FATCA Puts Foreign Banks on Notice…

“[The Foreign Account Tax Compliance Act] imposed a substantial withholding tax, due diligence, and reporting regime on non-U.S. entities to enlist their assistance in rooting out U.S. taxpayers who are using offshore entities and accounts to hide their assets and income. Unfortunately, the rules are lengthy, difficult to comprehend, expensive to implement, and will likely have the unfortunate result of keeping much needed capital from being invested in the U.S. at a time when that capital is needed for job creation.” (From FATCA Implementation Schedule by Charles “Chuck” Rubin)

Hailed as an important tool in the fight against tax evasion by US citizens hiding assets in non-US banks, the Foreign Account Tax Compliance Act imposes significant reporting and withholding obligations on foreign banks. For your reference, here’s a look at what non-US financial institutions need to know about FACTA:

The rule places unprecedented burdens on foreign financial institutions…

“… the Act requires foreign banks to forward details of US clients with deposits of over $50,000 to the IRS or withhold 30% of the interest, dividend and investment returns payable to them and send the money to the IRS instead. Both choices are seen to be unsavory… It has been widely seen as making foreign financial institutions become ‘tax agents’ for the IRS in monitoring the tax compliance of US taxpayers with assets abroad, which is something no other country does.” (From Foreign Account Tax Compliance Act Draws Flak by Darrin Mish, Tampa Tax Attorney) 

The good news is that implementation is still a few years off…

“To the surprise of many, rather than requiring that withholding commence on FATCA’s January 1, 2013 effective date, the Notice states that regulations will implement such withholding in a delayed, two-phase approach. In phase one, withholding agents (including domestic, foreign and participating FFIs) will be required to withhold only on U.S. source FDAP payments made on or after January 1, 2014. In phase two, withholding agents will be required to withhold on all withholdable payments made on or after January 1, 2015, including ‘gross proceeds.’” (From IRS Announces Phased Implementation of FATCA by Morrison & Foerster LLP) 

Foreign banks need to start preparing now…

“A [foreign financial institution (‘FFI’)] must enter an agreement with the IRS by June 30, 2013, to ensure that it will be identified as a participating FFI in sufficient time to allow withholding agents to refrain from withholding. The IRS will begin accepting FFI Agreements through the IRS’s electronic submissions process no later than January 1, 2013. An FFI agreement entered into prior to July 1, 2013, will be effective July 1, 2013.” (From IRS Issues New Timeline for Implementation of FATCA by Lowenstein Sandler PC) 

The rules are still in flux…

“Further guidance on the scope of the private banking procedures and the associated required searches of account holder files is to be provided in regulations. The scope of the current definition of ‘private banking account’ in Notice 2011-34 has been criticized as too broad, and government officials have publicly stated that the definition will be revised.” (From It’s Just a Phase: The “Phased Implementation” of FATCA Under Notice 2011-53 by Sutherland Asbill & Brennan LLP) 

The bottom line for foreign banks: comply or give up US clients…

“Practically, FATCA only offers non-U.S. financial institutions two choices – 1) implement costly U.S. style reporting and account due diligence on behalf of a foreign revenue agency, or 2) cease offering U.S. securities to clients. How many non-U.S. financial institutions will choose the latter option remains to be seen.” (From FATCA – What Non-U.S. Financial Institutions Should Do Now by Butler, Snow, O’Mara, Stevens and Cannada, PLLC) 

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