Daily Tax Update - February 8, 2012: Treasury, IRS Issue Proposed FATCA Regulations

TREASURY, IRS ISSUE PROPOSED FATCA REGULATIONS: Today, Treasury and the IRS issued proposed regulations under sections 1471 through 1474 (enacted as part of the Foreign Account Tax Compliance Act ("FATCA") provisions of the Hiring Incentive to Restore Act of 2010 (the "HIRE Act"), which require foreign financial institutions ("FFIs") to identify US account holders or face a 30% withholding tax on certain payments.  The proposed regulations are voluminous (388 pages) and will need to be carefully analyzed by FFIs, US withholding agents, and other persons potentially impacted by FATCA.  A summary of certain significant developments and provisions in the proposed regulations is provided below.

  • Government-to-Government Alternative.  In connection with the release of the proposed regulations, the United States, France, Germany, Italy, Spain, and the United Kingdom released a joint statement describing an intergovernmental approach to "improving international tax compliance and implementing FATCA." 
    • The joint statement outlines a possible framework for an intergovernmental approach, under which a partner country (a "FATCA partner") would agree to: (1) pursue legislation to require FFIs in its jurisdiction to collect and report to FATCA partner tax authorities the information required by FATCA; (2) enable FFIs established in the FATCA partner (other than FFIs that are excepted pursuant to the agreement or in US guidance) to apply the necessary diligence to identify US accounts; and (3) transfer to the United States on an automatic basis the information reported by the FFIs. 
    • The United States would agree to: (1) eliminate the obligation of each FFI established in the FATCA partner to enter into a separate FFI agreement; (2) allow FFIs established in the FATCA partner to comply with their FATCA obligations by reporting information to the FATCA partner rather than the IRS; (3) eliminate US withholding under FATCA on payments to FFIs established in the FATCA partner; (4) identify in the agreement specific categories of FFIs established in the FATCA partner that would be treated as deemed compliant or presenting a low risk of tax evasion; and (5) commit to reciprocity with respect to collecting and reporting on an automatic basis to the authorities of the FATCA partner information on the US accounts of residents of the FATCA partner. 
    • Under this approach, FFIs established in the FATCA partner would not be required to terminate the account of a recalcitrant account holder or impose passthru payment withholding on payments to recalcitrant account holders and payments to other FFIs organized in the FATCA treaty partner or other jurisdiction with which the United States has a FATCA implementation agreement.
  • Transition Rules.  The proposed regulations refine the transition rules of Notice 2011-53:
    • Treasury and the IRS intend to publish a draft model FFI agreement in "early 2012" and a final agreement in fall 2012.
    • For reporting in 2014 and 2015 (with respect to calendar years 2013 and 2014), FFIs will be required to report only name, address, TIN, account number, and account balance with respect to US accounts.  Reporting on income will be phased in beginning in 2016 (with respect to the 2015 calendar year) and reporting on gross proceeds will begin in 2017 (with respect to the 2016 calendar year). 
    • Withholding on passthru payments will not be required before January 1, 2017, but participating FFIs will be required to report annually the aggregate amount of certain payments made to each nonparticipating FFI.
    • A two-year transition (until January 1, 2016) rule (with certain due diligence requirements imposed) is provided for implementation of the section 1471(e) requirement that an FFI’s obligations under an FFI agreement apply to the US accounts of the participating FFI and US accounts of each other FFI that is a member of the same expanded affiliated group.
  • Due Diligence.  The proposed regulations provide detailed guidance on the due diligence that participating FFIs will be required to undertake to identify US accounts.  The approach of prior preliminary FATCA guidance (Notices 2010-60 and 2011-34) is modified in certain respects.
