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FATCA Update - Additional Treasury Department Guidance

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The document discusses recent updates from the U.S. Treasury regarding regulations on the Foreign Account Tax Compliance Act (FATCA). It outlines FATCA's goal of ensuring tax compliance for U.S. taxpayers' offshore financial assets and accounts. Key points include: expanded categories of compliant foreign institutions, extended timelines for requirements, and reduced burdens for foreign institutions. FATCA now joins existing disclosure regimes for foreign bank accounts, offshore entities, and specified foreign assets. Implementation of FATCA provisions will take place between 2013-2017.

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Financial Services Newsletter: News & Trends FATCA Update – U.S. Treasury Releases Additional Guidance Update on US Efforts to Ensure Tax Compliance Involving Offshore Financial Assets and Accounts Over the last several weeks the U.S. Treasury has released additional guidance with respect to the reporting by U.S. taxpayers of non U.S. domiciled financial assets. The most recent guidance has come in the form of newly issued proposed regulations governing the implementation of the FATCA rules, which were added to the Internal Revenue Code by the HIRE Act of 2010. These voluminous proposed regulations cover many topics, including expanding the categories of foreign financial institutions that are “deemed compliant,” the phase-in of requirements over a newly extended timeframe, and the reduction of certain of the burdens placed on foreign institutions associated with identifying U.S. accounts. Also released were the final Form 8938 and related instructions, which are to be used by individuals to report specified foreign assets for the 2011 tax year and beyond. This means that the U.S. Treasury framework to ensure full disclosure of all non-U.S. financial assets held by those subject to U.S. taxation is now comprised of four independent and sometimes overlapping regimes. These four regimes are: 1) Annual Report of Foreign Bank and Financial Accounts (FBAR), required to be filed annually to disclose all foreign accounts over which a U.S. taxpayer retains signature authority (Form TD F 90-22.1). 2) Various Entity Disclosure Returns required to be filed annually to disclose ownership of certain offshore entities, including offshore corporations (Forms 5471, 8621, 926, etc.), partnerships (form 8865) and trusts (Forms 3520 & 3520A). 3) Statement of Specified Foreign Financial Assets (Form 8938), required to be filed annually by U.S. individual taxpayers disclosing offshore ownership of certain financial assets in excess of applicable thresholds. The requirements are expected to be extended to U.S. entities in the near future. 4) Foreign Account Tax Compliance Act (FATCA) instituting a new disclosure and withholding regime whereby foreign financial institutions will be required to provide financial
information to the U.S. Treasury with respect to their U.S. accounts, and both U.S. and foreign institutions will be forced to withhold on payments between noncompliant or non participating institutions. Together these four regimes represent a formidable attempt on the part of the U.S. Treasury to maintain awareness of all non U.S financial assets of any person subject to U.S. taxation, regardless of the domicile of either the asset or the taxpayer. The annual FBAR and entity disclosures (#1 and 2 above) have been in existence for many years, and their provisions are familiar to many practitioners. The annual Form 8938 filing requirement (#3 above) became effective for the 2011 U.S. tax year. On December 21, 2011 the U.S. Treasury released the final version of the 2011 Form 8938, along with complete instructions. The digital links to both the Form 8938 and its related instructions are as follows: • IRS Form 8938: Here • IRS Form 8938 Instructions: Here The new FATCA legislation (#4 above) essentially ‘deputizes’ all foreign financial institutions (FFI’s) in the worldwide search for unreported income taxable in the U.S. On February 8, 2012 the U.S. Treasury issued almost 400 pages of proposed Regulations (REG-121647-10) in connection with these new requirements; their provisions begin to phase in for the 2013 tax year. The digital link to these newly proposed regulations can be found here. Briefly, the new FATCA framework contains two distinct components; a disclosure component requiring that foreign financial institutions meeting certain parameters report annually to the U.S. Treasury on their holdings of assets owned by persons subject to U.S. taxation, and a withholding component, requiring that payments of U.S. source income made to ‘non-compliant’ FFI’s be subjected to 30% withholding. (A non-compliant FFI is generally any institution which does not adhere to the disclosure requirements under FATCA). Each FFI would be required to enter into an ‘FFI Agreement’ with the U.S. Treasury, whereby it agrees to annually provide the subject information, as well as undertake due diligence and other internal procedures to ensure compliance, both on the disclosure and the withholding side. As one might expect the framework is extremely complex, and it will place a substantial burden on financial institutions both within and outside of the U.S. In partial recognition of this fact, the U.S. Treasury announced in February of 2012 that it had entered into agreements with the governments of five Eurozone countries: the UK, France, Germany, Italy and Spain, whereby each of these governments will collect the sought after information from its own financial institutions and forward it directly to the U.S. Treasury. This means that FFIs in those countries would escape some of the more onerous provisions of FATCA, such as entering into FFI Agreements, withholding on ‘passthru’ payments (payments between FFI’s), and closing recalcitrant accounts. The U.S. hopes that this can become a model approach going forward, in effect delegating FATCA enforcement to the country where a particular FFI is located.
