IRS Unveils Comprehensive Guidance on FATCA Reporting, Disclosure
By Alison Bennett
Publication Date: 08/30/2010
The Internal Revenue Service Aug. 27 unveiled eagerly awaited guidance on the implementation of the Foreign Account Tax Compliance Act (FATCA), which imposed a host of new requirements on foreign banks to report and disclose accounts with U.S. owners, garnering measured praise from practitioners.
In Notice 2010-60, IRS addressed a wide range of priority issues under the new law, including the scope of obligations exempt from withholding, the definition of a foreign financial institution (FFI), requirements for identifying and reporting U.S.-owned accounts, and the information that must be reported by foreign banks.
The government set out different rules for banks to use in identifying existing and new accounts in the 62-page notice. It also identified some carveouts for entities—such as holding companies and hedging and financing centers of nonfinancial groups—that would not be required to report and withhold under the statute.
Guidance Seen as Comprehensive
“This is comprehensive preliminary guidance on many of the most fundamental questions that need to be answered quickly,” Philip West, an international tax practitioner with Steptoe & Johnson LLP, Washington, D.C., said in an Aug. 27 interview. He called the guidance “clear and logical.”
John Staples, Burt, Staples & Maner LLP, Washington, D.C., told BNA Aug. 27 that overall, “The guidance is very much devoted to how institutions are going to have to identify their U.S. accounts,” which he said showed the government listened to industry concerns. Stressing that his views are initial impressions, he said, “The great hope by many was that the government would eliminate a lot of institutions from the definition [of a foreign financial institution], but they didn't do that.”
FATCA was enacted in March as part of the Hiring Incentives to Restore Employment Act (Pub. L. No. 111-147). The statute added Sections 1471, 1472, 1473, and 1474 to the tax code.
Proposed Regulations Planned
IRS said it plans to issue proposed regulations incorporating the guidance in the notice, and said in future guidance, the government plans to publish a draft foreign financial institution agreement and draft information reporting and certification forms. The agency said it plans to require “all or most” financial institutions to electronically file returns with respect to FATCA withholding.
As part of the analysis of when a bank would be considered to be a foreign financial institution under the new law, the notice said, “Treasury and the IRS anticipate that regulations will provide that whether an entity is engaged primarily in the business of investing, reinvesting, or trading in securities must be determined on the basis of all relevant facts and circumstances.” Although that analysis is fact-specific, IRS said it would set out some guidelines for that determination.
Some Institutions Carved Out
The notice carved out several classes of entities from the impact of the withholding rules, including:
• holding companies for subsidiaries that primarily engage in a trade or business other than that of a financial institution,
• start-up companies,
• nonfinancial entities that are liquidating or emerging from reorganization or bankruptcy, and
• hedging/financial centers of a nonfinancial group.
IRS noted that a foreign entity that otherwise satisfies the definition of a financial institution solely because it is primarily engaged in investing, reinvesting, or trading in securities will not be treated as an FFI if it falls within one of these categories.
Staples, who is representing the European Banking Federation, called the carveouts “very modest,” and said the financial industry likely will want to see more of them in forthcoming guidance. He said the notice contains “good news” for the insurance industry, however.
Insurance Addressed
The notice made a distinction between insurance and reinsurance contracts with and without cash value. “Treasury and the IRS do not view the issuance of insurance or reinsurance contracts without cash value as implicating the concerns of [FATCA],” the document said, noting that this would include most property and casualty insurance or reinsurance contracts or term life insurance contracts.
Language on Banks in U.S. Territories
The notice contained language on financial institutions organized in U.S. territories, noting that in general, the government does not intend to treat these as FFIs. However, it said, more guidance is needed to address compliance concerns, and added, “Treasury and the IRS intend to coordinate with the territorial governments in the course of providing guidance regarding the treatment of territory-organized FIs,”—a development that West said was significant.
IRS sought comments throughout the notice on a variety of issues, including the treatment of passthrough payments. The guidance can be seen, Staples said, as “very much a work in progress.”
Notice 2010-60 is scheduled to be published in Internal Revenue Bulletin 2010-37 on Sept. 13.
The complete text of this article can be found in the BNA Daily Tax Report, August 30, 2010. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today. Learn more »
© 2010, The Bureau of National Affairs, Inc.
