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More clarity on FATCA ruling

More clarity on FATCA ruling

US Treasury Department and the IRS release proposed regulations on new tax law

The Bahamas Investor Magazine
July 24, 2012
July 24, 2012
Lawrence Lewis (pictured)

Fall Winter 2012-2013FATCA stands for the Foreign Account Tax Compliance Act. It refers to certain provisions included in the Hiring Incentives to Restore Employment (HIRE) Act signed into law on March 18, 2010 and effective January 1, 2013. On February 8, 2012, the US Treasury Department and the IRS released proposed regulations that provide financial institutions with a clearer road map,―though not a final one,―to compliance.

While the 388-page document leaves many unanswered questions, FATCA’s central purpose remains simple: to identify US taxpayers who hold financial assets in non-US financial institutions and other offshore accounts, so that they cannot avoid US tax obligations.

Even with the uncertainty, financial institutions should be encouraged that the picture surrounding FATCA is brightening. Moreover, the US Treasury Department conveyed a clear intent to make the proposed requirements less difficult for institutions. In this context, they have relaxed certain thresholds for affected accounts, eased some timelines, and allowed greater reliance on existing processes and systems.

The proposed regulations impact four main areas:
Pre-existing account requirements: The proposed rules regarding classification and action on pre-existing accounts are a significant departure from the guidance contained in the prior notices and include changes that should reduce the affected customer population and streamline the remediation process. These new guidelines put more focus on electronic searches and modify the types of documents that must be looked at in those situations when paper searches are required.

New account requirements: Compared to previous notices, the proposed FATCA rules also simplify the documentation requirements for new accounts to some extent by relying more on existing anti-money laundering /know your customer policies and requirements. New accounts include any opened after the effective date of an FFI’s (foreign financial institution) agreement with the IRS (generally July 1, 2013).

Withholding requirements: The proposed withholding requirements are scheduled to be gradually phased in over several years starting with US-sourced income payments beginning on January 1, 2014. This includes payments that are considered Fixed or Determinable, Annual, or Periodic (FDAP), such as US-sourced interest, dividends, original issue discount, rents, and royalties. The withholding expands to include gross proceeds from the sale of property that can produce US-sourced interest or dividends beginning on January 1, 2015. The regulations exclude original issue discount from certain short-term obligations, payments in the ordinary course of the Withholding Agent’s business, the sale of fractional shares, and interest and proceeds from state and local bonds. Withholding also will not be required if the Withholding Agent lacks control, custody, or knowledge. The proposed regulations also expand the scope of “grandfathered” obligations, which will likely be exempt from FATCA withholding if they are issued before January 1, 2013.

Reporting requirements: While the proposed reporting rules ease some requirements, they add others. As with withholding, the reporting requirements will be phased in gradually between 2014 and 2017. Only identifying information (name, address, TIN, and account number) and account balance or value would be reported in 2014 and 2015. Beginning in 2016, reporting may be required for income and in 2017, it could be expanded to include gross proceeds from the sale of securities. In addition, the proposed regulations provide that the FFI may report information in US dollars or in the currency in which the account is maintained.

The scale of implementation can be daunting, but achieving compliance is a manageable task and can be done efficiently. To realize this goal, institutions will likely be required to make strategic choices, leverage existing investments, and thoughtfully coordinate execution. Most importantly, they should not delay in putting these into action.

Lawrence Lewis
Lawrence Lewis (pictured at top) is Deloitte Bahamas’ lead partner for the Foreign Account Tax Compliance Act (FATCA) initiative for The Bahamas and Turks & Caicos Islands. In this capacity, he works with the Deloitte US Tax Information and Reporting Practice.

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