On March 18, 2010, the Hiring Incentives to Restore Employment (HIRE) Act of 2010 was enacted into law. The Act added a new chapter 4 (sections 1471 – 1474) to the Internal Revenue Code. Chapter 4 expands the information reporting requirements imposed on foreign financial institutions (FFIs). These rules are commonly referred to as the Foreign Account Tax Compliance Act rules or “FATCA.” The FATCA provisions impose a 30 percent withholding tax on payments to a foreign financial institution (FFI) of U.S. source interest, dividends, rents, salaries, or gross proceeds from the sale of U.S. assets. The tax can be avoided, but only if the FFI enters into an agreement with the IRS to comply with information reporting requirements with respect to U.S. accounts and the FFI agrees to withhold on certain payments to non-participating FFIs and individual account holders.
FATCA is a key component of the federal government’s push for heightened tax compliance among U.S. taxpayers with foreign accounts and assets. FATCA was implemented to ensure there the U.S. government has the necessary tools effectively to determine the ownership of U.S. assets in foreign accounts. On February 8, 2012, the IRS issued proposed regulations to implement the new law. The proposed regulations were nearly 400 pages long and substantially modified preliminary IRS guidance on FATCA. At the time, it was understood that a draft FFI agreement would be finalized together with the appropriate reporting forms later in 2012.
Later in the 2012, the U.S. Department of Treasury released several model intergovernmental agreements (IGAs) to facilitate FATCA compliance in certain countries. Under the “Model I” IGA approach, FFI’s based in the signatory country are not required to sign an FFI agreement and report directly to the IRS. Instead, the Model I country promulgates its own rules mandating that in-country FFIs should report to the local revenue authority, and the revenue authority agrees to share relevant information with the IRS. Under the “Model II” IGA approach, in-country FFIs are still required to sign FFI agreements with the IRS, but they are relieved of certain FATCA requirements, such as the obligation to close the accounts of recalcitrant account holders. The IRS and Treasury have announced completed IGA agreements with several countries, including the United Kingdom, Mexico, and Denmark. Many others are in negotiation or have been initialed.
On January 17, 2013 the Treasury Department issued final regulations under FATCA. The final regulations are more than 500 pages long and include many updates and revisions to the proposed rules. The final rules include delayed implementation dates for U.S. withholding agents, extended grandfather protections for certain securities, and announce Treasury’s intention to re-propose regulations that will govern FATCA withholding on gross proceeds.