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Proposed Regulations and Joint International Statement Issued on FATCA Tax Compliance


The U.S. Department of the Treasury and the Internal Revenue Service (IRS) on February 8, 2012 released a notice of proposed rulemaking that would codify and expand on the three “Foreign Account Tax Compliance Act (FATCA) Notices” of 2010 and 2011 providing guidance under new chapter 4 (§§1471-1474) of the Internal Revenue Code.

The article examines some of the ways in which the proposed regulations and the Joint Statement break new ground.

Summary of highlights

Some of the key differences between the proposed regulations and the FATCA Notices are as follows:

  1. Notwithstanding the statutory transition rule in §501(d)(2) of the HIRE Act, which would have allowed FATCA withholding to apply generally to payments on any obligations not yet outstanding on March 18, 2012, the proposed regulations forgive chapter 4 withholding on payments and proceeds from obligations issued after March 18, 2012, and before January 1, 2013.
  2. The proposed regulations narrow the definition of “financial account” so as to exclude non-publicly traded debt and equity securities typically issued by banks and brokerage firms.
  3. The proposed regulations relax a number of the rules in the FATCA Notices applicable to “participating Foreign Financial Institutions (FFI)”: that is, FFIs that comply with §1471(b) (thus entitling them to receive payments without chapter 4 withholding) by individually entering into agreements with the IRS (FFI Agreements). These include: – Eliminating the requirement for agreements between the IRS and FFIs located in a country with which the IRS has concluded a government-to-government agreement of the type contemplated by the “intergovernmental approach” described in the Joint Statement;
    • Modifying the “due diligence” procedures for identifying “United States accounts” (U.S. accounts) among the accounts maintained by such FFIs on the date of their entry into their FFI Agreements (so-called “preexisting accounts”);
    • Modifying the rules by which officers of an FFI will verify and certify that the FFI is in compliance with its FFI Agreement;
    • Delaying the requirement for FFIs to withhold on so-called “foreign passthru payments” to nonparticipating FFIs and recalcitrant account holders, and extending the transition period during which FFIs will be ramping up the scope of their reporting under §1471(c) on the balances, income, and transactions of their U.S. accounts and recalcitrant account holders;
    • Making it easier to meet the affiliated group conformity requirement of §1471(e) — the general requirement (subject to exceptions) that all FFIs in a participating FFI’s “expanded affiliated group” (EAG) generally become participating FFIs or be deemed-compliant FFIs — including an expansion of the “deemed-compliant FFI” categories and a two-year grace period for operations in jurisdictions that essentially make entry into FFI agreements impossible.

Full article and FATCA Leader contact information are available for download in the attached PDF.

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