FATCA and You

The Foreign Account Tax Compliance Act (FATCA): Restoring Balance to the United States Tax Laws, oran Example of Unbridled American Imperialism?

Introduction

In our last installment, we referred to FATCA as a draconian piece of legislation. Indeed, it is draconian not only in its wording, but also in its effect on countries outside the United States. While it is quite fine for the United States – or any other country, for that matter – to enact legislation that will negatively affect its people, it is morally reprehensible for the United States to enact legislation that will negatively affect citizens of foreign countries who have little, if any, dealings with the United States. Yet, this is just what FATCA does. Accordingly, it is a statute that has no place in the United States Code. Congress should repeal it as soon as possible.

This installment of our five-part series will discuss FATCA's provisions and the burdens the statute places on non-U.S. banks and other financial institutions.

Key FATCA Provisions

Under FATCA, U.S. taxpayers holding financial assets in foreign countries must report those assets to the IRS. In addition, FATCA requires foreign financial institutions – including banks – to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

The IRS Website summarizes the two key provisions of the statute: reporting by U.S. taxpayers holding foreign financial assets, and reporting by foreign financial institutions.

Reporting by U.S. Taxpayers Holding Foreign Financial Assets

FATCA requires U.S. taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a new form (Form 8938) that they must attach to their annual federal income tax returns. Reporting applies for assets held in taxable years beginning after March 18, 2010. A taxpayer's failure to report financial assets on Form 8938 will subject him or her to a penalty of $10,000 (and a penalty of $50,000 for continued failure after IRS notification). Further, underpayments of tax attributable to non-disclosed foreign financial assets will subject the taxpayer to an additional substantial understatement penalty of 40 percent.

The FATCA reporting requirements are in addition to the requirement for the reporting of foreign financial accounts to the U.S. Treasury. This reporting requirement most notably includes Form TD F 90-22.1, "Report of Foreign Bank and Financial Accounts" ("FBAR") for foreign financial accounts exceeding US$10,000 required under the Bank Secrecy Act regulations issued by the Financial Crimes Enforcement Network.

Reporting by Foreign Financial Institutions

FATCA also requires foreign financial institutions ("FFIs") to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. To properly comply with these new reporting requirements, an FFI would have to enter into a special agreement with the IRS and thus become a "participating" FFI ("PFFI"). Under this agreement, a PFFI would be obligated to:

1. Undertake certain identification and due diligence procedures with respect to its accountholders;

2. Report annually to the IRS on its accountholders who are U.S. persons or foreign entities with substantial U.S. ownership; and

3. Withhold and pay over to the IRS 30 percent of any payments of U.S. source income, as well as gross proceeds from the sale of securities that generate U.S. source income, made to (a) non-participating FFIs, (b) individual accountholders failing to provide sufficient information to determine whether they are U.S. persons, or (c) foreign entity accountholders failing to provide sufficient information about the identity of their substantial U.S. owners.

In essence, then, FATCA makes every foreign financial institution an agent of the IRS. In Part V, we shall query whether one country can thus forcibly enlist as its agents citizens and corporate entities of other countries.

Intergovernmental Agreements

Dealing with individual FFIs could well be a nightmare for U.S. officials. Realizing this, the U.S. Department of the Treasury ("Treasury") developed model agreements called Intergovernmental Agreements ("IGAs") to be entered into with willing jurisdictions. On July 26, 2012, the Treasury released a model for agreement under which FFIs would satisfy their FATCA requirements by reporting information about U.S. accounts to their respective tax authorities, whereupon there would be an automatic exchange of that information on a government-to-government basis with the United States ("Model 1 IGA"). On November 14, 2012, the Treasury released a second model IGA under which FFIs would report specified information directly to the IRS in a manner consistent with final regulations, supplemented by government-to-government exchange of information on request ("Model 2 IGA"). As of today, the Treasury has concluded a number of bilateral IGAs based on both models.

Phased Timeline for Implementation

After President Obama signed FATCA into law on March 18, 2010, the Treasury and the IRS immediately got to work preparing the federal regulations that would give true life to the statute. On February 15, 2012, they published proposed regulations. After receiving public comment and making amendments, the Treasury and the IRS published final regulations on January 17, 2013. The final regulations provided for a phased implementation of the requirements of FATCA, beginning on January 1, 2014, and continuing through 2017. In particular, the final regulations provided that withholding agents (including PFFIs, qualified intermediaries that assume withholding responsibility ("QIs"), withholding foreign partnerships ("WPs"), and withholding foreign trusts ("WTs")) would be required to begin withholding with respect to withholdable payments made after December 31, 2013. Due diligence for documenting payees and account holders by U.S. withholding agents and PFFIs would be phased in during 2014 and 2015. Annual reporting by PFFIs would be phased in starting in 2015, with reporting of the full scope of FATCA information required beginning in 2017.

