On November 8, 2012, the U.S. Treasury Department announced that it is engaged with more than fifty countries to improve international tax compliance and implement the information reporting and withholding tax provisions under the Foreign Account Tax Compliance Act (“FATCA”).
The U.S. Treasury is seeking bilateral agreements in which they reciprocally exchange tax information with foreign governments who will give the IRS information on U.S. taxpayers (U.S. citizens, U.S. tax residents and U.S. Green Card Holders) who have accounts in their respective country, and they will receive financial information on their country’s taxpayers who have U.S. bank and brokerage accounts, disclosed by the IRS.
The U.S. Treasury Department has concluded a bilateral agreement with the United Kingdom and is currently finalizing inter-governmentals with the following countries:
12. Isle of Man;
15. The Netherlands; and
The task of gathering the information will be borne by the banks and financial institutions who are seeking to pass the cost of FATCA compliance on to their customers. The U.S. and the respective countries will focus on tax transparency and seek to find out where these taxpayers are hiding their unreported money.
FATCA/Foreign Financial Institutions
FATCA contains two principal operative provisions, one applying to “Foreign Financial Institutions” (“FFIs”) and the other to all other foreign entities receiving payments from U.S. sources, either on their own behalf or acting as an intermediary. FFIs and other foreign entities who receive payments from U.S. sources under the provisions of FATCA (signed into law March 2010, under the “HIRE Act”) are being compelled to promote compliance with U.S. law requiring the U.S. persons to report income from non-U.S. accounts.
“Foreign Financial Institutions” are defined to include any entity not resident in a U.S. state or possession that:
1. Accepts deposits in the ordinary course of a banking or similar business;
2. Engages in the business of holding financial assets for the account of others; or
3. Engages primarily in the business of investing, re-investing or trading in securities, partnership interests, commodities or any interests in securities, partnerships or commodities.
Foreign Financial Institutions – U.S. Tax Withholding
Any “withholdable payment” by a U.S. withholding agent to any FFI would be subject to 30% tax withholding unless the FFI enters into a reporting agreement with the IRS.
“Withholdable payments” include:
1. U.S. source investment income;
2. U.S. source proceeds from the sale of any property “of a type which can produce interest or dividends”;
3. While gains from the sale of property are generally not includable in U.S. income, for non-residents FATCA subjects sale proceeds to withholding.
FFIs may avoid U.S. tax withholding if they execute an IRS agreement, under which they would be required to:
1. Obtain information regarding each holder of each account maintained by the FFI to determine which accounts are U.S. accounts and comply with IRS’ verification and due diligence procedures;
2. Annually report information with respect to any U.S. account held at the FFI;
3. Deduct and withhold 30% of any “pass thru payment” to a ‘recalcitrant account holder’ or FFI not subject to an agreement (or elect to be withheld upon );
4. Comply with IRS information requests;
5. If under FFI’s domestic law, the FFI would be prohibited from reporting the required interaction, the FFI must obtain a waiver of such prohibition or lose the account.
FFIs that are subject to an agreement and are required to report the name, address and TIN of account holders include:
1. Any specified U.S. person included in the account (i.e. any U.S. resident with the exception of publicly-traded corporations, banks, R.E.I.T.s and RICs).
2. A “substantial U.S. owner” (i.e. any person owning more than a 10% interest in any entity) or in case of payees primarily in the business of trading, anyone who owns any interest in the entity, including a profits-only interest.
A payee of U.S. source income who is a non-FFI is not permitted to enter into an IRS non-withholding agreement.
A withholding agent is required to withhold 30% of any withholdable payment to a non-FFI, regardless of whether the payee is the beneficial owner of the payment.
To avoid withholding, the payee would either have to:
1. Certify that the beneficial owner of any payment have no “substantial U.S. owners”, or
2. Provide the name, address and TIN of each beneficial owner.
3. Report to the IRS all payee information received.
Exceptions to withholding:
1. Beneficial owners that are publicly traded;
2. Certain members of affiliated groups;
3. Residents of U.S. possessions.
The withholding agent would have to withhold if the agent has any reason to know any payee certifications or representations are false.
