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US Treasury Aims To Lower FATCA Burdens

by Mike Godrey,, Washington

30 January 2012

During her remarks at the New York State Bar Association Annual Meeting, Acting Assistant Secretary for Tax Policy, Emily McMahon, indicated that regulations for the implementation of the provisions of the Foreign Account Tax Compliance Act (FATCA) are in the final stages of clearance at the United States Treasury and the Internal Revenue Service (IRS).

FATCA was enacted by Congress 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.

Under the current timeline, an FFI must enter an agreement with the IRS to provide information on each account and US account holder 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.

Due diligence requirements for identifying new and pre-existing US accounts (including certain high-risk accounts, such as 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.

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.

However, McMahon has now said that Treasury and the IRS “are keenly aware that FATCA imposes significant new requirements and responsibilities on foreign financial institutions. We have received extensive input from the financial community and from practitioners on the challenges posed by these new requirements, and many useful suggestions on how to implement them.”

“As a result,” she confirmed, “we believe that significant progress has been made over the past year, such that FATCA can in fact be implemented in a manner that is not overly burdensome, when compared to its benefits, and that it can over time serve as a complement and a catalyst to the ongoing global efforts to combat offshore tax evasion.”

She pointed out that FATCA “came about as the result of a series of events in 2008 and 2009 involving very serious instances of offshore tax evasion,” and that those events “made clear that significant gaps remained in the system – in particular with regard to the reporting of foreign source income earned by US persons from offshore accounts, and the identification of US owners of foreign entities. It also became clear that some US investors had exploited those gaps to hide income and assets offshore.”

She added that it became obvious that identifying US taxpayers who earn foreign source income through offshore accounts would require the cooperation of FFIs. She considered it “understandable” that both FFIs and foreign governments have expressed concerns about the burdens imposed by FATCA, relative to what they perceive as the potential benefits, but believed that, in response, “we have sought from the beginning to minimize [the] burden to the extent we can, consistent with the objective of combating the use of offshore accounts to evade US tax.”

McMahon confirmed that “we understand that compliance with any new reporting or withholding requirements requires lead time for FFIs to reconfigure their computer systems, adjust their procedures, and inform their customers. We recognize that the industry has much to contribute, and we welcome ideas for achieving a smooth transition.”

Towards that end, the proposed FATCA regulations seek to further minimize the administrative burden of FATCA and better focus its application on circumstances that present a higher risk of tax evasion, for example by setting higher dollar thresholds. Furthermore, for new accounts, she disclosed that the proposed regulations seek to align, as far as possible, the review required for FATCA purposes with the procedures that FFIs already follow to comply with anti-money laundering and know-your-customer rules.

To further focus the FATCA implementation efforts on higher-risk institutions, MacMahon also disclosed that the IRS has expanded the categories of FFIs that are “deemed compliant” with FATCA, as well as the previously announced exception for retirement plans. In recognition that global FFIs face a variety of obstacles, the proposed regulations will also provide temporary relief from the requirement that all members of an affiliated group be participating or deemed compliant FFIs.

She then confronted the other challenge presented by FATCA in that “certain of its key components conflict, to varying degrees, with privacy or other laws in many countries”. In some countries, for example, FFI’s may be unable – under their country’s existing laws - to comply with the core requirement that they report customer information directly to the IRS.

In recognition of this problem, McMahon indicated that the US is “open to exploring an intergovernmental approach to FATCA implementation that would address legal impediments to direct reporting. To that end, Treasury’s international team has already begun conversations with a number of our major trading partners about bilateral approaches to overcome legal impediments and facilitate compliance.”

A key element of these efforts, she said, has been to explore the possibility that FFIs of a particular country could report the information required by FATCA to their home country government, which would then transmit the information to the IRS. She pointed out that the US already has a network of agreements providing for tax information exchange with more than 60 countries.

In fact, the Treasury and the IRS believe that their efforts “to implement FATCA and to resolve the challenges it poses can and should serve as precursors to a more comprehensive multilateral approach to information exchange. For that reason, we believe that FATCA – if implemented appropriately – can serve as a catalyst for further advances in the global effort to improve transparency and combat tax evasion.”

A comprehensive report in our Intelligence Report series, examining in depth the situation of offshore transparency and secrecy in a number of the most prominent jurisdictions, is available in the Lowtax Library at and a description of the report can be seen at
TAGS: compliance | tax | investment | business | offshore confidentiality | tax information exchange agreement (TIEA) | tax compliance | law | banking | insurance | retirement | investment funds | international financial centres (IFC) | Internal Revenue Service (IRS) | offshore | agreements | legislation | offshore banking | banking secrecy | withholding tax | United States | regulation | penalties

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