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Treasury Department, IRS Release Long-Awaited FATCA Guidance

Joe Mont | October 30, 2013

The Treasury Department and Internal Revenue Service have issued proposed guidance for foreign financial institutions (FFIs) as they prepare for compliance with the withholding tax provisions and reporting demands of the Foreign Account Tax Compliance Act. 

The guidance, the latest step in FATCA implementation, provides a draft agreement for participating FFIs and provides advance notice for withholding and account due diligence requirements that begin on July 1, 2014.

Congress enacted FATCA in 2010 as a way to identify U.S. citizens using foreign accounts to evade their domestic tax responsibilities. It requires U.S. financial institutions to withhold a portion of payments made to FFIs that do not agree to identify and report information on U.S. account holders.

To address situations where foreign law would prevent an FFI from complying with the terms of agreement with the U.S., the Treasury Department developed two alternative model intergovernmental agreements (IGAs). Under the first scenario (Model 1 IGA), FFIs report to their respective governments who then relay information to the IRS.  Under the Model 2 IGA, FFIs report directly to the IRS to the extent that the account holder consents and such reporting is legally permitted. This is supplemented by information exchange between governments. 

The notice issued on Tuesday offers guidance to FFIs entering into agreements directly with the IRS, and to those reporting through the Model 2 IGA. It includes updates to due diligence, withholding, and other reporting requirements. The draft FFI agreement will be finalized by Dec. 31.

According to a statement issued by the Treasury Department, the guidance reflects cost-saving simplifications suggested by financial institutions and foreign governments during a comment process. These helped it and the IRS “tailor the rules to achieve policy objectives… without imposing undue burdens or costs.” For example, the final regulations exempt all preexisting accounts held by individuals with $50,000 or less from review.  or similar accounts with less than $1,000,000, an FFI is only required to search the account information that is electronically available. In many situations, FFIs are permitted to rely on information they already must collect for local anti-money laundering and know-your-customer rules. 

While withholding requirements begin next July and the first report of FATCA information is due in 2015, the IRS' registration website is already open so that FFIs can testing the registration process and begin entering information.

The long-awaited guidance may help U.S. officials escalate efforts to secure multinational buy-in, a process that has been relatively slow-going. Thus far, nine countries have agreed to IGAs – Denmark, Germany, Ireland, Japan, Mexico, Norway, Spain, Switzerland and the UK – all of which agreed to the Model 1 approach and direct information sharing with the IRS. In a statement, the Treasury Department and IRS said they have also reached 16 “agreements in substance” and are “engaged in related conversations with many more jurisdictions.”