US Issues Plans To Phase In FATCA

by Mike Godfrey, Tax-News.com, Washington

18 July 2011

The United States Treasury Department and the Internal Revenue Service (IRS) have issued a notice announcing plans to phase in the requirements of the Foreign Account Tax Compliance Act (FATCA).

FATCA was enacted by the US in March 2010 and is intended to ensure that the US tax authorities obtain information on financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest, at foreign financial institutions (FFIs). Failure by an FFI to disclose information would result in a requirement to withhold 30% tax on US-source income.

A participating FFI will have to enter into an agreement with the IRS to provide the name, address and taxpayer identification number (TIN) of each account holder who is a specified US person; and, in the case of any account holder which is a US-owned foreign entity, the name, address, and TIN of each substantial US owner of such entity. The account number is also required to be provided, together with the account balance or value, and the gross receipts and gross withdrawals or payments from the account.

A notice issued by Treasury and the IRS now provides a timeline for FFIs and US withholding agents to implement the various requirements of FATCA. Specifically, an FFI must enter an agreement with the IRS by June 30, 2013, to ensure that it will be identified as a participating FFI in sufficient time to allow withholding agents to refrain from withholding beginning on January 1, 2014.

Withholding on US source dividends and interest paid to non-participating FFIs will begin on January 1, 2014, and will be fully phased in on January 1, 2015. Due diligence requirements for identifying new and pre-existing US accounts (including certain high-risk accounts, including private banking accounts with a balance that is equal to or greater than USD500,000) will begin in 2013, and reporting requirements will begin in 2014.

"FATCA is an important development in US efforts to combat offshore noncompliance. At the same time, the IRS recognizes that implementing FATCA is a major undertaking for financial institutions," said IRS Commissioner Doug Shulman. "Today's notice is a reflection of our serious commitment to implementation of the statute, but also a serious commitment to listen to the implementation challenges of affected financial institutions and make appropriate adjustments to ensure a smooth and timely roll-out."

It was said that Treasury and the IRS will continue to work closely with businesses and foreign governments to implement FATCA effectively. However, FFIs across the world (including banks, investment funds and insurance companies) have all expressed concern about the legislation, in particular the costs of compliance and penalties that will ensue in case of non-compliance.

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