    • As in prior guidance, the proposed regulations apply different due diligence rules to preexisting and new individual and entity accounts.  The proposed regulations also require FFIs to look for "US indicia" for individual accounts, which are refined to include (1) identification of an account holder as a US person; (2) a US place of birth; (3) a US address; (4) a US telephone number: (5) standing instructions to transfer funds to an account maintained in the United States; (6) a power of attorney or signatory authority granted to a person with a US address; or (7) a US "in-care-of" or "hold mail" address that is the sole address on file.
    • With respect to preexisting individual accounts, the private banking rules of Notice 2011-34, which required enhanced diligence for certain accounts, are eliminated and replaced with requirements based on account value threshold. 
      • Preexisting accounts with a balance or value that does not exceed $50,000 and certain cash value insurance and annuity contracts held by individual account holders with a value or balance of $250,000 or less are exempt from review unless the FFI elects otherwise.
      • Preexisting accounts with a balance or value below $1,000,000 are subject only to a review of electronically searchable data for indicia of US status.  Accounts with a balance exceeding $1,000,000 are subject to a review of electronic and non-electronic records (including the customer master file and the most recent documentary evidence and account opening documentation) for US indicia.  This enhanced review is only required, however, where certain information (that roughly corresponds to the indicia mentioned above) is not available through an electronic search.
    • With respect to new individual accounts, the FFI will be required to review the information provided at the opening of the account and determine whether US indicia are present.  If US indicia are identified, the FFI must obtain additional documentation or treat the account holder as recalcitrant.  The preamble states that "FFIs will generally not need to make significant changes to the information collected during the account opening process in order to identify U.S, accounts, except to the extent that US indicia are identified."
    • The proposed regulations provide rules on records that must be kept with respect to both new and preexisting accounts.
  • Compliance Verification.  The proposed regulations require FFI officer verification that the FFI has complied with the terms of the FFI Agreement.  Verification of compliance through third party audits, however, is not required.  Further, according to the preamble, "[i]f an FFI complies with the obligations set forth in an FFI agreement, it will not be held strictly liable for failure to identify a US account."
  • Grandfathered Obligations.  The proposed regulations expand the scope of a grandfathering rule in the HIRE Act, which provided that a payment under any obligation outstanding on March 18, 2012 (or from the gross proceeds from any disposition of such an obligation) is not subject to FATCA withholding.  The proposed regulations extend the March 18 date to January 1, 2013.  An "obligation" is generally defined to include debt and certain legal agreements, but not equity.  Comments are requested on the definition of obligation.
  • Deemed Complaint FFIs.  The categories of FFIs treated as deemed compliant under section 1471(b)(2) are expanded to include "registered deemed-complaint FFIs" (local FFIs, nonreporting members of participating FFI groups, qualified investment vehicles, restricted funds, and FFIs in compliance with an agreement between the United States and a foreign government that register with the IRS) and "certified deemed-complaint FFIs" (nonregistereing local banks, retirement plans, non-profit organizations, certain owner-documented FFIs, and FFIs with only low-value accounts).
  • Passthru Payments.  According to the preamble, Treasury and the IRS continue to consider ways to implement the passthru payment requirement while easing the compliance burden.  Comments are requested on this issue.  The preamble also states that Treasury and the IRS are studying options to prevent US institutions from serving as "blockers" with respect to passthru payments (as US institutions are required to withhold with respect to withholdable payments but not passthru payments).
  • The joint statement from the United States, France, Germany, Italy, Spain and the United Kingdom on FATCA can be accessed here.
  • The regulations can be accessed here.
  • For additional information, contact Philip R. West - pwest@steptoe.com or Amanda Varma - avarma@steptoe.com

