. 

On February 8, 2012, we received an IRS Alert Update in our inboxes regarding this very thing!  The Foreign Account Tax Compliance Act, commonly referred to as FATCA, had roots in 2009 and 2010 when Congress put forth the Hiring Incentives to Restore Employment (HIRE) Act.  FATCA requires foreign financial institutions (FFIs), and certain non-financial foreign entities (NFFEs) to provide information on their substantial United States owners to withholding agents and to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.  It also imposes a 30% withholding tax on certain payments to FFIs and NFFEs that fail to comply with their obligations.

The information that must be reported with respect to each U.S. account includes:

  • The name, address, and taxpayer identifying number (TIN) of each account holder who is a specified U.S. person (or, in the case of an account holder that is a U.S. owned foreign entity, the name, address, and TIN of each specified U.S. person that is a substantial U.S. owner of such entity)
  •  The account number
  • The account balance or value except to the extent provided by the Secretary
  • Except to the extent provided by the Secretary, the gross receipts and gross withdrawals or payments from the account (determined for such period and in such manner as the Secretary may provide)

What is being presented for comment at this point is an outline that also includes the ability to avoid being withheld upon under FATCA.  To do so, a participating FFI will have to enter into an agreement with the IRS to:

  • Identify U.S. accounts,
  • Report certain information to the IRS regarding U.S. accounts,
  • Verify its compliance with its obligations pursuant to the agreement, and
  • Ensure that a 30% tax on certain payments of U.S. source income is withheld when paid to non-participating FFIs and account holders who are unwilling to provide the required information.
  • In addition, to make this easier for participants, registration will take place through an online system which will become available by Jan. 1, 2013. FFIs that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to U.S. investments

If you are at all concerned with the elements of the current state of this regulation, speak now or forever hold your peace, as this discussion is several layers in already.  However, written or electronic comments can and must be received by April 30, 2012. Entities/parties can also register to speak at the general meeting, and outlines of topics to be discussed at the public hearing scheduled for May 15, 2012, at 10 a.m. must be received by May 1, 2012.

However, in an attempt to listen to tax payers (yes there was a bit of general outcry – imagine that!) and foreign governments, and to reduce the overall burden of compliance….an alternative approach to implementation was introduced.  This approach provides that an FFI could satisfy the reporting requirements if:

  • The FFI collects the information required and reports this information to its residence country government
  • The residence country government enters into an agreement to report this information annually to the IRS, pursuant to an income tax treaty, tax information exchange agreement, or other agreement with the United States.

What brings on the impetuous for change and/or the heightened focus in this area?  Well, legislators are saying that due to the current “abuse of the voluntary compliance system” and to “address the use of offshore accounts to facilitate tax evasion, it is essential in today’s global investment climate that reporting be available with respect to both the onshore and offshore accounts of U.S. taxpayers”.  Well, we shall see the future brings.  If you want to read the proposed update to the regulations you can click on IR-2012-15: Treasury, IRS Issue Proposed Regulations for FATCA Implementation.  It’s only 388 pages!  Happy reading.  Otherwise, if you want to get a quick update or “executive summary” if you will…including implications and some Big Four thinking, Deloitte is also holding a FREE webcast on Friday, February 10, 2012, 12:00 – 1:30 p.m. ET:  Proposed Regulations on Foreign Account Tax Compliance Act (FATCA) – What might the proposed rules mean for your financial services organization?  If FATCA is keeping you up at night, you might want to attend. 

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