Members of Ruchelman P.L.L.C. contribute to publications throughout the world and the Firm’s monthly tax journal, Insights.
This month, Galia Antebi and Philip R. Hirschfeld discuss (i) the growing list of countries with which the I.R.S. will exchange F.A.T.C.A. information, (ii) the litigation in Canada attempting to block F.A.T.C.A. exchanges with U.S., (iii) recent developments in acceptably encryption for F.A.T.C.A. exchanges, (iv) additional competent authority agreements, and (iv) an updated list of I.G.A. partner countries.
Read MoreThis month, Galia Antebi and Philip R. Hirschfeld discuss (i) changes to F.A.T.C.A. regulations designed to ease burdens on F.F.I.’s; (ii) continued I.R.S. interest in public comments; (iii) finalization of domestic entity reporting regulations under Code §6038D; (iv) an exemption from F.A.T.C.A. for a Swiss attorney’s confidential client escrow accounts; (v) competent authority agreements that have been reached with Brazil, Colombia, and Italy; and (vi) an updated list of I.G.A. partner countries.
Read MoreThis month, Insights looks at the I.G.A. experience in Mexico; updated Form W-8BEN-E and instructions; an announcement on forthcoming regulations that will ease burdens on F.F.I.’s; new I.G.A. competent authority arrangements signed with Norway, Barbados, Romania, Spain, Italy, and Costa Rica; a new I.G.A. with St. Lucia; and the most recent list of I.G.A. partner countries.
Read MoreThis month, recent developments in F.A.T.C.A. include the D.O.J.’s Swiss bank deferred prosecution program; new instructions for Form 8966, F.A.T.C.A. Report; six new YouTube videos regarding the Online Registration System; extension of time to file F.A.T.C.A. Reports; upgrade to F.F.I. lists, the current I.G.A. partner countries, and more.
Read MoreRecent developments in the F.A.T.C.A. practice include upgrades to the online registration system, a flurry of competent authority arrangements signed with other countries, F.A.T.C.A. guidance issued by the Turks and Caicos Islands, new authorizing statutes in Russia and Georgia, an implementing memorandum in Germany, an I.G.A. with Angola, updated F.A.Q.’s, and a list of Model 1 and Model 2 I.G.A. partner countries.
Read MoreThis month, Philip R. Hirschfeld and Galia Antebi report on Republican-led efforts to curtail F.A.T.C.A., new F.A.Q.’s released by the U.S. and Mauritius, publication of the St. Kitts and Nevis I.G.A., updated foreign account reporting procedures, and much more.
Read MoreJuly and August were busy months for F.A.T.C.A. developments. We explain the highlights: The I.R.S. notified countries with early I.G.A.’s that more favorable provisions are available, but the notice may escalate the on-boarding controversy with Canada and the U.K. The Common Reporting Standard (C.R.S.) is moving forward – either with or without U.S. participation – and global F.I.’s must adjust reporting systems. Iceland and the United Arab Emirates publish F.A.T.C.A. guidance. Belarus ratified the I.G.A. with the U.S. Italy published an implementation decree for exchange of information. Turkey and Slovakia signed Model 1 I.G.A.‘s. Mauritius and Luxembourg extend local F.A.T.C.A. reporting deadlines.
Read MoreOn July 1, the Foreign Account Tax Compliance Act (“F.A.T.C.A.”) celebrated the first anniversary of its implementation. F.A.T.C.A. was created to improve international tax compliance and combat offshore tax evasion. Notwithstanding dire predictions about its impact on the financial community when F.A.T.C.A. was first enacted in 2010, the sky has not yet fallen as of its first anniversary.
The Internal Revenue Service (“I.R.S.”) provided guidance to taxpayers who do not receive notification of the status of their reports once they have uploaded the data into the electronic system used to transmit information regarding overseas bank accounts to the I.R.S. under the Foreign Account Tax Compliance Act (“F.A.T.C.A.”). There has been growing concern among taxpayers as to what to do if they successfully upload a F.A.T.C.A. report into the International Data Exchange Service (“I.D.E.S.”) but do not get an International Compliance Management Model (“I.C.M.M.”) notification letting them know the status of the report.
