USA: Proposed FATCA regulations

On 8 February 2012, the IRS issued proposed regulations providing rules pursuant to the Foreign Account Tax Compliance Act (FATCA). The proposed regulations are generally consistent with the guidance set out in prior Notices. However, there are significant modifications and refinements. With the proposed regulations, the IRS has attempted to address many industry concerns, however, FATCA continues to pose a significant burden on the affected industries. This article discusses the background of FATCA and highlights the important modifications and repercusions of the proposed regulations.

Proposed FATCA regulations

On 8 February 2012, the IRS issued proposed regulations providing rules on information reporting by Foreign Financial Institutions (FFIs) and withholding on certain payments to FFIs and other foreign entities (REG-121647-10), pursuant to the Foreign Account Tax Compliance Act. Previous FATCA guidance was issued in Notice 2010-60, Notice 2011-34 and Notice 2011-53. 

On the same date, the US Treasury Department also issued a joint statement on FATCA with five European Union countries: France, Germany, Italy, Spain and the United Kingdom. They announced they are exploring a cooperative approach to combating international tax evasion.

Purpose of proposed regulations

The proposed regulations are designed to implement a step-by-step process for US account identification, information reporting and withholding requirements for FFIs, other foreign entities and US withholding agents. The proposed regulations take into account input from stakeholders, including financial institutions. IRS Commissioner, Doug Shulman, stated that the proposed regulations reflect the IRS’ “…commitment to take into account the implementation challenges of affected financial institutions while allowing for a smooth and timely roll-out of the law.” 


FATCA, part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010, (P.L. 111-47), was enacted to collect information with respect to US taxpayers investing through FFIs and non-financial foreign entities (NFFEs). FATCA requires FFIs to provide the IRS information regarding their accounts held by US taxpayers or by foreign entities in which US taxpayers hold a substantial ownership interest. FFIs include banks, insurance and real estate companies, hedge funds, mutual funds and private equity firms. FFIs must enter into agreements with the IRS to report US accounts. If an FFI fails to enter into such agreement, the FFI will be subject to a 30 percent withholding.

Under section 1471(a), a withholding agent must withhold 30 percent of certain payments to an FFI which does not meet the requirements of section 1471(b). Withholdable payments, subject to exceptions, include; payments of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments and other fixed or determinable annual or periodical gains, profits and FDAP income (if such payment is from sources within the U. S.) and any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the US An FFI satisfies section 1471(b), if it either enters into an FFI agreement with the IRS to perform certain obligations or otherwise qualifies for an exemption. 

The withholding agent must also withhold 30 percent of certain payments (listed above) to a NFFE if the payment is beneficially owned by the NFFE or if the NFFE is an agent acting on behalf of another NFFE that is the beneficial owner of the payment unless (1) the beneficial owner or agent provides the withholding agent with either a certification that such beneficial owner does not have any substantial US owners, or  provides the name, address and TIN of each substantial US owner, and (2) the withholding agent reports the information provided to the IRS.

In order to avoid withholding under FATCA, a participating FFI must enter into an agreement with the IRS to (1) identify US accounts, (2) report certain information to the IRS regarding US accounts, (3) verify its compliance with obligations pursuant to the agreement, and (4) ensure that a 30 percent tax on certain payments of US source income is withheld when paid to non-participating FFIs and account holders who are unwilling to provide the required information. (See IR-2012-15, Feb 8, 2012)  

Summary of proposed regulations

The proposed regulations provide significant modifications to the previously issued guidance, as highlighted:  

  • Grandfathered obligations: The HIRE Act provided that no withholding was required from any payment under any obligation outstanding on or before 18 March 2012, or from the gross proceeds from disposing of the obligation. The proposed rules will extend the grandfathered obligations, and their gross proceeds, to 1 January 2013
  • Eased initial reporting requirements on members of affiliated FFIs: Each FFI in an expanded affiliated group must either be deemed compliant or be a participating FFI. If the preceeding requirements are not met the group will be disqualified. The proposed regulations grant a two-year transition period to fully implement this requirement. Therefore, certain branches and FFI affiliates that are subject to local law restrictions that prohibit FATCA compliance will not cause disqualification of the group until 1 January 2016. Instead, such branches and affiliates will be treated separately for purposes of US withholding tax. During this period, an FFI affiliate, in a jurisdiction that prohibits withholding or reporting as these rules require, will not prevent other FFIs in the same group from entering into FFI agreements, as long as the other FFIs agree to perform due diligence to identify US accounts and meet other requirements.
  • Withholding on “pass-thru” payments is postponed: Withholding on “pass-thru” payments is postponed until 1 January 2017. However, for calendar years 2015 and 2016, FFIs are required to report annually the aggregate number of payments made to nonparticipating FFIs. The IRS and Treasury will work with the governments of the jurisdictions that enter into agreements to facilitate FATCA implementation, to develop practical alternatives to “pass-thru” payment withholdings.
  • Some information reporting is postponed: Under Notice 2011-53, only identifying information and account balances are required to be reported in 2014 for the 2013 calendar year. The proposed regulations add the requirement that income be reported beginning in 2016 for the 2015 calendar year, followed by gross proceeds in 2017 for the 2016 calendar year. The information may be reported in the account’s currency or in US dollars.
  • Modified procedures for identifying US accounts: The proposed rules permit participating FFIs to use electronic reviews to identify US accounts for pre-existing accounts with less than 1 million USD. Manual or enhanced review is required for certain categories of paper records for existing accounts over 1 million USD. If an “enhanced review” is required, an inquiry as to a relationship manager’s actual knowledge of the indicia of US ownership will be required. Reviews are not required for pre-existing individual accounts with a value of US$50,000 or less (US$250,000 for certain insurance contracts) and pre-existing entity accounts with a balance or value of US$250,000 or less. 
  • Procedures to verify compliance: Officers of a participating FFI will be expected to certify that the FFI has complied with the agreement, but no audit is required. If the FFI complies with the agreement, it will not be held strictly liable for failing to identify a US account.
  • Definition of financial accounts: The proposed regulations refine the definition of financial accounts to focus on traditional bank, brokerage and money market accounts, and interests in investment vehicles, but exclude most debt and equity securities issued by banks and brokerage firms.
  • Deemed-compliant FFIs are expanded: Deemed-compliant FFIs are expanded to include additional categories, thereby reducing burdens on truly local entities and other entities. The IRS says this will allow the focus of FATCA compliance activities to be on higher risk institutions that provide global investment services.

