On February 8, 2012, the IRS announced the release of proposed regulations for the next phase of implementing FATCA, which targets noncompliance by U.S. taxpayers using foreign accounts. Concurrently with the issuance of the proposed regulations, the United States, France, Germany, Italy, Spain, and the United Kingdom issued a joint statement outlining a potential intergovernmental framework for FATCA. Under the framework, much of the information required by FATCA would be collected directly by foreign governments and shared with the United States pursuant to existing bilateral tax treaties. Such an approach, if adopted, could eliminate withholding obligations and the requirement to enter into a separate disclosure compliance agreement for foreign financial institutions ("FFIs") organized in partner countries.

Since FATCA's enactment in March 2010, the IRS has issued several rounds of guidance, but the proposed regulations have been much anticipated by taxpayers that may be affected by the FATCA withholding tax regime.  FATCA imposes a new 30% withholding tax on (i) U.S. source fixed or determinable annual or periodic income that is described in applicable U.S. Treasury Regulations (e.g., interest, dividends, rents, salaries, wages), and (ii) gross proceeds from the disposition of any property of a type that can produce any of the foregoing types of income or profits. In order to avoid this withholding tax, foreign financial institutions ("FFIs") will need to either become a so-called "participating FFI" by entering into a disclosure compliance agreement with the IRS or otherwise meet certain requirements set out in the proposed regulations to qualify as a so-called "deemed compliant FFI." Any FFI that (a) is not a deemed compliant FFI, and (b) fails to qualify as a participating FFI will be subject to the 30% withholding tax beginning January 1, 2014.

Set forth below is a high level summary of certain key provisions of the nearly 400 pages of regulations and certain operational considerations. A more detailed alert will be distributed in the near future.

• FATCA withholding was originally scheduled to apply beginning on January 1, 2013. However, in light of the significant practical difficulties for market participants to develop compliance, reporting, and withholding systems necessary to comply with this highly complex regime in such a short time frame, the IRS decided to delay the original effective date and provide for a phased implementation. Withholding agents will be required to withhold on withholdable payments starting in 2014, and on gross proceeds starting in 2015.  For passthru payments, participating FFIs will be required to withhold on withholdable payments starting in 2014, and on all other passthru payments starting in 2017.
• FATCA withholding will not apply to any payment under any "obligation" outstanding on January 1, 2013, or from the gross proceeds from any disposition of such an obligation. The proposed regulations clarify that the term "obligation" includes a line of credit or a revolving credit facility.
• The categories of deemed compliant FFIs described in the proposed regulations are broader than the categories of deemed compliant FFIs described in prior guidance. The proposed regulations provide for two general types of deemed compliant FFIs: (x) registered deemed compliant FFIs and (y) certified deemed-compliant FFIs. A registered deemed compliant FFI generally is required to register with the IRS to declare its status as deemed compliant and to attest to the IRS that it satisfies certain procedural requirements.  The categories of registered deemed compliant FFIs are (a) local FFIs, (b) nonreporting members of participating FFI groups, (c) qualified investment vehicles, (d) restricted funds, and (e) FFIs that comply with the requirements of Section 1471(b) under an agreement between the United States and a non-U.S. government. The certified categories of deemed compliant FFIs are (i) nonregistering local banks, (ii) retirement plans, (iii) non-profit organizations, (iv) certain owner-documented FFIs, and (v) FFIs with only low-value accounts. 
• The proposed regulations provide for the coordination of FATCA with other existing U.S. federal withholding tax regimes and propose the use of modified IRS Forms W-8 and W-9 for certain certification requirements under FATCA.
• The proposed regulations refine the definition of a "financial account" (in the case of an FFI, an account with respect to which FATCA applies) to focus on traditional bank accounts, brokerage accounts, money market accounts, and interests in investment vehicles, and to exclude most debt and equity securities issued by banks and brokerage firms, subject to an anti-abuse rule.