The I.R.S. added a new Item D9 to its F.A.T.C.A. I.D.E.S. Frequently Asked Questions and Answers relating to data transmission. The I.R.S. has also stated that a similar question and answer was added to the F.A.Q.’s on the I.C.M.M., the I.R.S. system that ingests, validates, stores, and manages F.A.T.C.A. information once it is received.
Based on the answer to Question 10 under the “General Compliance” heading of the I.R.S.’s F.A.T.C.A. Frequently Asked Questions And Answers webpage, the I.R.S. requires that financial institutions in I.G.A. countries refuse to open new individual accounts if they cannot obtain a Form W-8BEN or a self-certification from the account holder. Conversely, the governments of both the U.K. and Canada have taken the position that under their I.G.A.’s, resident F.F.I.’s can open new individual accounts without self-certifications as long as the accounts are treated as reportable accounts.
In a letter to the Treasury Department released on March 27, the Securities Industry and Financial Markets Association (“S.I.F.M.A.”) pointed to this potential disagreement as having inconsistent guidance coming out of the U.S. and other I.G.A. countries. Such inconsistency may hurt American banks with foreign operations. These banks will be placed at a disadvantage if they follow U.S. authority while their competition is allowed to follow less restrictive rules. S.I.F.M.A. does not take a position as to who is right in the disagreement, but expressed their concern about this dispute and the lack of any information on this and similar disputes over the meaning of important I.G.A. terms that will need to be resolved in the future.
F.A.T.C.A. reports are to be submitted to the International Data Exchange Service (“I.D.E.S.”), which is a secure managed file transfer system that only accepts encrypted transmissions. The I.R.S. announced on March 2 that the I.D.E.S. gateway had been opened for countries and financial institutions to begin transmitting data.
The I.R.S. posted on a service called GitHub a new example showing F.F.I.’s how to create “data packets” of taxpayer account information to transmit using the I.D.E.S. The example also shows how to decrypt a notification.
GitHub is an open source repository hosting service that allows users to collaborate and share code and content. The I.R.S. has made it clear that they do not endorse any commercial product.
Form 8938, Statement of Specified Foreign Financial Assets, requires the disclosure of certain foreign financial assets owned by U.S. citizens, resident alien individuals, and nonresidents who elect to be treated as resident alien individuals for U.S. tax purproses. (E.g., a nonresident alien having a U.S. citizen spouse may elect be treated as a U.S. resident for purpose of filing a joint income tax return.) Form 8938 is attached to the individual’s income tax return for the applicable year (starting with tax year 2011) and must be filed by the due date for said return, including extensions.
Updates to the 2014 instuctions for the Form 8938 reporting requirements were announced on March 10, 2015 and incorporate final Treasury Regulations under Internal Revenue Code (the “Code”) §6038D, adopted in December 2014. The final regulations are effective for taxable years beginning after December 19, 2011. The update contains additional information not included in the updated instructions for Form 8938. Taxpayers and their tax return preparers must review these recent changes to the form’s instructions to make sure it does not affect their filing obligations.
Dual Resident Taxpayers
A dual resident taxpayer, within the meaning of these regulations, is an individual who is considered a resident of the U.S. under the Code and applicable regulations because he or she meets the “Green Card Test” or the “Substantial Presence Test” and is also a resident of a treaty country (pursuant to the internal tax laws of that country). The updated instructions apply to dual resident taxpayers who determine their income tax liability for all or a portion of the taxable year as if they were nonresident aliens (pursuant to a provision of an income tax treaty that provides for resolution of conflicting claims of residence by the U.S. and its treaty partner).
