FATCA prop. regs.

• Author: Nevius, Alistair M.
• Position: Foreign Account Tax Compliance Act of 2009

The IRS on February 8 issued proposed regulations providing rules on information reporting by foreign financial institutions (FFIs) and withholding on certain payments to FFIs and other foreign entities (REG-121647-10).

Under the Foreign Account Tax Compliance Act of 2009 (FATCA), part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010, P.L. 111-147, FFIs (any financial institution that is a foreign entity) must provide information to the IRS about their U.S. accounts. The rules also require certain nonfinancial foreign entities (NFFEs) to provide information on their substantial U.S. owners to withholding agents. Under these rules, foreign financial institutions must enter into agreements with the IRS and thus become participating FFIs. There is a withholding tax on payments to FFIs and NFFEs that fail to comply with the rules.

On February 8, Treasury also issued a joint statement from the United States, France, Germany, Italy, Spain, and the United Kingdom announcing that they are exploring a cooperative approach to combatting international tax evasion. The statement said that the United States is "willing to reciprocate in collecting and exchanging" information about accounts held in U.S. financial institutions by residents of France, Germany, Italy, Spain, and the United Kingdom.

Proposed regulations

The 389-page proposed regulations are designed to implement a step-by-step process for U.S. account identification, information reporting, and withholding requirements for FFIs, other foreign entities, and U.S. withholding agents. They include the following provisions:

Grandfathered obligations: The HIRE Act provided that no withholding was required from any payment under any obligation outstanding on March 18, 2012, or from the gross proceeds from disposing of the obligation. The proposed rules extend the grandfathered obligations to obligations outstanding on Jan. 1, 2013, and the gross proceeds from such obligations.

Eased initial reporting requirements on members of affiliated FFIs: FATCA applies to participating FFIs and, except to the extent the IRS exempts them, to other FFIs of an expanded affiliated group. Because some jurisdictions have laws that prohibit compliance with the requirements of FATCA, the proposed regulations give a two-year transition period, until Jan. 1, 2016, to fully implement this requirement. During this period, an FFI affiliate in a jurisdiction that prohibits withholding or reporting as these...