Firms subject to U.S. FATCA advised to press on with preparing despite rule delay
By Emmanuel Olaoye
WASHINGTON/NEW YORK, Nov. 6 (Thomson Reuters Accelus) – Financial institutions should take advantage of the U.S. Internal Revenue Service’s decision to postpone key start dates in the Foreign Account Tax Compliance Act (FATCA) and not wait for the U.S. Treasury to issue its final rules before they start their preparations, experts told Compliance Complete.
“If you put off your efforts or suspend them for too long I think you’ll fall way too far behind. I think you’ll have a very difficult time doing what you have to do. At this point you should have a very clear idea of what your current systems and procedures can and can’t do and how they are going to have to be modified,” said John Staples, managing partner of the law firm Burt, Staples & Maner, LLP.
FATCA, passed in 2010, requires overseas banks to report information on U.S. clients to the US Internal Revenue Service. Firms who fail to comply with the law are subject to a 30 percent withholding tax on the interest, dividend and investment payments the company earns in the United States.
The intent of FATCA is to combat tax evasion by U.S. taxpayers and prevent the loss of billions of dollars in tax revenue to the government. But financial firms have criticized the law on the grounds that it will drive up compliance costs and increase the reporting obligations for foreign financial institutions.
The firms received some relief in October when the IRS announced that it was postponing some of FATCA’s key start dates, to give institutions an opportunity to better coordinate the implementation of FATCA procedures globally. The agency extended the deadline for implementing new account opening procedures from July 1, 2013 to January 1, 2014. It also extended the date that firms have to start withholding U.S. tax from their client’s investment gains from January 1, 2015 to January 1, 2017.
Despite giving firms more time to comply, the Treasury Department has not issued the final rules for FATCA. The delay has left firms unclear about the final form that FATCA will take.
Staples said U.S. and foreign firms should be in “modification mode” instead of waiting for the Treasury to issue the final rules for FATCA. He said firms should have systems in place for capturing new data, reporting the data, and for withholding payments.
Time for checking accounts
The extended dates will allow firms more time to implement systems for checking hundreds of thousands of customer accounts when FATCA becomes effective, said J. Richard Harvey, a former senior advisor to IRS Commissioner Doug Shulman and now a professor at the Villanova University School of Law.
Harvey said that reviewing customer accounts and carrying out due-diligence procedures would help firms to understand what they need once the final rules are adopted.
Financial firms in countries such as Canada and Germany have also welcomed the IRS’s decision to extend key dates in FATCA.
Concern about the law led the United Kingdom to sign a bilateral agreement with the U.S. government in September. The deal would see the UK government share the tax information of U.S. residents who hold bank accounts in the country and spare UK firms from requirements such as reporting client information directly to the U.S. and withholding US taxes from clients.
Other countries are hoping to sign similar deals with the U.S. government.
Staples, whose firm is negotiating an inter-governmental agreement with the IRS on behalf of a European government, said the IRS’s announcement was a sign that the government was finally ready to move forward with FATCA. He said he expects to see a wave of inter-government agreements between the United States and other countries by the end of the year.
Andrea Taylor, a director at the Investment Industry Association of Canada, said the extensions reduced a lot of uncertainty for firms with operations in more than one jurisdiction. The IRS announcement allows the firms to have a single effective date for meeting their due diligence procedures on new accounts, she said.
“We’ve seen the inter-governmental agreement that is in place between the U.S. and the UK…What this does is it aligns the deadline between countries that have IGAs and those that don’t which reduces a lot of uncertainty for financial institutions, in particular the large financial groups that are operating in multiple jurisdictions,” she said.
The extended dates will not only help firms to prepare for FATCA but it will give the IRS more time to finalize the FATCA rules, said Alan Appel, counsel at Bryan Cave LLP and a professor at New York Law School.
“The IRS and the Treasury Department are dealing with two major pieces of legislation at the same time. They have not only got FATCA but they also have the Healthcare Affordability Act to implement,” Appel said. “They are very short staffed.”
Appel said he expects the IRS to issue final rules for FATCA by the end of the year.
“You should definitely continue to prepare for FATCA. FATCA is not going away. Its such a massive undertaking that you should use the time to get everything in position so you can properly comply,” he said.
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