FATCA Effective Dates
Most FATCA requirements would apply to payments made after 12/31/12.
On 4/8/11, the IRS issued FATCA guidance instructing FFIs on the steps required for them to identify U.S. accounts among their existing account holders.
The 4/8/11 notice includes:
1. “A private banking test” for private bankers to attempt to find U.S. connections among account holders.
2. Details on the definition of pass-through payments.
3. Provides for a certification process for “deemed compliant” FFIs.
4. Provides that FFIs have to report only year-end balances to the IRS, and does not have to report basis on investment transactions.
In IRS Notice 2011-76, the IRS provided a new timeline whereby FFIs have until 6/30/13 to enter into a FATCA agreement with the IRS, and they will not be required to report on U.S. account holders until 2014.
On 2/8/12 the IRS issued additional FATCA guidance, including an agreement among the U.S., France, Germany, Italy, Spain, Switzerland and the UK to cooperate on implementing FATCA and arranging an automatic bilateral information exchange with the U.S. through the existing treaty structure.
The information sharing arrangement takes one of two forms:
1. FFI to U.S. government direct, or
2. FFI to foreign government and then to U.S. government.
FATCA Information Disclosure
U.S. taxpayers (individuals, not corporations, partnerships, or limited liability companies) are required to attach Form 8938: Statement of Specified Foreign Financial Assets to their Form 1040 tax returns if the aggregate value of such assets is greater than $50,000.
Specified Foreign Financial Assets include: depository or custodial accounts at FFIs, stocks or securities issued by foreign persons, a financial instrument or contract held for investment issued by a foreign country or party and any interest in a foreign entity.
The civil penalty for failure to supply this information is $10,000 with an additional $10,000 penalty up to a maximum of $50,000, after notice from the IRS (IRC Sec. 6038D(g).
Any understatement of tax attributable to an undisclosed foreign asset is subject to a 40% penalty (IRC Sec. 6662(j)).
Statute of Limitations
FATCA (IRC Sec. 6501(c)(8)(e) extends from three years to six years the period of assessment for understatements attributable to failure to report foreign accounts on the date such information is actually provided to the IRS.
When a taxpayer fails to report certain foreign asset information, the statute is tolled for a period including the taxpayer’s non-compliance plus three years; the extended statute applies to the taxpayer’s entire tax return, not just to foreign assets. This provision is effective for any year open on the date of enactment (March 2010) and to returns filed after enactment.
FATCA Foreign Trusts
FATCA clarifies foreign trust reporting as follows:
1. An amount is treated as accumulated for the benefit of a U.S. beneficiary of a foreign grantor trust even if the U.S. beneficiary’s interests are contingent on a future event (IRC Sec. 679(c)(10).
2. If any person, such as a trustee or protector, has the power to add beneficiaries, the trust shall be considered to have U.S. beneficiaries unless a specific list is provided and no beneficiary is a U.S. person (IRC Sec. 679(c)(4).
3. Any agreement or understanding, such as a letter of wishes, may result in a U.S. person benefiting from the trust, and will be considered a trust term (IRC Sec. 679(c)(5).
4. It imposes new reporting requirements on any U.S. person treated as an owner of any portion of a foreign trust and creates a presumption that a foreign trust has a U.S. beneficiary, unless the beneficiary submits information that no part of the income or corpus of the trust may be paid or accumulated for the benefit of a U.S. person, and if the trust were terminated during the taxable year, no part of the income or corpus could be paid for the benefit of a U.S. person (IRC Sec. 679(d)).
5. Cash and securities, if provided or loaned to a beneficiary, are considered distributions, the fair market value of any use of property owned by the trust, such as real estate, is treated as a trust distribution (IRC Sec. 643(i)).