Tax Rules Roil Financial Sector

Proposed rules for implementing FATCA may have broad implications for U.S. banks.
Kathy HoffelderJune 15, 2012

One might think the “foreign” in the Foreign Account Tax Compliance Act relates to only a handful of firms. But proposed FATCA regulations have such a broad extraterritorial reach that they’re taking on renewed importance for many U.S. financial institutions.

First enacted by Congress in 2010, FATCA applies to any U.S. bank that makes dividend payments or interest payments to a non-U.S. entity. (The law was originally created to police noncompliance by U.S. taxpayers using foreign accounts.) Under proposed Internal Revenue Service rules, these banks would be required to withhold the interest or other payments they make to foreign financial institutions (FFIs) that fail to report certain account information to the IRS. If a U.S. bank failed to withhold as required, it would be liable for the withholding tax, plus potential penalties and interest.

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The proposed rules require the withholding agent to determine whether or not an FFI is in compliance with the 2010 law. The rules also require banks to use separate account identifiers for different types of entities and to abide by strict information-reporting standards. “We understand it [FATCA] creates a significant undertaking for financial institutions,” IRS commissioner Douglas Shulman said when the proposed rules were issued in February.

Currently, U.S. institutions do not have to report information on their accounts with foreign banks and other entities, says Adrienne Baker, partner at Dechert, an international law firm. Under the proposed rules, “U.S. institutions will end up being withholding agents,” says Baker. A recent Baker Hostetler report went even further, saying that U.S.-based payers of dividends or interest income would be “essentially deputized enforcers for the IRS.”

Financial-services firms have several concerns about the rules, including how to identify which accounts in each business unit must comply with FATCA. In a recent KPMG survey, 31% of 150 U.S. bank respondents cited account-identification requirements as their biggest compliance challenge under FATCA.

Companies are also concerned that they will not have the systems in place to handle all of the required compliance steps, says Laurie Hatten-Boyd, a national tax principal at KPMG. “It’s very important that they have their teams in place,” she says. “Right now they need to have steering committees with IT, operations, and their tax departments all together addressing this.” Some financial-industry CFOs are keeping tabs on FATCA through meetings with steering committees and regulators, but others are still educating themselves, she notes.

The IRS plans to release final regulations by September. But discussions in IRS and Treasury Department meetings have already surfaced about extending the initial deadlines. The IRS says FFIs will be able to register their account information in an online database starting on January 1, 2013, the first effective date for U.S. documentation compliance with FATCA.

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