Treasury Issues Final FATCA Regulations for Foreign Account Reporting (article)
Enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act, the Foreign Account Tax Compliance Act (more commonly known as "FATCA") provides rules that are intended to encourage foreign institutions, vendors, and service providers to disclose their U.S. owners and interest holders. FATCA attempts to accomplish this by imposing a 30% withholding tax on payments to these foreign entities unless the entities comply with a "know your customer" reporting regime. FATCA is unusual in that it imposes the 30% withholding requirement in order to encourage compliance; Congress did not impose the withholding tax in order to raise revenues. The final regulations bring certainty to the reporting regime and ease some of the reporting burden on taxpayers.
The 2011 tax year was the first year in which U.S. taxpayers were required to report ownership or interests in "foreign financial assets" pursuant to the FATCA requirements. Foreign financial assets are now reported on Form 8938, subject to certain conditions. Form 8938 reporting is in addition to any requirements to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts ("FBAR"). A comparison of the Form 8938 and FBAR filing requirements can be found in this IRS chart.
In January 2013, Treasury released detailed regulations that require foreign financial institutions ("FFIs") to disclose any accounts held by U.S. persons to the U.S. government. An FFI is any foreign entity that is a financial institution, except for such entities that are organized under the laws of a U.S. possession. A financial institution is defined as an entity that:
- accepts deposits in the ordinary course of banking or similar business;
- holds financial assets for others as a substantial portion of its business; or
- is (or holds itself out as being) engaged primarily in the business of investing, reinvesting, or trading of securities, partnership interests, commodities, or any interest therein.
The new regulations provide specific due diligence requirements with which an FFI must comply. The regulations also provide rules for non-financial foreign entities ("NFFE's"). Generally, these entities may be required to determine if they are exempt from the FATCA requirements altogether because they are "active" entities or are otherwise exempt. If they are not exempt, they must determine if they have any substantial U.S. owners and certify to a withholding agent that they either have no such owners or will report on those that they have. Treasury also released several intergovernmental agreements that the U.S. has entered into with the UK, Denmark, Mexico, and Ireland, through which the U.S. and foreign government will cooperate in reporting assets held by U.S. persons in these foreign countries to the U.S. government.
These new regulations — while extremely detailed — are viewed as beneficial to FFIs and withholding agents because they provide more certainty to the compliance requirements while providing a more relaxed regulatory regime than what many had anticipated. For example, the IRS is redesigning its Form W-8 series to comply with the new FATCA rules, but withholding agents can rely on existing Form W-8s in some situations to verify the U.S. or foreign status of an account holder. There are also procedures through which an FFI may be certified as "deemed compliant," which should ease administrative burdens for some FFIs that have to comply with the FATCA regime.
The final regulations extend the phased-in transition period for the due diligence, reporting and withholding requirements and align the regulatory timelines with the timelines prescribed in the intergovernmental agreements. For example, the due date for the first information report by FFIs for the 2013 and 2014 calendar years has been delayed from Sept. 30, 2014, to March 31, 2015.
In addition, passive entities that are not professionally managed generally will not be considered FFIs. Mutual funds, hedge funds and similar investment vehicles established with an investment strategy of investing, reinvesting or trading in financial assets, however, will be treated as investment entities that fall within the definition of an FFI.
The new regulations are extremely detailed. For more information about the FATCA rules and whether you are in compliance, please contact your local CBIZ MHM tax professional.
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