The Foreign Account Tax Compliance Act (“F.A.T.C.A.”) enacted in 2010 has been the driving force and the primary impetus for global tax transparency across borders. It has led to a ginormous administrative challenge for banks and other financial institutions as well as withholding agents in 2015. The O.E.C.D.’s recent release of the common reporting standard has led Treasury Department officials to view it as “the multilateralization of F.A.T.C.A.”
The U.S. has negotiated more than 100 Intergovernmental Agreements (“I.G.A.’s”) with nations across the globe to implement F.A.T.C.A and allow tax information to be shared between governments, which has set the stage for discussion for the onset of global exchange of tax information. More than 50 I.G.A.’s had already been signed and the remainder are treated as in effect and should be signed soon.
I.G.A. Challenge
The I.G.A.’s represent a growing trend in global tax transparency, though implementation has posed a challenge to some nations. Implementing an I.G.A. may require changes to local legislation, such as approving actions that are required to be taken under the I.G.A. and thus essentially making F.A.T.C.A. a part of the law of that country. The Internal Revenue service (“I.R.S.”) said in December 2014 that jurisdictions with I.G.A.’s treated as agreed-in-substance will have more time to get the pacts signed if they can demonstrate “firm resolve” to finalize them, which is subject to a monthly review. Given the uncertainty of whether all agreed-in-substance I.G.A.’s will eventually be signed, and what the language of the signed I.G.A. will provide, 2015 will pose a growing concern for foreign financial institutions (“F.F.I.’s”), who are required to navigate multinational F.A.T.C.A. compliance, and for banks, who must put new procedures in place.
Foreign financial institutions (“F.F.I.’s”) that are based in jurisdictions that have (or are treated as having) entered into a Model 1 Intergovernmental Agreement (“I.G.A.”) with the U.S. must register and obtain a Global Intermediary Identification Number (“G.I.I.N.”) as part of the process to properly certify its status as an F.F.I. that complies with F.A.T.C.A. Withholding for residents of Model 1 jurisdictions who do not comply with F.A.T.C.A. started on January 1, 2015.
Jurisdictions which are treated as having entered into a Model 1 I.G.A. include countries which have not yet signed, but have reached an agreement in principle to sign, a Model 1 I.G.A. Those countries are referred to as having an “in-substance I.G.A.” with the U.S. In early 2014, the I.R.S. announced that such in-substance I.G.A.’s can be treated as in effect and relied upon through the end of 2014. The I.R.S. F.A.T.C.A. webpage has a list of these in-substance I.G.A.’s. Announcement 2014- 38 provides that a jurisdiction that is treated as if it has an I.G.A. in effect (i.e., an in-substance I.G.A. country) but that has not yet signed an I.G.A. retains such status beyond December 31, 2014, provided that the jurisdiction continues to demonstrate firm resolve to sign the I.G.A. that was agreed in substance.
Announcement 2014-38 does not change the F.A.T.C.A. requirements relating to payments made on or after January 1, 2015. Therefore, F.F.I.’s subject to an in-substance I.G.A. will still need to meet the registration requirements and all due diligence and reporting requirements under F.A.T.C.A. to avoid withholding on payments received starting January 1, 2015.
The I.R.S. has added an additional web page to the F.A.T.C.A. International Data Exchange Service (“I.D.E.S.”). The I.D.E.S. system allows for the U.S. to securely exchange data with foreign tax authorities and F.F.I.’s. The I.D.E.S. enrollment process may be different based on the relevant I.G.A., but will generally entail the following steps:
Bitcoin and other virtual currency accounts held in foreign exchanges may be treated as a foreign financial account and thus be subject to F.B.A.R. reporting. Eventually, it is even possible that the foreign exchanges themselves may be considered foreign financial institutions (“F.F.I.’s”) that have to report the accounts to the I.R.S. under F.A.T.C.A.
This view follows caselaw where a court found that online accounts held for the purpose of foreign online gambling had to be reported on an F.B.A.R.
Currently, the I.R.S. treats virtual currency as property. However, some claim that it is only a short hop to apply the court's ruling in the online gambling case to digital currency accounts.
