Regulatory updates

The IRS and US treasury today released proposed regulations to govern the application of the Foreign Account Tax Compliance Act (FATCA). The key highlights are summarised below, including comments regarding the joint statement between the US, French, German, Italian, Spanish and UK governments regarding the intention to pursue a government-to-government framework for FATCA implementation. A full analysis by Kinetic Partners will be circulated in due course;

• Extension to the categories that qualify as deemed compliant FFIs. Of particular interest to the Funds industry is the extension of the Deemed Compliant status to “restricted” funds that restrict access to non-US investors. In order to meet the criteria, a “restricted” fund will likely need to repaper prospectuses, agreements and terms and conditions. The criteria require the restricted funds to obtain a US Tax Identification Number (TIN), certify the status of the fund every 3 years, and notify the IRS of any changes in status or ownership (as a result of a merger or acquisition). In short the potential exemption will reduce the FATCA burden for restricted funds but some work is still required.

• Modification of the due diligence procedures to propose that the due diligence of pre-existing accounts is limited to electronic review and an extended reliance on Know Your Customer (KYC) and AML documentation. The proposed regulations also extend the thresholds beyond which a review of pre-existing accounts is required. The stated aim is also to avoid the need for new client take-on procedures to be modified, but in practice certain procedural changes and remediation of KYC may still be required to gain the assurance required to sign an FFI Agreement.

• A refinement to the definition of a financial account focuses on traditional bank, brokerage, money market accounts and interests in investment vehicles and excludes most debt and equity securities issued by banks and brokerage firms. This reduces the scope of many firms but in reality is unlikely on its own to remove the need to become FATCA compliant.

• Extension of the transition period for reporting requirements which relaxes the timeframe for reporting on income (to begin in 2016 with respect to the calendar year 2015) and gross proceeds (to begin in 2017 in respect of the calendar year 2016).

• Extension to the timeframe for the withholding requirements on pass-thru payments from 1 January 2015 to 1 January 2017 with participating FFIs being required in the interim to report annually on the amounts of certain payments made to non-participating FFIs. This step is in recognition of concerns raised over the administrative burden, complexity of implementing systems and possible legal impediments of complying with the requirements and amongst other things allows the IRS and US Treasury time to refine their thinking on the subject.

• Expanded scope of Grandfathered Obligations to exclude from the definition of a withholdable payment, any gross proceeds from disposition of an obligation existing as at 1 January 2013 (rather than 18 March 2012) in recognition of the burden of the implementation requirements of FATCA

• The proposed regulations also confirm that no external audit is required and that FFIs that comply with the obligations of their FFI Agreement will not be held liable for the failure to identify a US account.

• Extension to the transition rules for affiliates with legal prohibitions to compliance to allow more time to seek legal waivers regarding data protections and imposing withholding, until 1 January 2016. The transition period requires the restrictive jurisdiction to identify its US accounts and maintain records and meet other requirements.

International coordination

The US Treasury today also issued a Joint Statement from the governments of the US, the UK, France, Germany, Italy and Spain regarding an intended inter-governmental approach to FATCA and tax compliance more generally. Click here to view the statement.

At first glance the proposal is encouraging, with its promise of reciprocal information exchange and the facility for FATCA reporting to the IRS to make use of existing bi-lateral tax treaties. But the proposed approach would see “FATCA Partner” countries enacting quasi-FATCA legislation of their own to require financial institutions to collect and report information to their domestic tax authority for onward transmission to the IRS. In return, the financial institutions will be excused certain withholding and account closing obligations which FATCA would otherwise impose.

Any such local legislation would, however, need extensive industry consultation, and European Union Member States may face additional coordination issues. It seems unrealistic to expect individual FATCA Partner countries to be willing or able to draft and enact such legislation, especially within a sufficiently short timeframe to meet the IRS timetable. Surely, a simpler facility by which FFIs could choose to report to the IRS under existing treaties via their domestic authorities would be more practicable.

For more information please contact Nick Matthews or Matt Haddow.