The implementation schedule for selected FATCA provisions includes the following : 2013 tax year: FFI’s need only provide the name, address, TIN, account number and account balance of each U.S. account; withholding on the payment of U.S. source income to noncompliant FFI’s begins. 2015 tax year: Income reporting will be added to the required disclosure. 2016 Tax year: Gross proceeds from asset sales will be added to the required disclosure. 2017 tax year: Withholding on foreign ‘pass-thru’ payments begins. As a final note, the U.S. Treasury has reinstituted its offshore voluntary disclosure program, which allows U.S. taxpayers who in the past have failed to report income from offshore assets and/or failed to make the required annual disclosure filings to come forward and be brought into compliance. And although the penalty framework under this new amnesty program is somewhat more severe than under previous programs, it is slated to go on indefinitely. To learn more about FATCA and other tax planning, structuring and compliance considerations, visit www.odmd.com or call Eric Gelb, Tom Riggs or Leo Parmegiani at (212) 286-2600. About Our Practice: O'Connor Davies, LLP - Financial Services Group (ODFS) is a leading provider of tax, accounting, audit, regulatory compliance, fund administration and investor consulting services to the financial community and especially the Alternative Investment Industry. ODFS is a division of O'Connor Davies, LLP, was founded in 1891 and is the 2nd fastest growing public accounting firm in the United States. The firm is PCAOB-registered. O’Connor Davies, LLP is a member firm of the PKF International Limited network of legally independent firms and does not accept any responsibility or liability for the actions or inactions on the part of any other individual member firm or firms. IRS CIRCULAR 230 DISCLOSURE: To comply with IRS regulations, we are required to inform you that unless expressly stated otherwise, any discussion of U.S. federal tax issues in this correspondence (including any attachments) is not intended or written to be used, and cannot be used, (i) to avoid any penalties imposed by the Internal Revenue Code, or (ii) to promote, market, or recommend to another party any transaction or matter addressed herein. Our firm provides the information in this e-newsletter for general guidance only, and it does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.

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FATCA Update - Additional Treasury Department Guidance

  • 1. Financial Services Newsletter: News & Trends FATCA Update – U.S. Treasury Releases Additional Guidance Update on US Efforts to Ensure Tax Compliance Involving Offshore Financial Assets and Accounts Over the last several weeks the U.S. Treasury has released additional guidance with respect to the reporting by U.S. taxpayers of non U.S. domiciled financial assets. The most recent guidance has come in the form of newly issued proposed regulations governing the implementation of the FATCA rules, which were added to the Internal Revenue Code by the HIRE Act of 2010. These voluminous proposed regulations cover many topics, including expanding the categories of foreign financial institutions that are “deemed compliant,” the phase-in of requirements over a newly extended timeframe, and the reduction of certain of the burdens placed on foreign institutions associated with identifying U.S. accounts. Also released were the final Form 8938 and related instructions, which are to be used by individuals to report specified foreign assets for the 2011 tax year and beyond. This means that the U.S. Treasury framework to ensure full disclosure of all non-U.S. financial assets held by those subject to U.S. taxation is now comprised of four independent and sometimes overlapping regimes. These four regimes are: 1) Annual Report of Foreign Bank and Financial Accounts (FBAR), required to be filed annually to disclose all foreign accounts over which a U.S. taxpayer retains signature authority (Form TD F 90-22.1). 2) Various Entity Disclosure Returns required to be filed annually to disclose ownership of certain offshore entities, including offshore corporations (Forms 5471, 8621, 926, etc.), partnerships (form 8865) and trusts (Forms 3520 & 3520A). 3) Statement of Specified Foreign Financial Assets (Form 8938), required to be filed annually by U.S. individual taxpayers disclosing offshore ownership of certain financial assets in excess of applicable thresholds. The requirements are expected to be extended to U.S. entities in the near future. 4) Foreign Account Tax Compliance Act (FATCA) instituting a new disclosure and withholding regime whereby foreign financial institutions will be required to provide financial