Joint statement on FATCA

The Treasury Department reported that France, Germany, Italy, Spain and the United Kingdom have agreed to jointly develop a framework to collect and send to the IRS information about offshore accounts held by Americans from their respective banks. Once the framework is finalised, banks in the five European countries will be exempt from entering into separate agreements with the IRS. The US has agreed to reciprocate by collecting and sharing information with the five aforementioned countries about accounts held by their citizens in US financial institutions.

Industry response

The IRS has requested comments on the implementation of FATCA and industry leaders have responded with concerns over the high cost of complying with FATCA.

Private Equity - The European Private Equity and Venture Capital Association (EVCA), believes that investment by the European private equity/venture capital industry in the US may be negatively impacted if FATCA as proposed is implemented. In a letter to the IRS, EVCA noted that the nature of investment activities in the private equity/venture capital (PE/VC) industry is unique compared with other financial institutions, (i.e. banks and hedge funds), making FATCA compliance burdensome.  In its letter to the IRS, EVCA addressed the following concerns:1

  1. If an investor in a European PE/VC fund is a recalcitrant account holder, the fund would not have a mechanism to force the investor to withdraw from the partnership for FATCA non-compliance purposes. This could lead to commercial problems for the PE/VC fund as there would be reduced available funding for investment.
  2. A typical fund could have ten to forty portfolio investments with each investment involving a number of holding companies, viewed as FFIs, which could increase European PE/VC compliance costs.
  3. The regulations pertaining to “pass-thru” payments require valuations more frequently than the fund would normally be required to make, and therefore will increase the burden on European funds. 

Insurance - A financial institution includes an insurance company or a holding company that issues, or is obligated to make, payment to financial accounts. A financial account includes cash value life insurance contracts and annuity contracts. Insurance industry leaders note that the guidance to date is directed towards the banking industry and that the application of FATCA to the insurance industry needs further clarification.2

Pension – The proposed regulations expand the definition of a retirement business, which is exempt from the scope of FATCA. Old Mutual, in its submission to the IRS, states that this expansion is welcome as most pension and retirement programmes are not favourable for use in avoiding taxes and exemptions. However, the linear application of a US$50,000 limit means that, in a number of jurisdictions, retirement plans will still be in scope. Given the relative inflexibility of personal pension products, the industry believes that the US$50,000 limit should be increased.3 

Bank – Barclays Bank PLC contends that there still remains a number of significant issues that must be addressed for FFIs to be able to fulfill the requirements of FACTA in a manner that limits the need to create duplicative and costly systems and procedures, address the potential conflict of law issues, and accommodate industry practices and legal requirements, while still meeting the intent of Congress to address potential tax evasion and avoidance by Americans utilizing offshore accounts.4

Credit Card Company – The proposed regulations indicate that financial accounts are (i) any depository account maintained by a FFI; (ii) any custodial account maintained by a FFI; (iii) a non-publicly traded debt or equity interest in an FFI, and (iv) any cash value insurance contract.  In its submission to the IRS, Visa Inc. asserts that neither credit cards nor prepaid cards represent any interest in any financial institution and are not insurance contracts.5Furthermore, these card products will not be a financial account unless they constitute depository accounts or custodial accounts. Non-income credit cards and prepaid card products should neither be depository accounts nor be custodial accounts under the proposed regulations.

Action items

While the regulations have not been finalised to date, they are of particular importance to banks, insurance and real estate companies, hedge funds, mutual funds and private equity firms. These types of entities should begin to consider making modifications to their internal systems, processes and procedures to be in compliance with the regulations which will be effective 1 January 2013. At a high level, compliance includes the identification of US account holders, annual FATCA reporting requirements and long-term (ten years) data retention, storage and security.

For further information please contact

Larry LeBlanc
Partner - International Tax
McGladrey LLP
[email protected]
T +1 240 426 2209


Ayana Martinez
Manager, International Tax
McGladrey LLP
[email protected]
T +1 703 336 6469

1 Comment letter submitted on January 6, 2012 by European Private Equity and Venture Capital Association, (untitled).

2 Comment letter submitted on April 23, 2012 by Walter C. Welsh, Mandana Parsazad, and Lisa G. Strikowsky at the American Council of Life Insurers, “Proposed Regulations REG-121647-10, Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities”.

3 Comment letter submitted on March 16. 2012 by Stephen Lock at Old Mutual, (untitled).

4 Comment letter submitted on April 20, 2012 by Philip Jacobs at Barclays Bank PLC,  “Comments on Proposed Regulations under FATCA”.

5 Comment letter submitted on April 13, 2012 by Linda Selker at VISA Inc, “Comments Pursuant to Notice of Proposed Rulemaking dated February 15, 2012 Regarding Definition of “Financial Account” Under FATCA”.

Disclaimer: The information contained herein is general in nature and based on authorities that are subject to change. McGladrey LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. McGladrey LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations.

Circular 230 Disclosure: This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

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