In the preamble to the final regulations, the Treasury and the IRS announced their intent to create a FATCA registration website, which would serve as the primary way for FFIs to interact with the IRS to complete the required registration, agreements, and certifications. The preamble stated that the FATCA registration website would have been accessible to FFIs no later than July 15, 2013. After approval of its registration, each PFFI and registered deemed-compliant FFI would be assigned a global intermediary number (GIIN), which would be used both for reporting purposes and to identify the FFI's status to withholding agents. The preamble also provided that the IRS would electronically post the first list of PFFIs and registered deemed-compliant FFIs on December 2, 2013, and would update the list on a monthly basis. To ensure inclusion on the December 2013 list, FFIs were required to register by October 25, 2013.

Modification of the Phased Timeline for Implementation

Man proposes; God disposes. So let it be with the Treasury, the IRS and FATCA. U.S. officials were unable to meet their original deadlines for FATCA implementation. Accordingly, they developed a new timeline. On April 28, 2014, the IRS updated its Summary of FATCA Timelines. The revised timelines contained therein covered withholding (by withholding agents) and reporting (by financial institutions).

Withholding (by Withholding Agents)

Effective July 1, 2014, withholding agents will be required to begin withholding 30 percent U.S. withholding tax on payments of certain U.S. source income (such as dividends, interest and insurance premiums) made to non-U.S. FFIs unless the FFI establishes by registration that it is:

• a participating FFI, including FFIs in Model 2 IGAs;

• an FFI in a jurisdiction with a Model 1 IGA treated as in effect; or

• a low-risk FFI.

An exception exists whereby certain smaller and more local FFIs and exempt beneficial owners (primarily government-owned entities and international organizations) can avoid withholding if they provide the withholding agent with documentation about their status.

Registration (by Financial Institutions)

By now, FFIs should have registered and obtained their GIINs. Also, the final day to register for inclusion on the first registered FFI list (to avoid withholding) was May 5. The first Registered FFI list was published on June 2. Suffice it to say that seventeen (17) FFIs in Dominica are included on the list. The list will be updated monthly.

An exception exists here also. FFIs in Model 1 IGA jurisdictions have more time to register and be listed, because withholding agents are not required to confirm GIINs before January 1, 2015.

Reporting (by Financial Institutions)

Reporting by FFIs begins in 2015. The first report – by FFIs in non-IGA jurisdictions and FFIs in Model 2 IGA jurisdictions – is due March 31, 2015. FFIs in Model 1 IGA jurisdictions have more time; they must file their first reports by September 30, 2015.

In 2015, FFIs will report information for calendar year 2014. They will be required to report the following information:•The account holder's name. For a passive non-financial foreign entity, the FFI must report the name(s) of any substantial U.S. owners.

• The account holder's U.S. taxpayer identification number ("TIN"). For passive non-financial foreign entities, the FFI should report only the TIN(s) of any substantial U.S. owner(s).

• The account holder's address. For passive non-financial foreign entities, the FFI should report only the address(es) of the substantial U.S. owner(s).

• The account number.

• The account balance or value.

• For accounts held by nonconsenting (i.e., recalcitrant) account holders, the FFI must report the aggregate number and balance or value.

Reporting requirements will be slightly different in 2016. The reporting deadlines will remain the same. However, FFIs will then be required, with respect to the year 2015, to report the same items reported in 2015 for the year 2014, and also report on the income paid to these accounts (except certain gross proceeds from the sale or redemption of property).

In 2017, once again the reporting deadlines shall be unchanged. Added to the list of items to be reported (with respect to the year 2016) will be gross proceeds paid to custodial accounts.

The phase-in period ends in 2017. Effective 2018, the deadlines will be unchanged and fixed, and all items reported in 2017 will be reported by the FFIs.

Conclusion

FATCA places onerous burdens on FFIs. These banks and other financial institutions must register to be withholding agents of the IRS, then must provide the IRS with voluminous information about their clients and, if their clients' accounts are deemed recalcitrant, the FFIs must withhold taxes and penalties therefrom, and return these funds to the IRS. Something is wrong with this picture. We shall explore this in our next, and final installment.

(FATCA and You is a Five-Part Series by Vaughn E. James, MBA, JD, Ph.D.

Dr. Vaughn E. James is a former Calypso and Roadmarch King of Dominica, and former President of the Dominica Calypso Association. A member of the Dominica Calypso Music Hall of Fame, he is currently an Endowed Professor (The Judge Robert H. Bean Professor of Law) at Texas Tech University School of Law in Lubbock, Texas. He is the former Director of the Texas Tech University Tax Clinic, and the Incoming Director of the Texas Tech University Master of Laws Program. He teaches International Taxation, Federal Income Taxation, Federal Estate and Gift Taxation, Elder Law, and Law & Religion).