  • 2. information to the U.S. Treasury with respect to their U.S. accounts, and both U.S. and foreign institutions will be forced to withhold on payments between noncompliant or non participating institutions. Together these four regimes represent a formidable attempt on the part of the U.S. Treasury to maintain awareness of all non U.S financial assets of any person subject to U.S. taxation, regardless of the domicile of either the asset or the taxpayer. The annual FBAR and entity disclosures (#1 and 2 above) have been in existence for many years, and their provisions are familiar to many practitioners. The annual Form 8938 filing requirement (#3 above) became effective for the 2011 U.S. tax year. On December 21, 2011 the U.S. Treasury released the final version of the 2011 Form 8938, along with complete instructions. The digital links to both the Form 8938 and its related instructions are as follows: • IRS Form 8938: Here • IRS Form 8938 Instructions: Here The new FATCA legislation (#4 above) essentially ‘deputizes’ all foreign financial institutions (FFI’s) in the worldwide search for unreported income taxable in the U.S. On February 8, 2012 the U.S. Treasury issued almost 400 pages of proposed Regulations (REG-121647-10) in connection with these new requirements; their provisions begin to phase in for the 2013 tax year. The digital link to these newly proposed regulations can be found here. Briefly, the new FATCA framework contains two distinct components; a disclosure component requiring that foreign financial institutions meeting certain parameters report annually to the U.S. Treasury on their holdings of assets owned by persons subject to U.S. taxation, and a withholding component, requiring that payments of U.S. source income made to ‘non-compliant’ FFI’s be subjected to 30% withholding. (A non-compliant FFI is generally any institution which does not adhere to the disclosure requirements under FATCA). Each FFI would be required to enter into an ‘FFI Agreement’ with the U.S. Treasury, whereby it agrees to annually provide the subject information, as well as undertake due diligence and other internal procedures to ensure compliance, both on the disclosure and the withholding side. As one might expect the framework is extremely complex, and it will place a substantial burden on financial institutions both within and outside of the U.S. In partial recognition of this fact, the U.S. Treasury announced in February of 2012 that it had entered into agreements with the governments of five Eurozone countries: the UK, France, Germany, Italy and Spain, whereby each of these governments will collect the sought after information from its own financial institutions and forward it directly to the U.S. Treasury. This means that FFIs in those countries would escape some of the more onerous provisions of FATCA, such as entering into FFI Agreements, withholding on ‘passthru’ payments (payments between FFI’s), and closing recalcitrant accounts. The U.S. hopes that this can become a model approach going forward, in effect delegating FATCA enforcement to the country where a particular FFI is located.
  • 3. The implementation schedule for selected FATCA provisions includes the following : 2013 tax year: FFI’s need only provide the name, address, TIN, account number and account balance of each U.S. account; withholding on the payment of U.S. source income to noncompliant FFI’s begins. 2015 tax year: Income reporting will be added to the required disclosure. 2016 Tax year: Gross proceeds from asset sales will be added to the required disclosure. 2017 tax year: Withholding on foreign ‘pass-thru’ payments begins. As a final note, the U.S. Treasury has reinstituted its offshore voluntary disclosure program, which allows U.S. taxpayers who in the past have failed to report income from offshore assets and/or failed to make the required annual disclosure filings to come forward and be brought into compliance. And although the penalty framework under this new amnesty program is somewhat more severe than under previous programs, it is slated to go on indefinitely. To learn more about FATCA and other tax planning, structuring and compliance considerations, visit www.odmd.com or call Eric Gelb, Tom Riggs or Leo Parmegiani at (212) 286-2600. About Our Practice: O'Connor Davies, LLP - Financial Services Group (ODFS) is a leading provider of tax, accounting, audit, regulatory compliance, fund administration and investor consulting services to the financial community and especially the Alternative Investment Industry. ODFS is a division of O'Connor Davies, LLP, was founded in 1891 and is the 2nd fastest growing public accounting firm in the United States. The firm is PCAOB-registered. O’Connor Davies, LLP is a member firm of the PKF International Limited network of legally independent firms and does not accept any responsibility or liability for the actions or inactions on the part of any other individual member firm or firms. IRS CIRCULAR 230 DISCLOSURE: To comply with IRS regulations, we are required to inform you that unless expressly stated otherwise, any discussion of U.S. federal tax issues in this correspondence (including any attachments) is not intended or written to be used, and cannot be used, (i) to avoid any penalties imposed by the Internal Revenue Code, or (ii) to promote, market, or recommend to another party any transaction or matter addressed herein. Our firm provides the information in this e-newsletter for general guidance only, and it does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.