An Excerpt From:
K&L Gates Global Government Solutions ® 2011: Mid-Year Outlook
July 2011
Financial Services
Treasury’s Implementation of Foreign Account Information
Reporting Law Stokes Controversy
While attention in Washington is focusing on tax reform and deficit reduction,
it would be easy to lose sight of key tax policy debates this summer over
implementation of existing laws. Nowhere is this more apparent than in the U.S.
Treasury Department’s efforts to put into force the Foreign Account Tax Compliance
Act (“FATCA”), sweeping tax legislation aimed at thwarting offshore tax evasion
by U.S. persons.
Enacted in March 2010, FATCA provides
the Internal Revenue Service (“IRS”) with
additional tools to identify U.S. holders
of foreign financial accounts and entities.
Congress reasoned that such information
was necessary as a matter of tax policy
to prevent U.S. taxpayers from using such
accounts to hide income.
Beginning in 2013, FATCA will require
both foreign financial institutions
(“FFIs”) and non-financial foreign
entities (“NFFEs”) to obtain and report
information annually to the IRS about their
U.S. account holders and owners. FFIs
and NFFEs that fail to comply face a
30 percent withholding tax. Withholding
applies to almost all types of U.S.-source
income, including interest, dividends,
royalties, wages, gross proceeds from the
sale of U.S. stocks and bonds, and other
remuneration. Withholding applies to all
such payments to a non-compliant FFI or
NFFE, even to income payable to nonU.S. account holders and owners.
FFIs include hedge funds, funds-of-funds,
or other private funds—and an equity
interest in such funds would generally
be treated as a financial account for this
purpose. NFFEs can include corporations,
partnerships or trusts.
To date, Treasury has issued two notices
providing FATCA guidance, but there
remain many unanswered questions of
scope and implementation.
The issues of main concern addressed by
the guidance to date relate to:
• P rocedures that FFIs must have in place
to identify U.S. persons among their
account holders;
• R ules for calculating how much U.S.
tax an FFI must withhold on payments
to account holders who have not
complied with FATCA; and
•E
xemptions for various classes of
entities and payments with a low risk of
tax evasion.
In general, all FFIs will be required to pore
over their accounts (including depository,
custodial and investment accounts) to
determine whether they have any U.S.
account holders. Even institutions that know
they have no U.S. account holders still will
have to certify they have no U.S. account
holders to the IRS to avoid the 30 percent
withholding tax.
The guidance issued by Treasury so far
sets forth stringent and comprehensive
procedures to establish U.S. ownership,
especially for private banking clients and
high-wealth accounts (those with balances
of $500,000 or more). Institutions must
certify to the IRS that they have followed
all of the procedures to determine
U.S. status, non-U.S. status, or that an
account holder is “recalcitrant,” e.g., the
owner refuses to provide the information
necessary to establish the owner’s status.
FATCA requires an FFI to withhold on
“passthru payments” made to recalcitrant
account holders or other FFIs that have
not entered into information-sharing
agreements with the IRS. However, the
mechanics are unclear if a foreign bank
receives a U.S.-source dividend and
then makes a payment to a recalcitrant
account holder. For example, it remains
to be seen how much of the payment
is “attributable” to the dividend, and
thus a “pass-thru payment” subject to
withholding. The latest guidance adopts
an expansive approach based on the
ratio of the FFI’s U.S. assets to its total
assets. The Treasury, however, may
consider modifying this approach for
specific categories of FFIs or payments.
There also is significant uncertainty over
“deemed compliant” institutions, which
are those considered to pose a low risk
of tax evasion, or that can establish they
do not do business with U.S. persons. In
general, the various exceptions provided
thus far in Treasury guidance have been
quite limited.
Congress granted Treasury broad
regulatory authority in this far-reaching
statute, and the department has signaled
its intent to make further changes to the
guidance based on additional comments
and recommendations from stakeholders:
tax compliance officers and their
advisers have already told Treasury that
FATCA’s January 1, 2013, effective date
is unrealistic.
In any case, drafting of guidance for
implementing FATCA is likely to remain a
fluid process and those who care about the
issue would be advised to remain vigilant.
Roger S. Wise (Washington, D.C.)
roger.wise@klgates.com
Mary Burke Baker (Washington, D.C.)
mary.baker@klgates.com
K&L Gates Global Government Solutions ® 2011 Mid-Year Outlook
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