The Foreign Account Tax Compliance Act is due to begin taking effect on 1 Jan 2013, and foreign banks, trust administrators, asset managers and others have been keenly awaiting this last set of draft regulations, which had been expected before the end of December.
The final FATCA implementation rules are due sometime this summer.
In the documents unveiled today, the US said it had agreed a deal with five European countries, including the UK, whereby financial institutions in these countries would forward the necessary data on American account-holders to the governments of the respective countries, which then would forward it to the US.
A US Treasury Department spokesman in Washington told journalists in a conference call that the US would be happy to agree similar deals with other countries, including Canada, the Cayman Islands and Switzerland.
Other features of the latest version of FATCA regulations included the introduction of higher dollar thresholds for due diligence review of pre-existing individual and "entity" accounts; permitting non-US banks to make use of information they already have in order to comply with due diligence requirements as well as for anti-money laundering and similar screening; and an expansion in the categories of foreign financial institutions (FFIs) that are "deemed compliant" and thus will not be required to enter into formal agreements with the Internal Revenue Service (IRS).
The US Treasury and IRS also said that they would stagger the implementation of certain elements of FATCA in an effort to make it easier for FFIs, many of which have lobbied extensively for changes to the Act, to comply.
As reported, FATCA was signed into law in 2010 by President Obama in an effort to try to bring into the US tax net income realised by US citizens that was believed to be accumulating in undeclared bank accounts around the world. At the time the legislation was passed, the total value of such hidden assets was estimated at around $10bn.
Under FATCA, banks and other foreign financial institutions that refuse to disclose information to the IRS face a 30% withholding tax on US source payments regardless of whether the recipient is a US taxpayer.
In addition to the UK, the other European countries that have agreed to work with the US in enforcing FATCA are France, Germany, Italy and Spain.
‘Common interest’
The news that five European countries had agreed to collect data on behalf of the American tax authorities was framed by the six countries involved as being part of a “joint” effort to combat tax evasion.
In a so-called joint statement, the five European countries said the arrangement had been built on their “longstanding and close relationship with respect to mutual assistance in tax matters”, and a desire to “intensify their cooperation in combating international tax evasion”.
In this statement, which may be viewed on the Treasury’s website, the five countries also say that they and the US “have agreed to explore a common approach to FATCA implementation through domestic reporting and reciprocal automatic exchange”, which would also take into account existing bilateral tax treaties between the various countries.
Spokespeople for most non-US financial services organisations contacted late on Wednesday said they were still studying the 388-page implementation document ("Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities”), and could not immediately provide a detailed analysis.
Among them was the Investment Management Association’s Julie Patterson, director of authorised funds and tax at the London-based funds industry organisation.
On initial review, though, she said, the draft regulations “take into account the IMA’s lobbying by providing a special exemption for regulated investment funds, where the distributors of the fund comply with certain criteria.
“We have yet to work through the technical details of this exemption, but we welcome this positive development.”
She said the IMA also welcomed the feature whereby the UK and four other countries would work together to help with the implementation by their resident financial institutions of the FATCA regulations.
In practice, this approach –whereby firms would report to their domestic authorities and governments with information – “would mean that UK firms and funds would not have to sign up to an agreement with the IRS, reducing many of the industry’s legal concerns with the original proposals”, she noted.
David Treitel, tax director at US Tax & Financial Services, which looks after American expatriates in the US, Switzerland and Israel, said the latest FATCA regulations changed little as far as his clients were concerned: they still faced an ever-more complex set of forms to fill out, and for those who might be determined to continue to avoid paying tax, an ever-dwindling number of places in which to hide.
Josh Matthews, a managing partner of Maseco Private Wealth, a wealth manager that also specialises in looking after American expats, said the new regulations "will have major implications for foreign financial intermediaries [that] want to have US tax payers as clients", and that, as a result, "we expect more foreign firms will shed their US clients as a consequence".
To view in full the FATCA implementation document, released today, click here.