Speaking at the fall meeting of the American Bar Association Section of Taxation, a senior I.R.S. official said the I.R.S. doesn't have a stance yet on whether the currency is subject to F.B.A.R. or F.A.T.C.A. reporting, even though the agency is well aware of the issue.
On November 17, the I.R.S. published a corrected amendment under which F.F.I.’s can treat all accounts that were opened before the date on which the F.F.I. signed an agreement with the I.R.S. to participate in F.A.T.C.A. (an “F.F.I. Agreement”) as pre-existing accounts for 2014 reporting purposes. Before this announcement was made, only accounts opened on or before June 30, 2014 were treated as preexisting accounts.
While Mexico, the largest Central American nation, signed an I.G.A. in April of 2014, other Central American nations are also deciding to join the F.A.T.C.A. bandwagon. Panama, which has the greatest number of U.S. residents in Central America along with Costa Rica, are leading an effort to have Central America move towards compliance by the September 2015 deadline. In May 2014, Panama reached an agreement in substance to adopt an I.G.A., and has been treated as if an I.G.A. has been in effect since then. Costa Rica had already signed a Model 1 I.G.A. in December 2013.
Though Guatemala has not yet signed an I.G.A., many local financial institutions have registered for direct exchange with the I.R.S. under the Treasury Regulations. It was reported that nearly 100 foreign financial institutions (“F.F.I.’s”), including 18 banks, ten stock brokerages, and 28 insurance firms have registered with the I.R.S. to start sharing information by March 31, 2015, as required under the Regulations with respect to F.F.I.’s in non-I.G.A. jurisdictions. Edgar Morales, operation subdirector at banking trade group Asociación Bancaria de Guatemala, said that unlike Panama or Costa Rica, where aggregating these lists of U.S. resident account holders “will be much harder,” the process in Guatemala hasn’t been so complex because “there aren’t that many people who qualify under F.A.T.C.A. here.” Guatemala has a robust banking secrecy law that forbids banks from sharing customer data with other government institutions, and therefore banks that register with the I.R.S. have to obtain privacy waivers from customers to be able to reveal their information under F.A.T.C.A.
Canada’s recently published guidance with respect to F.A.T.C.A. provides that only “listed financial institutions” should be considered investment entities subject to F.A.T.C.A. under the intergovernmental agreement (“I.G.A.”) with Canada (“U.S.-Canada I.G.A.”). The U.S. Treasury has accepted this position.
The U.S.-Canada I.G.A. provides that the definition of “investment entity” is to be interpreted in a manner consistent with the definition of “financial institution” in the recommendations of the Financial Action Task Force (“F.A.T.F.”). The F.A.T.F. provides that any natural person or legal entity that conducts, as a business, one or more listed activities or operations for, or on behalf of, a customer, would be treated as a “financial institution.” The F.A.T.F. also provides a list of designated nonfinancial businesses and professions, including certain trust and company service providers that are not otherwise financial institutions and act as trustees for trust entities. Canada’s anti-money laundering rules interpret this standard to treat the unlisted financial institutions as designated nonfinancial businesses. The Canadian F.A.T.C.A. guidance treats only the expressly listed financial institutions as investment entities, and as mentioned above, the I.R.S. has approved this position.
On May 4, 2014 Israel reached a Model 1 agreement with the U.S. Israel has shown a strong eagerness to accept F.A.T.C.A. In 2012, the Association of Banks in Israel urged the country's central bank, the Bank of Israel, to ask the government to reach a F.A.T.C.A. agreement with the United States. Earlier in 2014, even before the signing of the F.A.T.C.A. agreement, the Bank of Israel ordered Israeli financial institutions to begin to implement F.A.T.C.A. procedures, including appointing an officer to oversee F.A.T.C.A. compliance, identifying U.S. customers, making them sign I.R.S. declarations (such as I.R.S. Form W-9 or Form W-8BEN), and expelling any clients unwilling to do so. Israel has shown strong support and an eagerness to uphold the enforcement of F.A.T.C.A.
