Banks Have More Time to Comply With Offshore Tax Rule

With questions remaining over country agreements, the government has given financial institutions a six-month breather.
Kathy HoffelderJuly 16, 2013

The Internal Revenue Service and the Department of the Treasury are giving financial institutions a longer time to comply with rules that seek to curb offshore tax evasion.

The move helps the agencies work more closely with international governments and makes it easier for CFOs and their staffs to follow the often-misunderstood Foreign Account Tax Compliance ACT (FATCA), which applies to any U.S. bank making dividend or interest payments to a non-U.S. entity. Firms now have until July 1, 2014 instead of January 1, 2014 to adhere to the law. Additionally, the timeline for foreign financial institutions to register as a participant in the FATCA process has also been extended.   

The IRS and the Treasury said in a statement on Friday that due to a “groundswell of international interest” they were extending the deadline for compliance to the act.  

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U.S. banks and credit unions will benefit from the extension by having a longer time to get their operations and internal staffs ready. If a U.S. bank fails to withhold as required, it could be on the hook for the withholding tax on the payments made to foreign financial institutions (FFI) plus potential penalties and interest. 

Robert Kerr, director with accounting advisory CBIZ MHM, says the extension will be welcomed by foreign as well as domestic institutions. “These changes will be beneficial to foreign financial institutions and their representatives as they go through the FATCA registration process in the upcoming months,” he explains. FFIs used to just have a short window to register for a global intermediary identification number (GIIN) with the IRS, he says, but now they will have the remainder of 2013 to use the registration website on a test basis until April 25, 2014.   

The act was created in 2010 as a way to target non-compliance by U.S. taxpayers using foreign accounts or foreign entities in which U.S. taxpayers hold a substantial ownership interest. But FATCA has since evolved into a data-sharing exchange among more than 80 countries. Through intergovernmental agreements (IGAs), the IRS and Treasury work with countries to attempt to streamline the reporting process involved in FATCA information gathering.

Despite much uncertainty that still exists over the IGAs, Manal Corwin, KPMG LLP tax principal and former deputy assistant secretary for tax policy for international tax affairs at the Treasury, says “there is a definite preference among financial institutions that this is implemented through [an] intergovernmental approach as opposed to a one-on-one approach,” she says.

But some firms say confusion over the IGAs is slowing down FATCA implementation. “Many of those IGAs have not been finalized. You have large multinational institutions trying to build their global solutions and don’t necessarily have a clear road map,” adds Terence Cardew, partner and Americas FATCA tax leader at global accounting firm EY.

Under FATCA, countries have a choice of two IGA approaches. The first model, which is the most common, requires a foreign financial institution to report FATCA information to its home country revenue authority, which then provides the information to U.S. authorities, provided there is an income-tax treaty in place. Alternatively, the second model also involves FATCA information sharing but would require FFIs to provide the information directly to the IRS.      

But as Cardew notes, the principles of FATCA can be the same from country to country “yet the implementation and [the way local tax laws are enforced]  may be different by country.” To the IRS’s credit, Cardew says that the current extension reflects the service’s grasp of the problems participants have had with FATCA compliance and the country agreements.   

Indeed, critics have been vocal about their dislike of FATCA and its use of IGAs. Rep. Bill Posey (R-Fla) wrote to the Treasury earlier this month criticizing the FATCA process. In June, he introduced H.R. 2299 in Congress to abolish the act altogether. In his arguments, he questioned the legality of having IGAs and the need for banks and credit unions to have more compliance work. He says FATCA will only discourage investment in the United States.

But countries themselves are seeing the benefits that can be derived by such information sharing agreements. The Australian government, for one, considers its IGA with the United States a stepping stone for more data sharing between the Australian Taxation Office and the IRS.

Similarly, the United Kingdom has asked for reciprocal reporting of information between the United States and United Kingdom as part of its agreement. Taiwan also said it was “interested in exploring a framework for mutual cooperation.”

The United States is certainly not alone in its attempts to curb cross-border tax evasion. The Organisation for Economic Co-operation and Development (OECD), which supports the IRS and Treasury’s FATCA initiative, is due to com out this month with its own global tax-action plan.