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No more delays for FATCA, says IRS

Thursday, 30 January, 2014

The US Foreign Account Tax Compliance Act (FATCA) will definitely come into effect on 1 July this year with no possibility of further delay, according to officials of the US Internal Revenue Service (IRS).

FATCA, enacted as part of the HIRE Act in 2010, requires foreign financial institutions to report their American clients' and beneficiaries' doings to the US IRS, and to impose 30 per cent withholding penalties on those who do not comply. It was originally scheduled to have been in force long ago, but implementation difficulties have forced at least two postponements. The difficulties include negotiations with foreign governments and problems in setting up the necessary administrative systems, for example a website where foreign banks can register their compliance.

Rumours and media speculation of yet another postponement have circulated in the past month, after some US official bodies criticised the IRS's state of preparedness. In December, the IRS's own computer watchdog, the Information Reporting Program Advisory Committee, noted that the IRS had still not issued new forms and regulations that banks need to see in order to comply with the law. It urged the IRS to postpone the introduction of FATCA's withholding penalties by a further six months to 1 January 2015. The same demand was made in a joint letter to the IRS from the American Bankers Association, The Clearing House Association, the Institute of International Bankers and the Securities Industry and Financial Markets Association. A group of US banks has even sued the IRS to try and get the legislation halted, though without success.

This month, another watchdog, the Treasury Inspector General for Tax Administration criticised the IRS for wasting millions of dollars on an online FATCA registration system that had to be scrapped and rewritten. The system now appears to work but still needs some tweaking before it is functional; for example, foreign banks that registered their compliance before the end of December had to go back to the site and do it again this month.

Moreover, this month the USA's official National Taxpayer Advocate, Nina Olson, in her annual report to Congress, urged the IRS to introduce extra safeguards to protect US persons against the consequences of FATCA. However, senior IRS officials have now signalled that the delays are over. This week, IRS deputy commissioner Michael Danilack told a conference in New York that there is 'absolutely no chance' of further postponements. His comment was later confirmed by an IRS spokesperson.

It is not just banks that are affected but also trusts and other entities. 'All foreign trusts, foreign trustees and underlying foreign holding companies must act now to determine their FATCA classification,' says Warren Whitaker and colleagues at US law firm Day Pitney. The registration rules are 'complicated and replete with conditions and exceptions,' he said, and many trustees are expected to seek expert advice.

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