FATCA: Proposed Regulations: IRS and Treasury Department Release Proposed FATCA Regulations

Sullivan & Cromwell LLP - February 28, 2012

On February 8, 2012, the IRS and Treasury Department issued proposed regulations (the “Proposed Regulations”) under the foreign account tax compliance (“FATCA”) provisions of the Internal Revenue Code. The Proposed Regulations provide significant detail regarding how the IRS and Treasury Department expect to implement FATCA, and appear intended—to the extent possible—to coordinate FATCA withholding and information reporting with the current rules requiring withholding on U.S.-source income paid to nonresident aliens and information reporting on U.S. persons. Highlights of the Proposed Regulations include proposals to:

  • Extend the deadline for issuing obligations that are “grandfathered” from withholding under FATCA from March 18, 2012 to December 31, 2012;
  • Postpone withholding on foreign-source “passthru payments” until at least January 1, 2017;
  • Treat certain insurance companies as “financial institutions” for FATCA purposes, and treat both cash-value life insurance contracts and annuity contracts as “financial accounts”;
  • Expand the categories of institutions that may register or certify as “deemed-compliant” under FATCA;
  • Provide temporary relief for Foreign Financial Institutions (“FFIs”) that have affiliates that are subject to local laws that conflict with the reporting and withholding required by FATCA; and
  • Revise the account identification and due diligence steps that are required of FFIs that agree to report information on their U.S. account holders to the IRS (such FFIs, “Participating FFIs”). Significantly, the Proposed Regulations provide that certain accounts existing as of the date of a Participating FFI’s agreement with the IRS (such an agreement, an “FFI Agreement”) may be subjected to more limited due diligence than “new” accounts, and do not include the earlier proposal to subject “private banking” accounts to heightened scrutiny.

The Proposed Regulations do not include a draft FFI Agreement. The preamble to the Proposed Regulations indicates that the IRS intends for a draft agreement to be published in “early 2012” and for the agreement to be finalized in the autumn of 2012.

In a related development, on February 8, 2012, the Treasury Department issued a joint statement (the “Joint Statement”) with five European countries. The Joint Statement outlines the commitment of the IRS and the other signatories to pursue an intergovernmental approach to FATCA implementation and provides a possible framework for bilateral information-sharing agreements with countries that agree to become “FATCA Partners”.

This publication provides an introduction to the Proposed Regulations and expands on the aspects of the Proposed Regulations that differ from earlier guidance. Sullivan & Cromwell LLP expects to release a more detailed memorandum, which will provide an in-depth discussion of the mechanics of the implementation of FATCA under the Proposed Regulations, in the future.