The Israeli Ministry of Finance has drafted proposed regulations that would impose criminal penalties on Israeli financial institutions (including banks, brokerage houses, and insurance companies) that do not comply with F.A.T.C.A. reporting obligations.
On August 11, through the Alliance for the Defense of Canadian Sovereignty, two U.S.-born Canadians filed a lawsuit against the Canadian government asserting that the Canadian I.G.A. was unconstitutional.
A statement of claim at the Federal Court of Canada in Vancouver was filed against the defendant, the Attorney General of Canada, contesting the Model 1 reciprocal I.G.A. that Canada and the United States signed on February 5.
On August 1, the Internal Revenue Service (“I.R.S.”) clarified in its F.A.T.C.A. Frequently Asked Questions (“F.A.Q.”) that the I.R.S.’s main contact with a foreign financial institution (“F.F.I.”) will be the “responsible officer” identified under Question 10 of the registration form (i.e., Form 8957, which should be completed on the I.R.S. F.A.T.C.A. portal and not in paper form). However, the I.R.S. reiterated that the responsible officer can authorize as many as five additional points of contact to receive F.A.T.C.A.-related information regarding the F.F.I. and to take other F.A.T.C.A.-related actions on behalf of the F.F.I.
Additionally, the responsible officer will receive an automatic e-mail notification to check the F.F.I.’s F.A.T.C.A. message board when certain messages are posted. For example, when the F.F.I.’s registration status changes, the responsible officer will receive an e-mail notification. Such e-mail notifications will include the last several characters of the F.F.I.’s F.A.T.C.A. identification number so that the officer can identify which F.A.T.C.A. account is being referred to. If no e-mail notifications are received, the responsible officer must verify that the e-mail address entered in Question 10 of the registration form is correct, as well as ensure that their spam blocker is not preventing e-mail notifications from getting through. Note that the responsible officer can only list one e-mail address on Question 10 of the registration form.
On August 1, the I.R.S. also updated its F.A.Q. on the list of registered F.F.I.’s. (“F.F.I. List”). The I.R.S. stated that it is possible that an F.F.I. that appears in the search tool on the I.R.S.’s website will not appear in a downloaded F.F.I. List in C.S.V. format.
Because some C.S.V.-compatible spreadsheet and database applications may only display a maximum number of records, an F.F.I. that is located on the list beyond that maximum limit may not be seen. To address this problem, the I.R.S. suggests that taxpayers try to use another spreadsheet and database application or text editor to open the downloaded C.S.V. file.
On June 19, Instructions for the Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting, were released. The instructions provide useful guidance because they allow entities to attach alternative certifications based on an Inter-Governmental Agreement (“I.G.A.”) or the regulations instead of checking a box on the form.
On June 24, the Internal Revenue Service (“I.R.S.”) released final instructions on Form 8966, F.A.T.C.A. Report. The instructions provide that taxpayers must file Form 8966 for the 2014 calendar year on or before March 31, 2015. They will get an automatic 90-day extension for calendar year 2014 without the need to file any form or take any action.
On June 2, implementation of the Foreign Account Tax Compliance Act (“F.A.T.C.A.”) reached another milestone. On that date, the I.R.S. published its first list of foreign financial institutions (“F.F.I.’s”) that have registered with the I.R.S. to show intent to comply with F.A.T.C.A. and have received a Global Intermediary Information Number (“G.I.I.N.”) to document that compliance. The I.R.S. list is important since U.S. withholding agents who are being asked by F.F.I.’s not to remit the 30% withholding tax imposed under F.A.T.C.A. must first obtain a G.I.I.N. from the F.F.I. and then confirm on the I.R.S. published list that the G.I.I.N. is accurate and in full force.
More than 77,000 F.F.I.’s appear on this first list and include foreign affiliates of some of the U.S.'s largest financial institutions. Among those financial institutions are Bank of America, JPMorgan Chase, Merrill Lynch, and Franklin Templeton.
