Industry Welcomes US Delay Of When FATCA Act Starts To Bite

Tom Burroughes

26 October 2012

Financial industry figures have welcomed this week’s move by US tax authorities to push back the key start dates for when the Foreign Account Tax Compliance Act – or FATCA – kicks in.

As reported by this and other publications, the Internal Revenue Service on Wednesday announced the delay of certain FATCA requirements, including new timelines for due diligence, withholding and documentation requirements, as well as guidance on gross proceeds and grandfathered obligations.

The US will require that each citizen reports their global assets and earnings to the Internal Revenue Service, regardless of where they live, how long they have lived there or whether any money is owed. Foreign financial institutions will also be required to disclose such information concerning any American clients they may have, or if they do not, pay a 30 per cent withholding tax. A number of firms have said they are no longer willing to serve expat US citizens because of the associated rise in compliance costs. Increasing numbers of expats are renouncing their US citizenship, as reported here.

As part of delays, institutions will now have until January 1, 2017 – an additional two years – to begin withholding US tax from clients' investment gains.

“The IRS announcement on Wednesday that certain FATCA compliance dates have been extended is welcome news that many financial institutions were hoping for. The IRS is providing companies with the additional time that they need to meet key compliance milestones – in many cases up to six months or more,” Deloitte Tax Global FATCA Leader Denise Hintzke, said.

“These revised compliance dates are consistent with the ones contained in the model intergovernmental agreements. The news also included an expanded definition of grandfathered obligations that includes certain types of derivative-associated income. In addition, withholding on gross proceeds has been pushed out two years, taking effect in 2017,” Hintzke continued.

“However, it’s imperative that financial firms continue to push towards compliance. Companies that relax their sense of urgency around implementing compliance programs may quickly find themselves facing the new deadlines, and quite possibly some implementation challenges may yet be discovered,” she added.

Mike Laveman, tax partner at US accounting firm EisnerAmper, said: “The most important effect of the announcement is that we now have alignment of new account and due diligence procedures for us withholding agents such as US-based funds, foreign financial institutions, and entities that may fall under the purview of the intergovernmental agreements being worked on.”

“Before this announcement all three had different set of rules which has led to a lot of confusion as to how and when to implement FATCA. These new rules essentially give everyone a little more time to create a FATCA process,” he said.

“In addition the announcement pushed off withholding taxes from the gross proceeds from the sale of US securities two years. This is significant because most of dollars generated from FATCA would likely come from this as opposed to dividend and interest income. The delay does not mean FATCA registration won't take place in 2013 but the pressure is off to do it immediately at the beginning of 2014,” Laveman added.

International

The US Treasury is working with a number of countries on an intergovernmental framework to address legal issues under the Act and to simplify its implementation, having published two versions of a model intergovernmental agreement earlier this year.

The UK became the first country to sign an agreement with the US on implementation in September, a step that was welcomed by the UK financial services industry, the law firm Withers told Family Wealth Report. The treaty, which still needs to be enacted by parliament, aims to curb compliance costs and address the fears of financial institutions worried that imposing the FATCA Act rules will drive up regulatory burdens.

The Treasury has pending agreements with France, Germany, Italy, Spain, Switzerland and Japan, and is cooperating with at least 40 other countries on FATCA agreements, Reuters reported, citing comments from tax lawyers.

The FATCA Act came under fire at SIFMA's annual meeting in New York earlier this week. To view coverage of the event click here.