The U.S. Treasury said Wednesday it would ease some of the planned rules in the Foreign Account Tax Compliance Act (FATCA), which will require foreign banks and financial institutions to divulge information about their account-holders to U.S. regulators so that the U.S. taxation body can more easily tax citizens foreign assets. Five European governments also have joined the effort, and will help the U.S. to collect the required data rather than foreign institutions in those countries having to report directly to U.S. regulators.
France, Germany, Italy, Spain and the United Kingdom have joined the United States in an inter-governmental approach at collecting pertinent tax information from resident financial institutions. In turn, the U.S. will do the same for citizens of those countries with assets held in the States.
Previously, foreign financial institutions would have been required to register with the U.S. Internal Revenue Service (IRS) in order to submit the client account information. Now, institutions in those five countries will submit the data to their national regulators, which will forward it on to the IRS. Financial institutions in other countries will still have to register with the IRS.
The approach envisages firms reporting to their domestic authorities and governments sharing that information, says Julie Patterson, director of Authorised Funds and Tax at Investment Management Association, which represents the U.K. investment management industry. In practice, this would mean that U.K. firms and funds would not have to sign up to an agreement with the IRS, reducing many of the industrys legal concerns with the original proposals. Patterson says the association welcomes the positive development.
Not everyone was as laudatory of the U.S. partnership with the European countries on FATCA. Julian Skingley, partner at Ernst & Young, says too many details remain unclear to determine how much the changes will ease the FATCA burden on foreign institutions. “The jury is out on the merits of the inter-governmental approach, Skingley says. This is a good step in the right direction, but it is just five countries involved at the moment, and there remain significant questions around the mechanics of how this would work in practice.”
U.S. clients with accounts holding $50,000 or more in any financial institution around the world must be reported. Foreign financial institutions (FFIs) and/or individual account holders who fail to or who are unwilling to submit FATCA information remain subject to a 30% tax penalty on U.S.-connected payments.
The act has been criticized by some in the industry who say it is overly burdensome and costly, with some industry bodies, such as the Alternative Investment Management Association, representing hedge funds, asking for leniency on the reporting requirements. But the IRS has stood its ground, backed by claims the act could plug a $100 billion hole in uncollected taxes.
FFI registration with the IRS for FATCA purposes will begin Jan. 1, 2013, the Treasury said Wednesday.
The Treasury says the new form of FATCA reduces the administrative burden of ferreting out U.S. accounts globally by allowing FFIs to rely on information they already collect, based on anti-money laundering or Know Your Customer rules; expands the number of institutions that can comply with FATCA without having to register with the IRS by focusing on higher-risk financial institutions; and phases in the reporting and withholding obligations of FATCA over an extended transition period to allow institutions more time to develop necessary systems.
FATCA was initially included in a Congressional mandate in 2010 and later expanded upon by the IRS. The Treasury was called in to develop further details about FATCA and respond to industry concerns about specific points, the result of which was Wednesdays announcement.
David Richardson, managing director of the tax division at KPMG, says the most crucial point in the Treasurys announcement Wednesday was the expansion of the types of FFIs that are considered deemed compliantthat is, those institutions that are essentially exempt from reporting to FATCA. But it is still not entirely clear who qualifies, Richardson says. More clarification is needed on this and various other aspects of FATCA, he says, so further explanation by the Treasury is almost certain to come in the future.
“The proposals for allowing greater use of deemed compliance rules and temporary relief for the requirement for all group entities to be compliant will be welcomed, giving firms more ability to make strategic choices about how they approach FATCA, E&Ys Skingley says.
Offshore funds in particular should begin preparing for FATCA right away, Richardson says. Its clear that these are some very complex rules for offshore funds, which up until now had very little or no direct compliance or withholding obligations with respect to U.S. taxes, he says. They must think about how this impacts them and start planning not only for an assessment but also for developing what operating models would be required to be in compliance, because noncompliance is not an option when youre talking about a tax of 30% in gross proceeds, which could literally put a fund out of business.
For more on FATCA, see Hedge funds and FATCA: bracing for impact, Global Custodian, Winter 2011.
(CG)