WAYS AND MEANS HEARING ON EFFECT OF TAX AND FINANCIAL ACCOUNTING ON TAX REFORM:  Today, the House Ways and Means Committee held the first of two hearings on how accounting rules affect how businesses evaluate tax policy.  The first hearing will focus on the interaction of tax policy and financial accounting rules (such as Generally Accepted Accounting Principles, or "GAAP"), and how this interaction affects how publicly-traded companies respond to tax policy. 

  • In his opening remarks, Committee Chairman Dave Camp said, "During today’s hearing we will consider how public companies evaluate tax policy options in light of financial accounting – or 'book' considerations.  As such, we will examine whether tax legislation works as intended when Congress does not consider the effects of financial accounting.  When companies report profits in their financial statements, the primary purpose is to convey information about a company’s financial condition to investors and creditors.  Conversely, the primary purpose of tax accounting is to measure income for levying the Federal income tax.  These two functions are not necessarily consistent, and in some cases, may even be at odds.  For publicly-traded companies focused on Earnings per Share (EPS) in addition to cash flows, changes in tax policy might not produce intended results if the effect of tax policy on EPS is not well understood."  Camp added, "If the goal is, as I believe, to transform the code and create a climate ripe for hiring and investment, then we must solicit input and insight from the very job creators who will do that hiring and investing.  Properly designing tax reform requires an understanding of the financial accounting rules and how those rules might influence the investment decisions of public companies.  I am pleased to have some of those businesses here today, along with members of the academic community who have done extensive research on how financial accounting affects corporate behavior, and I look forward to hearing from all of them."
  • The witnesses were:
    • Mr. Michael D. Fryt, Corporate Vice President, Tax, FedEx Corporation
    • Mr. Mark A. Schichtel, Senior Vice President & Chief Tax Officer, Time Warner Cable
    • Ms. Michelle Hanlon, Associate Professor of Accounting, MIT Sloan School of Management
    • Mr. Tom S. Neubig National Director, Quantitative Economics and Statistics, Ernst & Young LLP
    • Mr. Timothy S. Heenan, Vice President, Treasury & Tax, Praxair, Inc.
  • Mr. Fryt testified, ". . . Fed Ex, like many other businesses across the country, is intensely interested in comprehensive corporate income tax reform.  We believe it is critical that this occur.  Indeed, we do not think continuation of the status quo is an acceptable option, either for us as a company or for our country."
  • Mr. Schichtel stated, "As a business and an industry, we understand that our growth is largely tied to the overall economy.  That is why we are strong advocates for tax reform generally and for a significant reduction in the corporate tax rate."
  • Ms. Hanlon testified, "The main point of my testimony is that financial accounting implications for publicly traded companies can influence the effectiveness of tax policies, including policies related to investment.  The financial accounting effects represent a non-tax cost (or benefit) that public companies consider in their decision-making process.  Thus, companies’ responses to tax policies are not only governed by the tax effects, but also the cosmetic financial accounting effects, often producing unintended consequences."  Ms. Hanlon continued, "It is important to recognize that financial accounting can affect responsiveness to tax policies. However, the fact that some firms with deferred tax assets would have to write-down the value of those assets if corporate rates are reduced should not stop the US from lowering the corporate tax rate.  Even this sub-set of companies will benefit in the future from lower rates, assuming these companies become profitable."
  • Mr. Neubig stated, "Financial statement accounting is one of several factors that influence business decision making, and is often not taken into account in some economists’ proposals for tax reform and their modeling.  The positive effects of a lower corporate income tax rate compared to the negative effects of corporate base broadening will be underestimated without understanding these other effects.  These other effects include tax risk and uncertainty, compliance burdens, and other non-income taxes that affect business decisions."  Mr. Neubig concluded, "Most of the corporate tax community would prefer to see the United States join other countries in significantly lowering its corporate income tax rate.  How a lower corporate tax rate would be financed matters, but I hope that future modeling of US corporate tax reforms will take into account more of the benefits of a lower corporate tax rate."
  • Mr. Heenan testified, "As the committee explores rate reduction, I encourage the Committee to weigh the cash flow benefits of a rate reduction versus any potential cash flow harm from eliminating tax expenditures, such as accelerated depreciation.  In conducting this analysis, I encourage the Committee to consult with individuals at companies that are making investment decisions, including, but not limited to those firms’ Chief Financial Officers and Treasurers."
  • Testimony can be accessed here.
  • The Joint Committee on Taxation’s report in conjunction with the hearing can be accessed via: http://www.jct.gov/
  • For additional information, contact Philip R. West - pwest@steptoe.com or  Amanda Varma - avarma@steptoe.com

FINANCE COMMITTEE APPROVES OFFSETS FOR HIGHWAY BILL:  Last night, the Senate Finance Committee favorably reported the "Highway Investment, Job Creation and Economic Growth Act of 2012," sponsored by Chairman Max Baucus.

  • Additional information on the bill can be accessed here.

MISCELLANEOUS GUIDANCE RELEASED:

Notice 2012-16 provides guidance as to the corporate bond weighted average interest rate and the permissible range of interest rates specified under § 412(b)(5)(B)(ii)(II) of the Internal Revenue Code as in effect for plan years beginning before 2008.  It also provides guidance on the corporate bond monthly yield curve (and the corresponding spot segment rates), and the 24-month average segment rates under § 430(h)(2).  In addition, this notice provides guidance as to the interest rate on 30-year Treasury securities under § 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008, the 30-year Treasury weighted average rate under § 431(c)(6)(E)(ii)(I), and the minimum present value segment rates under § 417(e)(3)(D) as in effect for plan years beginning after 2007.

Notice 2012-18 informs State housing finance agencies participating in a specified pilot program about an alternative way to satisfy certain inspection and review responsibilities under section 1.42-5(c)(2) of the Income Tax Regulations.  The notice also invites taxpayers to comment generally on issues relating to section 1.42-5 for potential changes to those rules.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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