On February 8, 2012, the IRS and the Treasury Department released proposed regulations under the Foreign Account Tax Compliance Act (“FATCA”). The FATCA provisions, enacted as part of the Hiring Incentives to Restore Employment Act of 2010 (“HIRE Act”) and comprised of sections 1471 through 1474 of the Code, create reporting, withholding, and documentation requirements for certain foreign financial institutions (“FFIs”) and non-financial foreign entities (“NFFEs”) designed to thwart attempts by U.S. taxpayers to avoid tax by using offshore accounts. The proposed regulations contain helpful guidance on both the substantive and procedural elements of the FATCA regime, and modify and expound upon the approach previously outlined in IRS Notices 2010-60, 2011-34, and 2011-53.
Notable provisions of the proposed regulations include the following:
- Dates extended for grandfathered obligations, FFI reporting on income and gross proceeds. The proposed regulations designate January 1, 2013 as the date on which outstanding obligations qualify as grandfathered obligations (the date previously designated by the HIRE Act was March 18, 2012). Therefore, no amount shall be deducted or withheld pursuant to FATCA from any payment under any obligation outstanding on January 1, 2013 or from the gross proceeds from any disposition of such an obligation. In addition, in response to comments suggesting more time was needed to prepare for the reporting of income and gross proceeds, with respect to FFIs, income reporting will now be required beginning in 2016 (with respect to the 2015 calendar year) and gross proceeds reporting starts in 2017 (with respect to the 2016 calendar year).
- Affiliated group FFI requirements. Generally, in order for any FFI to be a participating FFI (“PFFI”) under FATCA, every other FFI that is a member of the same affiliated group must also qualify as a PFFI or a deemed-compliant FFI. Recognizing that this rule could create problems due to legal prohibitions on elements of FATCA compliance in certain jurisdictions, the IRS and the Treasury Department include a transitional period for this affiliated group rule in the proposed regulations. Before January 1, 2016, as long as the FFI (or branch of FFI) subject to the legal prohibition complies with certain reporting and diligence requirements, other FFIs in the same affiliated group will not be prevented from entering into an FFI Agreement (thus obtaining PFFI status).
- Expansion of definition of “deemed compliant” FFIs. IRS Notice 2011-34 provided several categories of FFIs that would be considered deemed-compliant and therefore exempt from withholding without an FFI Agreement. The proposed regulations add to the categories of FFIs that get deemed-compliant status, to include, for example, certain banks and mutual funds which only have local clients and certain retirement plans seen as posing a low risk in terms of the abuses FATCA is designed to prevent.
- Phase-in of passthru payment regime. Participating FFIs will be required to begin withholding on passthru payments that are withholdable payments (as defined in the regulations) on January 1, 2014. Beginning no earlier than January 1, 2017, withholding by FFIs with respect to passthru payments will no longer be limited to withholdable payments, and FFIs will be required to withhold on such payments to the extent required by future guidance.
Additional guidance is forthcoming, including the release of a draft model FFI agreement in early 2012. The IRS and the Treasury Department indicate that they plan to make necessary amendments to the regulations in order to prevent the circumvention of reporting and withholding on passthru payments through the use of certain U.S. financial institutions as “blockers.” In an effort to minimize any burden imposed by FATCA provisions, comments are requested concerning practical approaches to the treatment of withholding on passthru payments. Furthermore, an alternative method of compliance with FATCA, under which an FFI would provide relevant information to its residence country government and such government would report the information to the IRS, is under consideration. Persons who wish to submit comments on these regulations must do so in written or electronic form by April 30, 2012.