The time for waiting is over! Today the Department of the Treasury and the IRS issued the long-awaited final regulations implementing the information reporting and withholding tax provisions of the Foreign Account Tax Compliance Act (FATCA). These regulations aim to combat offshore tax evasion, with far-reaching implications for Foreign Financial Institutions (FFI) and non-compliant U.S. taxpayers using foreign accounts.
In order to avoid withholding under FATCA, a participating FFI will have to enter into an agreement with the IRS to report information regarding certain U.S. account holders and their accounts. Non-compliant taxpayers will be subject to a 30% withholding amount on some payments. The final regulations clarify the scope and timing of reporting and payments along with compliance and verification procedures for the FFIs.
In order to avoid withholding under FATCA, a participating FFI will have to enter into an agreement with the IRS. Under the agreement, the FFIs will have to identify U.S. accounts, report certain information to the IRS regarding U.S. accounts, and withhold a 30 percent tax on certain U.S.-connected payments to non-participating FFIs.
According to the press release, the final regulations:
- Build on intergovernmental agreements that foster international cooperation. The Treasury Department has collaborated with foreign governments to develop and sign intergovernmental agreements that facilitate the effective and efficient implementation of FATCA by eliminating legal barriers to participation, reducing administrative burdens, and ensuring the participation of all non-exempt financial institutions in a partner jurisdiction. In order to reduce administrative burdens for financial institutions with operations in multiple jurisdictions, the final regulations coordinate the obligations for financial institutions under the regulations and the intergovernmental agreements.
- Phase in the timelines for due diligence, reporting and withholding and align them with the intergovernmental agreements. The final regulations phase in over an extended transition period to provide sufficient time for financial institutions to develop necessary systems. In addition, to avoid confusion and unnecessary duplicative procedures, the final regulations align the regulatory timelines with the timelines prescribed in the intergovernmental agreements.
- Expand and clarify the scope of payments not subject to withholding. To limit market disruption, reduce administrative burdens, and establish certainty, the final regulations provide relief from withholding with respect to certain grandfathered obligations and certain payments made by non-financial entities.
- Refine and clarify the treatment of investment entities. To better align the obligations under FATCA with the risks posed by certain entities, the final regulations: (1) expand and clarify the treatment of certain categories of low-risk institutions, such as governmental entities and retirement funds; (2) provide that certain investment entities may be subject to being reported on by the FFIs with which they hold accounts rather than being required to register as FFIs and report to the IRS; and (3) clarify the types of passive investment entities that must be identified and reported by financial institutions.
- Clarify the compliance and verification obligations of FFIs. The final regulations provide more streamlined registration and compliance procedures for groups of financial institutions, including commonly managed investment funds, and provide additional detail regarding FFIs' obligations to verify their compliance under FATCA.