A few weeks ago, Treasury and the IRS released the long awaited proposed regulations on the Foreign Account Tax Compliance Act (FATCA). FATCA was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act in March 2010. As a result of its enactment, chapter 4 was added to the Internal Revenue Code. The proposed regulations are intended to prevent U.S. taxpayers from playing “hide and go seek” with Uncle Sam by holding assets and investments offshore. Below is a very general discussion of FATCA and describes some of the basic concepts in the proposed regulations by creatively adopting a “fact or fiction” format to this post.
The proposed regulations are really long.
- FATCA. Prior to publication in the Federal Register, the proposed regulations amounted to nearly 400 pages. The guidance took up about 90 pages in the February 15, 2012 edition of the Federal register
- Bonus: The IRS initially released the proposed regulations without any page numbers. FATCA.
The proposed regulations impose a 30% withholding tax on certain payments.
- FATCA. Under the proposed regulations, a 30% withholding tax is applied to “withholdable payments.” Such payments include payments that are ordinarily subject to withholding tax (e.g. FDAP), including interest, dividends, and rents. This category of payments also includes gross proceeds from the sale of any property that could produce interest or dividends from sources within the U.S.
The withholding tax applies to all “withholdable payments.”
- FICTION. The proposed regulations provide a number of significant exceptions to the withholding regime. For example, certain “grandfathered obligations” are not subject to FATCA. An “obligation” for purposes of the proposed regulations is essentially any legal agreement that could produce a withholdable payment. The grandfather provision applies to obligations outstanding on or before January 1, 2013 and not materially modified thereafter.
A “foreign financial entity” (FFI) can also avoid the 30% withholding if they are a “deemed compliant FFI” or a “participating FFI.” Under the first category, certain FFIs are considered to be in compliance with the FATCA rules by meeting certain requirements. For example a deemed compliant FFI that certifies its status to a withholding agent is a “certified deemed compliant FFI.” (Note: In general, only certain entities are considered to be “deemed-compliant” ). Participating FFIs are required to enter into an agreement with the IRS in order to avoid withholding. Under the agreement, the participating FFI will be required to obtain certain information about its account holders in order to determine which are U.S. accounts as well as report certain information on those accounts, among other things.
FATCA starts tomorrow.
- FICTION. The proposed regulations provide an effective date of January 1, 2014 for withholding of FDAP and other pass-thru payments and a September 30, 2014 effective date for reporting identifying information.