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Long-Awaited Foreign Account Tax Compliance Act Final Rules Issued by Government

January 22, 2013 in BNA's Banking Report · Leave a Comment 

By Alison Bennett.

The Treasury Department and the Internal Revenue Service issued long-awaited final rules T.D. 9610 on the Foreign Account Tax Compliance Act Jan. 17, with changes intended to harmonize the rules with FATCA agreements negotiated with other countries.

The 2010 law is intended to stop cross-border tax evasion. It requires foreign financial institutions to tell the Internal Revenue Service about their U.S.-owned accounts. If the banks do not comply, they could face a 30 percent withholding tax on the accounts.

“The final rules mark a critical milestone in international cooperation on these issues, and they provide important clarity for foreign and U.S. financial institutions.”
Treasury Deputy Secretary Neal Wolin

“These regulations give the administration a powerful set of tools to combat tax evasion and efficiently,” Treasury Deputy Secretary Neal Wolin said in a news release. “The final rules mark a critical milestone in international cooperation on these issues, and they provide important clarity for foreign and U.S. financial institutions.”

Treasury said the rules are intended to finalize a step-by-step process for U.S. account identification, information reporting, and withholding requirements for foreign financial institutions (FFIs), other foreign entities, and U.S. withholding agents.

Rules Intended to Build On IGAs

The rules also are intended to build on intergovernmental information sharing agreements (IGAs) that allow financial institutions to report information on U.S.-owned accounts directly to their own governments, which then would share the data with the United States.

Treasury said it has signed or initialed such agreements with the United Kingdom, Mexico, Denmark, Ireland, Switzerland, and Spain, and announced for the first time Jan. 17 that Norway has joined this group.

A Treasury official said in a news conference that such IGA harmonization is a key goal of the final rules. She stressed that the general approach and intent of the Jan. 17 guidance remains the same as the proposed rules (REG-121647- 10) the government unveiled in February 2012.

The official said the refinements to the rules came in response to the hundreds of comments Treasury and IRS received on the proposed guidance.

Timelines Phased In

According to the news release, the final rules phase in the timelines for due diligence, reporting, and withholding in order to give financial institutions time to build systems to comply. Another goal for the government was to align these time frames with those for the IGAs. The Treasury official said this phase-in is consistent with Announcement 2012-42.

Treasury also said the rules expand and clarify the scope of payments not subject to withholding with respect to certain grandfathered obligations and certain payments made by nonfinancial entities. This is to “limit market disruption, reduce administrative burdens and establish certainty,” the government said.

In another major development, the rules are intended to “better align the obligations under FATCA with the risks posed by certain entities,” Treasury said. The guidance allows more flexible treatment of certain categories of low-risk institutions, such as governmental entities and retirement funds.

Changes to Reporting for Investment Entities

The final rules also provide that some investment entities may be subject to being reported on by FFIs with which they hold accounts, rather than being required to register as FFIs and report to IRS, Treasury said. The final rules also clarify the types of passive entities that must be identified and reported by financial institutions…

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