foreign account tax compliance act (fatca) and irs … pdfs... · invested in non-u.s. bank and...
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Foreign Account Tax Compliance Act (FATCA) and IRS Notices and Treasury Regulations Relating
to FATCA and US Treasury and IRS Reporting Compliance for US Taxpayers who own Foreign Entities
FATCA stands for the “Foreign Account Tax Compliance Act” which was incorporated into the HIRE Act that became law on March 18, 2010.
The goal of FATCA is to require foreign financial institutions (“FFIs”) and non-financial foreign entities (“NFFEs”) to provide information to the IRS identifying U.S. persons invested in non-U.S. bank and securities accounts.
The policy of FATCA is to reduce U.S. tax evasion by improving the information available to the IRS about the offshore accounts of U.S. persons.
Treasury/IRS accordingly describe FATCA as a “reporting regime.”
FATCA As a Reporting Regime
FATCA’s lever to achieve this goal is a NEW 30% withholding tax levied on “withholdable payments” made to nonparticipating FFIs and NFFEs.
“Withholdable payments” include all U.S. source income (“FDAP”) and gross proceeds from the sale or disposition of any property of a type that can produce interest or dividends from U.S. sources.
Withholding may also apply to non-U.S. source payments because of the “passthru payment” concept.
FATCA’s Teeth = Withholding
Broad definition that includes any non-U.S. entity that: • Accepts deposits; • Holds financial assets for the account of others; • Engages primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest in such securities.
FFI Examples: non-U.S. banks, securities brokers and dealers, hedge funds, collective and family investment vehicles.
• A Miami bank custodies the U.S. assets for a non-U.S. bank with solely non-U.S. customers – the non-U.S. bank is an FFI. • A Miami bank’s customer is a Panamanian personal investment corporation (“PIC”) holding solely passive assets – the PIC is an FFI.
FFIs
How to be a “good” FFI not subject to 30%
FATCA withholding?
• Belong to a class of institutions that Treasury/IRS designate as per se “good” and not subject to FATCA withholding.
• Enter into an “FFI Agreement” with the IRS with the attendant obligations (“participating FFI”).
• Comply with procedures to establish that the institution does not maintain “U.S. Accounts.”
• Be exempted because another withholding agent has agreed to take on expanded documentation and due diligence requirements for underlying owners.
“Good” FFIs
A participating FFI must enter into an agreement with the IRS to do all of the following:
• Identify its “U.S. Accounts” including all its worldwide affiliates;
• Comply with due diligence criteria to ensure that it has really identified its U.S. Accounts;
• Provide the IRS with an annual report with details about the U.S. Accounts that it has found;
• Deduct and withhold 30% on withholdable payments made to “recalcitrant account holders” or non-participating (or “bad”) FFIs;
• Provide any follow-up information requested by the IRS with respect to the U.S. Accounts; and
• Request a waiver from any U.S. account holder if disclosure would otherwise be prohibited on the basis of non-U.S. law (e.g., privacy or bank secrecy laws), and close the account if the account holder refuses to cooperate.
The IRS can terminate the agreement if any of the above is not done.
The FFI Agreement Route
Non-financial Foreign Entities (“NFFEs”) are non-U.S. entities that are not FFIs.
The goal of section 1472 is to find “substantial U.S. owners” of these entities.
• “Substantial” means >10% U.S. owners of non-U.S. corporations or partnerships and >10% beneficiaries of non-U.S. trusts.
• A U.S. grantor of a grantor trust is always considered a “substantial U.S. owner.”
Examples: non-U.S. corporations, partnerships.
• A Miami bank’s customer is a closely-held Argentine manufacturing company – the company is an NFFE
NFFEs
How to be a “good” NFFE not subject to 30% FATCA withholding:
• Belong to a class of NFFEs that Treasury/IRS designate as per se “good” and not subject to FATCA withholding (or “good” under the statute, e.g., publicly traded corporations);
• Engage in an “active business;”
• Certify to the withholding agent that the NFFE has no substantial U.S. owners; or
• Provide the names, addresses, and U.S. taxpayer identification numbers (“TINs”) of substantial U.S. owners to the withholding agent to then be reported to the IRS.
“Good” NFFEs
Notice 2010-60 – Issued August 27, 2010. • Overall FATCA system architecture. • Grandfathering of certain obligations from FATCA withholding. • Documentation of accounts by FFIs, including transition “relief.”
Notice 2011-34 – Issued April 8, 2011. • Modified rules for documenting preexisting individual accounts. • Passthru payments. • Deemed compliant FFIs. • FFI annual reporting. • Expanded affiliated FFI group rules. • QI coordination.
The FATCA Notices
Primarily modifies original FATCA effective date of January 1, 2013.
FFI elections must be made in 2013 by June 30 to ensure that they are effective for that year.
