IRS Issues Guidance On FATCA

by Mike Godfrey, Tax-News.com, Washington

Thursday, September 02, 2010

The United States Treasury and the Internal Revenue Service (IRS) have stated their intent to issue guidance on the reporting requirements imposed on foreign financial institutions (FFIs) by the enactment of the Foreign Account Tax Compliance Act (FACTA) on March 18, 2010 within the Hiring Incentives to Restore Employment (HIRE) Act.

They are requesting public comments on the priority issues they have identified in the preliminary guidance on the application of the FACTA. The legislation makes a number of changes to tax law affecting individuals with foreign bank accounts and assets held abroad.

The FACTA provisions of the HIRE Act add a new chapter 4 to Subtitle A of the Internal Revenue Code. Chapter 4 expands the information reporting requirements imposed on FFIs, as defined in the proposed guidance, with respect to accounts held abroad by US residents.

FFIs are required to deduct and withhold a tax equal to 30% of the amount of any payment to an FFI unless the FFI agrees to disclose the identity of the US residents and report on their bank transactions. The IRS intends to publish a draft FFI Agreement and draft information reporting and certification forms, which will be electronically filed.

The name, address and taxpayer identification number (TIN) is required of each account holder which is a specified US person; and, in the case of any account holder which is a US-owned foreign entity, the name, address, and TIN of each substantial US owner of such entity. The account number is also required to be provided, together with the account balance or value, and the gross receipts and gross withdrawals or payments from the account.

To facilitate this process, the Treasury and the IRS contemplate that the IRS will issue employer identification numbers (EINs) to participating FFIs and that participating FFIs will use these EINs to identify themselves to withholding agents.

Chapter 4 is generally effective for payments made after December 31, 2012, and any US resident who holds more than USD50,000 in a depository or custodial account maintained by an FFI is required to report on any such account under this legislation.

The Treasury and the IRS intend to issue definitive guidance in advance of that effective date to ensure that affected FFIs have time to implement the systems and processes necessary to comply fully with the new withholding, documentation, and reporting obligations imposed.

An FFI is defined as any financial institution which is a foreign entity, and which accepts deposits in the ordinary course of a banking or similar business; holds financial assets for the account of others as a substantial portion of its business; and/or is engaged primarily in the business of investing, reinvesting, or trading in securities, partnership interests or commodities.

However, there are categories of business which have been excluded for having to report or withhold under the FACTA. These include certain holding companies, start-up FFIs for the first 24 months of their operation, hedging/financial centres of a non-financial group, and the issuers of insurance contracts that have no cash value.