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New York Lawyers Issue FATCA Recommendations

by Leroy Baker,, New York

01 June 2012

The New York State Bar Association (NYSBA) has written to the United States Treasury and the Internal Revenue Service (IRS), submitting a report on the proposed regulations implementing the Foreign Account Tax Compliance Act (FATCA) and outlining an alternative approach to implementing some of its information collection and reporting requirements.

FATCA, enacted in March 2010, is intended to ensure that the US tax authorities obtain information on financial accounts, above certain limits, held by US taxpayers at foreign financial institutions (FFIs). Failure by an FFI to disclose information to the IRS would result in a requirement to withhold 30% tax on US-source income.

Under the current proposed regulations, institutions with US clients will be required to report basic account details for 2013 and 2014 by January 1, 2015, but the income of those clients will not need to be reported until January 1, 2016, with respect to calendar year 2015.

FFIs across the world (including banks, investment funds and insurance companies) have expressed concern about the legislation, in particular at the costs of compliance and the penalties that would ensue in case of non-compliance.

However, after intensive discussions with foreign governments, in February this year the Treasury issued a joint statement with France, Germany, Italy, Spain and the UK expressing mutual intent to pursue a government-to-government framework for implementing FATCA – an important step toward addressing impediments to FFIs’ ability to comply with the regulations.

The statement did not contemplate an exemption from FATCA for any jurisdiction, but instead offers a framework for information sharing based on existing bilateral tax treaties. It would allow FFIs to report the necessary information to their respective governments rather than to the IRS. The agreements would also impose certain reciprocal obligations on the US.

With regard to the joint statement, the NYSBA believes the approach that is proposed may over time eliminate or at least mitigate many of the legal and compliance burdens associated with the regime currently envisioned. However, to maximize the likelihood that the US will have an effective network of FATCA implementation agreements with partner countries, it has certain recommendations.

For example, for FFIs that operate primarily or exclusively in a single partner country, it says that the implementation agreement with that country should provide rules for such FFIs that are tailored to take into account any unique or distinguishing legal, regulatory or commercial features of the financial services industry in that country; while, for multinational FFIs that may be subject to multiple implementation agreements, the reporting and other requirements of such agreements should be standardized.

While agreeing that the IRS’s proposed regulations properly recognize that the broad definition of an FFI has the potential to reach a large number of foreign entities that Congress did not intend to target, the NYSBA believes that several of the categories of excepted FFIs will not apply to many of the foreign entities they are meant to reach.

It is suggested that most categories of excepted FFIs be replaced with rules that test an “expanded affiliated group” on an aggregate basis to determine whether the group is principally engaged in the active conduct of a trade or business (other than a financial services business). If the group is so engaged, then all members of the group should be excepted FFIs, other than group members directly engaged in a banking, custodial, insurance or other similar financial services business.

In addition, with respect to foreign 'passthru' payments (defined in the law as any withholdable payment or other payment "to the extent attributable to" a withholdable payment), it is recommended that the IRS should issue an interim guidance limiting the definition to payments on financial accounts. Although the regulations postpone the withholding on foreign passthru payments until 2017, the NYSBA points out that transactions already being negotiated in the financial markets need to account for the potential impact of withholding on future payments and allocate the economic cost among the participants.

By confirming that the definition of foreign 'passthru' payments will be confined to payments on financial accounts, it is said that the IRS would quell much of the current confusion among FFIs and their advisors on this issue.

TAGS: compliance | tax | investment | offshore confidentiality | tax compliance | law | banking | financial services | insurance | investment funds | Internal Revenue Service (IRS) | tax authority | offshore | agreements | legislation | offshore banking | withholding tax | United States | regulation | penalties | services

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