• New account opening procedures must be in place by July 1, 2013 (or effective date of FFI agreement if later).
Withholding on FDAP begins January 1, 2014.
Reporting of certain known U.S. persons begins Sept. 2014.
Withholding on gross proceeds from the sale of securities giving rise to U.S. source interest and dividends begins January 1, 2015.
Passthru payment withholding may also begin January 1, 2015.
Notice 2011-53 – Issued July 14, 2011
Governments Reach Agreements. The Treasury Department Feb. 8 2012 said it had reached an agreement with the governments of France, Germany,
Italy, Spain, and the United Kingdom for designing a framework to implement the information reporting and
withholding provisions by foreign financial institutions under the Foreign Account Tax Compliance Act (FATCA).
According to Treasury's news release, the governments expressed their “mutual intent to pursue a government-to-
government framework for implementing FATCA—an important step toward addressing legal impediments to financial
institutions' ability to comply with the regulations. Treasury has later announced that this agreement is the foundation
for the US to enter into other agreements with other countries.
FATCA Treasury Regulations. The Internal Revenue Service and Treasury Department on Feb. 8 2012 released the long-awaited proposed rules on
the Foreign Account Tax Compliance Act (FATCA). In proposed rules that appeared in the Feb. 9 2012 Federal
Register, IRS said the proposals reflect concerns that were raised when the agency asked for feedback. Among the
areas where IRS has revised its previous notices on FATCA include expanding the scope of grandfathered
obligations; transitional rules for affiliates with legal compliance prohibitions; additional categories of deemed
compliant foreign financial institutions; and modification of due diligence requirements. The rules are a good response
to the Industry’s complaints about FATCA administration; albeit lengthy and convoluted.
Treasury Statement Announcing Government to Government Agreements and FATCA Treasury Regulations
• The FFI agreements will provide for a gradual phase-in of reporting requirements. For reporting with respect to calendar years 2013 and 2014, participating FFIs are required to report only name, address, taxpayer identification number (TIN), account number and account balance with respect to U.S. accounts. For reporting with respect to calendar year 2015, participating FFIs are also required to report income. For reporting with respect to calendar year 2016 and thereafter, the regulations require full reporting, including reporting of gross proceeds.
• Withholding on pass-thru payments will also be gradually phased in. The pass-thru payment regime requires withholding on two types of payments: withholdable payments and other payments to the extent attributable to a withholdable payment. Participating FFIs will be obligated to withhold on withholdable payments starting on 2014. For other pass-thru payments, however, the regulations postpone the withholding requirement until 2017. The U.S. Treasury also expressed willingness to further relax the pass-thru payment withholding obligations for jurisdictions that enter into agreements to facilitate FATCA implementation.
Highlights of FATCA Treasury Regulations (Con’t)
• Treasury form 3520 — Creation of or Transfer to Foreign Trusts.
• Treasury form 3520A — Annual Returns for Foreign Trusts.
• Treasury form 1040, Schedule B, part 3, to report Foreign
Accounts and Trusts.
• Treasury Form 56.
• W8/W9 Treasury Reporting.
• Form TD.F. 90-22.1, Report of Foreign Bank and Financial Account.
• Section 6048A statement & annual information return.
• Form 8832 — Entity Classification Election.
• Form 8858 — Information Return of U.S. Persons with Respect to Foreign Disregarded Entities.
• Form 926. VDP.
• Form 8938 – Statement of Specified Foreign Financial Assets.
U.S. Treasury Reporting Requirements
You are a specified individual. A specified individual is: • A U.S. citizen • A resident alien of the United States for any part of the tax year • A nonresident alien who makes an election to be treated as resident alien for purposes of filing a joint income tax return • A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico
AND
You have an interest in specified foreign financial assets required to be reported. A specified foreign financial asset is:
• Any financial account maintained by a foreign financial institution • Other foreign financial assets held for investment that are not in an account maintained by a US or foreign financial institution
AND
The aggregate value of your specified foreign financial assets is more than the reporting thresholds that applies to you:
• Unmarried taxpayers living in the US • Married taxpayers filing a joint income tax return and living in the US • Married taxpayers filing separate income tax returns and living in the US
Form 8938 – Do I Have to File?
Offshore mutual funds:
• Must report investment income.
• Treasury form 8621.
Closely held foreign corporations:
• Treasury form 5471.
Other required U.S. treasury tax returns.
Offshore life insurance products and annuities.
Other Offshore Structures and Reporting
• U.S. citizens/residents must report their world wide income to the U.S. treasury.
• Penalties for failure to file and report treasury forms 3520 and 3520A can range from a minimum $10,000 penalty up to 35% of the amount of assets contributed to the trust. IRC section 6677.
• Penalties imposed on U.S. grantor for trustee non compliance. IRC section 6048A.
• Criminal penalties.
Severe Penalties for Non Compliance
of Tax Reporting
