FATCA Flashes Forward

12 March 2013

Enacted in 2010, the Foreign Account Tax Compliance Act (“FATCA”) requires foreign financial institutions (“FFIs”) to report information to IRS on their US accounts and to withhold and pay tax on various US source payments. FATCA also imposes substantial rules on Non-FFIs (NFFIs).

In our blog, we have posted several updates (links listed below) on this legislation as it continues to weave itself into the fabric of international tax relationships. Below I discuss some recent notable developments applicable to FFIs in general and Switzerland in particular. We will discuss the implications for NFFIs in a later blog.

Final Regulations:

On January 17, 2013, the IRS released final regulations under FATCA. The 544 pages which comprise these final regulations (the “Regulations”) generally follow the proposed rules that had been released in February 2012, with various clarifications and modifications.

The Regulations provide the substantive requirements for FFI agreements. Participating FFI’s will interact with IRS via the “FATCA Registration Portal” which should be accessible by July 15, 2013. This portal will be the means by which financial institutions will complete and maintain their FATCA registrations, agreements and certifications. The IRS will begin issuing a Global Intermediary Identification Number (GIIN) to participating FFIs and deemed-compliant FFIs by October 15, 2013. FFIs will use their GIINs when fulfilling their reporting requirements, and to identify their status to withholding agents. IRS will also revise certain existing tax forms and issue new forms, including Form 8966 “FATCA Report” expected by late 2013 or early 2014.

The Regulations confirm timelines for due diligence, reporting, and withholding, to complement IRS’ Announcement 2012-42. Here is a summary of important dates:

December 2, 2013: The IRS expects to post its initial list of participating FFIs and registered deemed-compliant FFIs; updated on a monthly basis.
January 1, 2014: FFI Agreements will start taking effect
March 15, 2015: FFI reporting begins on “US accounts” held in 2013 and 2014.
(Please note: US accounts are accounts beneficially owned by US persons as defined under the FATCA rules.)
Withholding agents are required to withhold on withholdable payments made after December 31, 2013. Withholding requirements on gross proceeds and foreign passthru payments are suspended until January 1, 2017.

Upon the effective date of an FFI Agreement, the “responsible officer” must certify that the FFI has established a compliance program, including good internal controls and procedures. On an ongoing basis, the responsible officer must also certify that there have been no “material failures” to comply, or if there are identified material failures that these have been remediated and actions taken to prevent a re-occurrence. This certification must be renewed every 3 years.

The Regulations did expand the categories of deemed-compliant FFIs that do not need to enter into FFI agreements and include certain modifications to the definition of a “Financial Institution.” These are important since they determine which entities must comply with FATCA, but persons hoping for an IRS expansion of deemed-compliant status will be disappointed. Importantly, Treasury explains that Annex 2 of the IGAs will be the appropriate venue for FFI carve-outs on a national basis.

FATCA Inter-Governmental Agreements (IGA)

Both Model 1 and 2 IGAs are now defined in the Regulations and the IRS will publish lists of countries that have entered respective agreements under one or the other of the model IGAs. The Final Regulations set December 31, 2013 as the effective date for FFI agreements in coordination with the IGAs. As mentioned, the Regulations also defer to the applicable IGA to determine whether a resident entity is an FFI or may be exempt or deemed-compliant. The Treasury Department announced that it hopes to reduce the costs and burdens of implementing FATCA by coordinating the Regulations with the IGAs. This means that the applicable IGA will be vital in determining steps to FATCA compliance.

US-Swiss Inter-Governmental Agreement (IGA) on FATCA

It was announced on February 14, 2013 that the United States and Switzerland had signed a bilateral IGA to facilitate FATCA reporting and withholding between the two countries under FATCA. This is the first signed Model 2 IGA, though we note that this IGA still needs to be ratified by the Swiss parliament.

The Swiss IGA does not establish automatic information exchange between governments. Instead, the Swiss government has agreed it will ensure that Swiss financial institutions will, under Swiss law, be able to become participating FFIs and directly report to the IRS on their US accountholders and beneficial owners. In return for entering into the IGA, Swiss FFIs will not be subject to the 30% withholding tax on US source payments. The US also agreed to treat Swiss retirement plans and certain qualified collective investment vehicles as deemed-compliant entities which exempts them from the FATCA reporting requirements.

With regards the mechanics of reporting their US accounts, a Swiss FFI must first actively attempt to obtain consent to report account information to the IRS from the accountholder. If an accountholder refuses to provide consent, the FFI cannot report their information to IRS; this would violate Swiss banking secrecy rules which are still in effect. A “refusing” accountholder is then treated as a “Recalcitrant Accountholder.” The IRS can demand information on Recalcitrant Accountholders via a group request; the authority for this request rests in the US -Switzerland Income Tax Treaty. After a group request is made and has worked its way through the mechanics of the Treaty, a Swiss FFI will report on its recalcitrant accounts in accordance with FATCA as if it had received consent from the accountholder. Thus, although the exchange of information is not automatic, it remains all-inclusive.

FATCA Becomes a Reality

Over the past several weeks, some of our clients here in Switzerland are feeling the effect of the IGA as they have just received FATCA consents from their Swiss bank. One such consent is headed “Authorization to Disclose Data to the IRS” and specifically references the bank being subject to FATCA. In the consent, the bank’s customer “authorizes the Bank to report to the IRS … all information concerning the above-mentioned account relationship … including but not limited to the Client’s name and address, beneficial ownership information, a copy of any IRS Form W-9, account statements, the amount of assets held with the Bank, the amount of revenues and income and any other information regarding the relationship which may be requested or required by the IRS (collectively, the Data). The Client understands that the IRS may further share the Data with third parties wherever located and whom they deem appropriate.”

By signing the authorization, the client further “releases the Bank from all liability in connection with the provision of Data to the IRS” and “hereby expressly waives any protection or right under Swiss bank-client confidentiality and data protection laws to the extent necessary for the reporting of any Data hereunder.” The cover letter accompanying the Authorization states that if the Authorization is not returned to the bank by a specified date, the bank “will not be able to continue to maintain the above-referenced relationship and will be required to terminate your account.”

As one might imagine, this letter has had considerable effect on US accountholders and we have been fielding numerous frenzied calls. Beyond the obvious tax compliance issues which these US persons face, the Authorization also has consequences on regularizing their tax situations. Under IRS practice, a voluntary disclosure must be truthful, timely and complete. The Authorization thus throws into question the element of being “timely” which includes that the disclosure is made before “the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance.” (Internal Revenue Manual at Section 9.5.11.9.4.B).

Conclusion

FFIs face the arduous task of being prepared for FATCA this year. FATCA implementation plans must sometimes still be designed, and at the very least reviewed to ensure compliance with the Final Regulations. No less arduous, US persons are faced with information exchanges and the disclosure of all their account details to IRS; for those who are not yet compliant with their US tax obligations, this FATCA mandated information exchange leaves them little choice, and little time.

Our other FATCA blog posts: