US To Cooperate With EU Countries On FATCA

By Editorial 10 February, 2012

The United States Treasury Department and the Internal Revenue Service (IRS) have issued proposed regulations for the next major phase of implementing the Foreign Account Tax Compliance Act (FATCA), which also includes a joint statement with France, Germany, Italy, Spain and the United Kingdom on a possible government-to-government framework for information exchange.

FATCA was enacted by Congress in March 2010 and is intended to ensure that the US tax authorities obtain information on financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest, at foreign financial institutions (FFIs). Failure by an FFI to disclose information would result in a requirement to withhold 30% tax on US-source income.

FFIs across the world (including banks, investment funds and insurance companies) have all expressed concern about the legislation, in particular the costs of compliance and penalties that will ensue in case of non-compliance.

The proposed regulations lay out a step-by-step process for US account identification, information reporting, and withholding requirements for FFIs, other foreign entities, and US withholding agents, but they also implement FATCA’s obligations in stages to minimize burdens and costs consistent with achieving the statute’s compliance objectives.

“FATCA strengthens US efforts to combat offshore noncompliance. In doing so, we understand it creates a significant undertaking for FFIs," said IRS Commissioner Doug Shulman. "Today's proposed regulations reflect our commitment to take into account the implementation challenges of affected FFIs while allowing for a smooth and timely roll-out of the law."

“When taxpayers overseas avoid paying what they owe, other Americans have to bear a disproportionate share of the tax burden,” Acting Assistant Secretary for Tax Policy, Emily S. McMahon, added. “FATCA is an important part of the US government’s effort to address that issue, and these regulations implement FATCA in a way that is targeted and efficient. We believe these efforts will serve as a complement and catalyst to the ongoing global efforts to combat offshore tax evasion.”

The proposed regulations will reduce the administrative burdens associated with identifying US accounts by calibrating due diligence requirements based on the value and risk profile of the account, and by permitting FFIs in many cases to rely on information they already collect, including information received to comply with anti-money laundering (“know your customer”) rules.

They will also expand the categories of FFIs that are deemed to comply with FATCA without the need to enter into an agreement with the IRS, in order to focus the application of FATCA on higher-risk FFIs that provide services to the global investment community, and phase-in the reporting and withholding obligations of FATCA over an extended transition period to provide sufficient lead time for FFIs to develop necessary systems.

While FFIs will be able to register through an online system that will become available by January 1, 2013, and institutions with US clients will be required to report basic account details for 2013 and 2014 by January 1, 2015, the income of those clients will not need to be reported until January 1, 2016, with respect to calendar year 2015.

In addition, after intensive discussions with foreign governments, the Treasury Department has also issued a joint statement with France, Germany, Italy, Spain and the UK expressing mutual intent to pursue a government-to-government framework for implementing FATCA – an important step toward addressing legal impediments to FFIs’ ability to comply with the regulations.

The statement does not contemplate an exemption from FATCA for any jurisdiction, but instead offers a framework for information sharing based on existing bilateral tax treaties and allows FFIs to report the necessary information to their respective governments rather than to the IRS. In that regard, the US is also willing to reciprocate in collecting and exchanging, on an automatic basis, information on accounts held in US FIs by residents of France, Germany, Italy, Spain and the UK.

It is hoped that the joint statement will serve as a model for the United States’ work with other countries, as Treasury officials continue to engage in discussions with foreign governments about the effective and efficient implementation of FATCA by their FIs.

Following the publication of the joint statement, the European Commission stated that it welcomed the US acceptance of a government-to-government approach to tackling tax evaders and implementing FATCA. Its opinion was that, “through such an approach to tax information exchange, the administrative burden, compliance costs and legal difficulties which European Union (EU) FIs would otherwise face in applying the FATCA provisions should be greatly reduced.”

It confirmed that “any member state that wants to should now be able to adopt this government-to-government approach to information exchange through coordinated bilateral agreements with the US. This would benefit member states' tax administrations by ensuring reciprocal information provision by the US, and could be the basis for broader cooperation between the EU and the US on information exchange at a later stage.”

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