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Foreign Account Tax Compliance Act (FATCA)

New developments | February 2012


Foreign Account Tax Compliance Act (FATCA)The U.S. Treasury Department and the Internal Revenue Service (IRS) issued its proposed regulations for the next major phase of implementing the Foreign Account Tax Compliance Act (FATCA). Enacted by Congress in 2010, the law targets non-compliance by U.S. taxpayers using foreign accounts.

The regulations lay out a step-by-step process for U.S. account identification, information reporting, and withholding requirements for foreign financial institutions (FFIs), other foreign entities and U.S. withholding agents. Whilst some concessions have been made as a result of world-wide lobbying efforts, the draft regulations remain challenging.

Relief provisions

The relief provisions included in certain areas to ease the administrative burden of FATCA include:

  • Changes to the de minimis thresholds for account identification
  • Greater reliance on customer data required for existing anti money laundering/know your customer (AML/KYC) legislation
  • Broader definitions of deemed compliant financial institutions
  • Refined definitions of financial accounts and simplified compliance certification requirements
  • Longer transitional periods for certain reporting and withholding requirements.

Intergovernmental approach

In a significant development, the U.S. Government in a joint statement with France, Germany, Italy, Spain and the United Kingdom noted that they are working to adopt a common intergovernmental approach to FATCA implementation through reliance on domestic reporting to local tax authorities and information exchange mechanisms in double tax treaties, to facilitate the automatic transfer of relevant information to the U.S. IRS. 

This alternative approach does not appear to include any Asia Pacific countries at this stage.

Still uncertain

The IRS acknowledges the concerns raised around one of the most contentious areas of FATCA - the pass-thru payment calculation methodology - and seeks comment on approaches to simplify the methodology, while extending the start date for pass-thru payment withholding. While this is a welcome step, pass-thru payments remain an area of uncertainty.

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