Could you spell out, as clearly as you can, what the new IRS regulations say?

On 8 February 2012 the Department of Treasury issued nearly 400 pages of proposed regulations dealing with FATCA. FATCA was signed into law on 3/18/10 and due its large scope implantation date is 1/1/13. FATCA’s purpose is to obtain transparency as to where US Citizens have invested their money. Simultaneously, the Department of Treasury issued a joint statement with France, Germany, Italy, Spain and the UK which expressed a mutual intent to enter into an inter-governmental  approach to improving international tax compliance and implementation of FATCA.

The goal of the intergovernmental framework was to address legal issues under FATCA, simplify FATCA implementation and reduce compliance costs

On 26 July 2012 the Department of Treasury published a model intergovernmental agreement. This agreement reflects the government to government sharing of information concepts that was expressed in February. The model agreement spells out specific procedures on how information is to be shared. Two versions of the model agreement have been issued - a reciprocal and non-reciprocal version. The reciprocal version will allow foreign governments to receive information from the US about accounts held in US financial institutions by residents of their countries.

What are the key features of the new guidance? Why are they important?

The intergovernmental agreements will allow Foreign Financial Institutions and Non-Financial Foreign institutions to avoid directly registering their entities with the Internal Revenue Service which they may have an obligation otherwise under FATCA. In lieu of registration these institutions will provide information directly to their government who in turn will provide the information to the US. 

What sort of financial entities will be affected?

FATCA impacts a wide range of foreign financial institutions. The rules were written extremely broadly and will capture non-US entities that accept deposits in the ordinary course of a banking or similar business, holds financial assets for the account of others, or is engaged primarily in the business of investing or trading securities (this will include non us hedge funds, private equity, venture capital funds)

On balance, does the new guidance add or detract from the severity of FATCA and its provisions?

The intergovernmental agreement still requires financial institutions to share nearly the same amount of information that would have otherwise been required under registration with the IRS. The only difference is that it will be provided directly to their government. Some of the items required to be shared include US account holders’ information such as:

a.         Name, address, and US taxpayer identification number

b.         Account numbers

c.         Account balance/value

d.         In some cases the amount of income generated by the account

One important aspect to the intergovernmental agreement is that to the extent a participating financial institution has an account holder which will not provide information to them to identify themselves as US or non-US (this is called a recalcitrant account holder) the financial institution will not be required to implement withholding taxes or close the account as long as the US government receives information from the institution (such as some of the items listed in item 4)

What major areas of uncertainty remain after this new development?

Timing is an issue with respect to FATCA registration. Generally FATCA registration should take place no later than 6/30/13 in order to be viewed as FATCA compliant by 1/1/14 (1/1/14 is a key date as this is the starting point for US withholding agents to start withholding on certain US-sourced income ). Since the model agreement is not finalised financial institutions will need to monitor its finalisation. Rather than rush to IRS registration it may be prudent to wait to see when these agreements may be finalised. It is anticipated that final FATCA regulations as well as the actual FATCA registration process will be completed by 12/31/13 but its unknown as to when each respective government may sign an agreement

What is your overall impression of how well firms are preparing for this? Do you see any differences in parts of the world, such as Asia/Europe/Latin America, etc?

The model agreement issued today generally covers the five countries listed above. Additionally, in June the Treasury Department issued a statement that the US governmental is also pursuing an intergovernmental framework with Switzerland and Japan.