Final FATCA Rules Issued by U.S. Treasury Deparment: Future Impact Still Being Considered, But It Will Be Huge for International Investment

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This week, the Treasury Department released the Final Rules for FATCA -- the agency regulations that work to implement and enforce the Foreign Account Tax Compliance Act. (For details on FATCA and both domestic and foreign response to its passage, check out our series of earlier posts.)

Many were hoping that these Final FATCA Rules would not take effect until next year (January 2014) but no such luck. Debuting last Thursday, the Final FATCA Rules are a done deal and basically they are requiring foreign financial institutions to report to the Internal Revenue Service of the United States any accounts on their books held by Americans that hold $50,000 or more.

Seems that the federal government is not willing to wait in waging its war against offshore tax evasion and these new rules are only a part of the U.S. fight against foreign tax shelters. Banks are targets, as well as individuals.

Consider this: just this month there was the guilty plea entered by the oldest bank in Switzerland in a case brought against it by the Internal Revenue Service in a New York federal district court. Wegelin & Co. took the plea deal rather than go to trial on allegations that the Swiss financial institution worked with American clients to keep $1.2 billion in Swiss accounts and away from U.S. taxation. The bank is no more: after this case and its fine of $57.8 million, Wegelin & Co. went out of business.

Final FATCA Rules - Treasury Releases Its Own Synopsis

They've been on the runway for awhile now, and there's been much waiting to see what the final regulations regarding FATCA were going to look like and what they were going to do. According to the Treasury Department, these FATCA Rules do the following:

  • Build on intergovernmental agreements that foster international cooperation. The Treasury Department has collaborated with foreign governments to develop and sign intergovernmental agreements that facilitate the effective and efficient implementation of FATCA by eliminating legal barriers to participation, reducing administrative burdens, and ensuring the participation of all non-exempt financial institutions in a partner jurisdiction. In order to reduce administrative burdens for financial institutions with operations in multiple jurisdictions, the final regulations coordinate the obligations for financial institutions under the regulations and the intergovernmental agreements.
  • Phase in the timelines for due diligence, reporting and withholding and align them with the intergovernmental agreements. The final regulations phase in over an extended transition period to provide sufficient time for financial institutions to develop necessary systems. In addition, to avoid confusion and unnecessary duplicative procedures, the final regulations align the regulatory timelines with the timelines prescribed in the intergovernmental agreements.
  • Expand and clarify the scope of payments not subject to withholding. To limit market disruption, reduce administrative burdens, and establish certainty, the final regulations provide relief from withholding with respect to certain grandfathered obligations and certain payments made by non-financial entities.
  • Refine and clarify the treatment of investment entities. To better align the obligations under FATCA with the risks posed by certain entities, the final regulations: (1) expand and clarify the treatment of certain categories of low-risk institutions, such as governmental entities and retirement funds; (2) provide that certain investment entities may be subject to being reported on by the FFIs with which they hold accounts rather than being required to register as FFIs and report to the IRS; and (3) clarify the types of passive investment entities that must be identified and reported by financial institutions.
  • Clarify the compliance and verification obligations of FFIs. The final regulations provide more streamlined registration and compliance procedures for groups of financial institutions, including commonly managed investment funds, and provide additional detail regarding FFIs’ obligations to verify their compliance under FATCA.

Other Experts Still Reviewing Final FATCA Rules For What They Mean to Clients

Experts are still reviewing the Final FATCA Rules released this week, but already there are reports that these Final Rules, while jiving with the proposed regulations for the most part, do have changes that seem to focus upon solving problems in administration of FATCA along with targeting specific areas of Treasury concern. Expect more details over how the final FATCA rules are different from earlier proposed versions of FATCA Rules in the future.

Differences that are already apparent include:

  • Extensions (expansion of scope).
  • Covered Financial Institutions (expansion of scope).
  • "Deemed compliant" (expansion of definition).
  • Changes in the interaction of U.S. with Intergovernmental Agreements (IGAs).
  • Diligence Procedures (changes made for identification and documentation).