December 14th, 2011 by Angela Offerman
The Securities Industry and Financial Markets Association (SIFMA) hosted an event led by the group’s Operations & Technology Society’s Securities Operations Section, advising financial industry participants on the details and compliance requirements around the forthcoming provisions of the U.S. Foreign Account Tax Compliance Act, more commonly known as FATCA.
FATCA was enacted in March 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. The Act increases reporting requirements for both individual U.S. taxpayers holding foreign assets and foreign financial institutions to provide the IRS with an increased ability to detect U.S. tax evaders hiding their money in foreign accounts and investments. While FATCA provisions were effective on individual U.S. taxpayers in 2010, new requirements on financial institutions were phased out through 2013 as the new information collection and reporting obligations are substantial. However, recent notices released by the U.S. government on FATCA have delayed some effective dates to 2014 and 2015 to give financial institutions time to implement.
Under FATCA, foreign financial institutions (FFIs) are required to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. To properly comply with these new reporting requirements, an FFI will have to enter into a special agreement with the IRS by June 30, 2012 or face a 30% withholding tax on withholdable or passthru payments made to the FFI.
Mark Naretti, Managing Director at KPMG, highlighted the impending issues compliance officers will soon be faced with on signing off on such broad global FFI certifications. “A huge administrative burden is being put on financial institutions, and there is a great deal of uncertainty in all areas.” However, he also noted it is much less burdensome for U.S. financial institutions to comply than for foreign financial institutions, as there is no additional work for individuals’ due diligence and no requirements to calculate passthrus.
There are two different year-end reporting options for foreign financial firms regarding FATCA provisions. Under the first option, FFIs must report the name, address, and taxpayer identification number (TIN) of each account holder that is a U.S. person, the account number, the year-end account balance or value, and income and gross proceeds credited to the account. The second option calls for the same identifying information but uses the U.S. 1099 Form.
These controversial rules have been met with significant opposition from foreign institutions, but the Act is expected to recover around $8 billion over 10 years. The IRS is still working out several details and has recognized the publics’ concern on the feasibility of timely compliance, as seen through the temporary relief provided in the delay of certain FATCA effective dates. Proposed regulations and a first draft of the FFI agreement are expected by January 1, 2012 or shortly after.
Click here to see SIFMA’s slides from the What You Need to Know About FATCA Presentation.
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