The US Internal Revenue Service has announced an 18-month grace period before it begins enforcing the Foreign Account Tax Compliance Act against foreign financial institutions (FFIs) that cannot meet FATCA’s requirements. However, the concession is being offered only to banks and other institutions that make ‘good faith’ efforts to follow the reporting and withholding duties imposed by FATCA. The law, enacted in 2010, requires FFIs to identify their American accountholders and report their financial affairs to the IRS, starting on 1 July this year. Those that do not comply, or cannot comply due to the laws of their own jurisdictions, are in theory subject to a 30 per cent withholding tax on all income from US sources. All FFIs that claim compliance with FATCA must also enforce this withholding tax.
Yesterday, 5 May, was the official deadline for FFIs to register with the IRS as either compliant with or exempt from FATCA’s reporting and withholding provisions. However, the IRS admits that many FFIs that have registered will not be able to meet the 1 July implementation deadline, particularly regarding new due diligence procedures to be applied when new accounts are opened. Thus it has had to step back from its original enforcement regime.
‘Calendar years 2014 and 2015 will be regarded as a transition period for purposes of IRS enforcement and administration of the due diligence, reporting, and withholding provisions … With respect to this transition period, the IRS will take into account the extent to which a participating or deemed-compliant FFI, direct reporting NFFE, sponsoring entity, sponsored FFI, sponsored direct reporting NFFE, or withholding agent has made good faith efforts to comply with the requirements of [FATCA] … For example, the IRS will take into account whether a withholding agent has made reasonable efforts during the transition period to modify its account opening practices and procedures to document the [nationality] status of payees … Additionally, for example, the IRS will consider the good faith efforts of a participating FFI, registered deemed-compliant FFI, or limited FFI to identify and facilitate the registration of each other member of its expanded affiliated group as required for purposes of satisfying the expanded affiliated group requirement… An entity that has not made good faith efforts to comply with the new requirements will not be given any relief from IRS enforcement during the transition period.’
The announcement also makes two other key concessions. One of the major criticisms of FATCA is that it restricts foreign banks’ ability to open accounts for residents of the country where the bank is operating. That restriction is usually in conflict with the country’s own banking laws, which typically require banks to offer banking services to any qualifying resident. Several organisations have been lobbying for this aspect of FATCA to be relaxed. The US Treasury Department and the IRS have now conceded this. They intend to amend the regulations to permit a ‘limited’ (i.e. non-compliant) FFI to open US accounts for persons resident in the same jurisdiction as the FFI, and accounts for non-participating FFIs resident in that jurisdiction. The FFI must not, however, solicit US accounts from non-resident individuals or FFIs.
The IRS’s announcement also partially resolves another difficulty facing international FFI groups. If a group has an affiliate that operates in a country whose laws prohibits it from complying with FATCA’s reporting regime, then every other member of the group would also have been unable to register as FATCA-compliant. The US has now agreed to amend the rules to give such groups a way to distinguish between its compliant and non-compliant (‘limited’) members.
Robert Stack of the US Treasury Department said the concessions would ‘provide for a smooth start to FATCA’. However, they may come too late for some American expatriates: it is reported that Deutsche Bank AG has already told US citizens that they must close their accounts in Belgium.