The US Foreign Account Tax Compliance Act ("FATCA") is an extraordinarily complex piece of legislation that will be extremely burdensome for affected entities in the UK to comply with.  Recent preliminary guidance published by the US Internal Revenue Service has provided some clarity as to the scope and effect of the legislation but the position is far from straightforward.  Since then, the IRS has issued informal clarification in relation to two further issues of importance.

Background

Chapter 4 of FATCA was designed to prevent US persons from evading US tax by holding income producing assets with Foreign Financial Institutions ("FFIs") or through Non-Financial Foreign Entities ("NFFEs"). An FFI, which is a broadly defined term, and NFFEs, will be subject to a 30 percent US withholding tax on "withholdable payments,"1  unless the FFI enters into an agreement with the IRS and agrees to report information on US accounts, (the "FFI agreement").  (A NFFE is subject to another reporting regime). A US account is any financial account which is held by one or more specified US persons or US-owned foreign entities. In order to perform its obligations under an FFI agreement, the FFI must identify and classify its account holders, whether they be US individual account holders, US account holders of US owned foreign entities and numerous other classifications.

In late August, the IRS issued Notice 2010-60, which contains preliminary guidance on the implementation of Chapter 4 of FATCA. The Notice was issued after the IRS had solicited comments from stakeholders as to how to implement FATCA.

We consider two small but important issues:

First, the statute contains an exception for certain accounts held by individuals. As interpreted by the Notice, with respect to pre-existing accounts, an FFI may elect to treat a depository account as a non-US account, if the average of the balances of all depository accounts held by the account holder was less than USD $50,000 (or the equivalent in foreign currency) during the calendar year preceding the entry into force of the FFI agreement. Under the Notice, it was not entirely clear whether the account balances needed to be aggregated per legal entity or per expanded affiliated group of the legal entity (more than 50% ownership). If the IRS were to exercise its discretion to apply the de minimis exception group wide, the exception would be pretty useless.

Second, personal pension plans. The issue here is whether a foreign personal pension plan that an individual establishes and maintains at a financial institution will be treated as an FFI.

Some slight relief

De Minimis Exception

In an open forum on 14 September, the principal IRS author of the Notice confirmed that the Notice does not require aggregation across an expanded affiliated group (in other words, subsidiaries or related group companies will be treated separately for the purposes of the $50,000 threshold below which accounts can be exempted).

However, it is to be noted that this key and welcome bit of good news was to some extent dampened by his confirmation that the present approach of the IRS will be to insist upon aggregation within a legal entity (so that all balances at separate branches must be aggregated, to include both domestic and overseas branches).  Whilst the position in relation to domestic branches is not entirely surprising, the inclusion of wholly autonomous branches overseas is likely to cause enormous problems for those affected, not least in obtaining access to overseas data which may well be inaccessible or governed by confidentiality laws in the overseas jurisdiction).  The effect of this is likely to be that the de minimis exception will effectively be denied to them.  It may therefore be necessary to make representations to the IRS on behalf of a number of affected parties in the hope that it will reconsider its position.

Personal Pension Plan

In the same public forum, another IRS draughtsperson suggested that even though a personal pension plan could be classified as an FFI, the IRS is considering whether the FFI maintaining the account should perform the reporting on the 'account holders', as opposed to treating the personal pension plan as an FFI which would itself be subject to the need to report.

Next steps

The positive news is that US Treasury and IRS appear to be open to consider ways of ameliorating the expansive reporting provisions, provided that they can obtain appropriate information in relation to  relevant US account holders. The current IRS guidance only deals with certain issues and much will have to be done to achieve specific, actual, workable interpretations of the legislation in a timely manner for FFIS and NFFEs to adopt relevant systems and controls and to reconfigure or implement appropriate IT capabilities

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.