An FFI can avoid withholding under FATCA by entering into an FFI agreement with the IRS to:
· identify U.S. accounts it maintains;
· report information to the IRS on an annual basis regarding each U.S. account; and
· withhold a 30-percent tax on withholdable payments to non-participating FFIs and account holders who are unwilling to provide the required information.
FATCA also requires a NFFE to certify to the U.S. withholding agent whether it has any substantial U.S. owners and to report certain information about such owners to the IRS. A substantial U.S. owner is any U.S. person that owns directly or indirectly more than 10 percent of the stock of a corporation, 10 percent of the capital or profits interest in a partnership, 10 percent of the beneficiary interests in a trust, or is treated as an owner of any portion of a grantor trust.
In addition to the regulations, the IRS will need to provide addition guidance to implement FATCA, particularly a draft model FFI agreement and draft reporting forms. “Everyone will be looking for the draft FFI agreement,” Angus said. “It should be out relatively soon, in the next month or so. It’s really good that it will be a draft and that taxpayers can see it together with the regulations. Despite the regulations’ detail, some details are missing.”
The proposed regulations outline the due diligence requirements imposed on FFIs to identify U.S.-owned accounts and to be in compliance. For example, the proposed regulations rely on electronic review of pre-existing accounts and limit manual review of accounts exceeding $1 million. The regulations also exclude pre-existing individual accounts of $50,000 or less, pre-existing entity accounts of $250,000 or less, and insurance contracts with a cash value of $250,000 or less. For existing accounts, the regulations allow reliance on information gathered under AML/KYC (anti-money laundering/know your customer) rules.
“[T]he proposed regulations generally do not require an FFI to make significant modifications to the information collected on customer intake, other than with respect to account holders identified as FFIs, passive investment entities, or as having U.S. indicia,” Joseph Calianno, partner, International Technical Tax Practice Leader, Grant Thornton LLP, told CCH.
“The proposed regulations have completely eliminated the heightened scrutiny for accounts that previously fell within the broad definition of ‘private banking,’” Laurie Hatten-Boyd, principal, KPMG LLP’s Washington National Tax Practice, said in a statement. “Instead, the heightened scrutiny is based solely on a $1 million threshold. Significantly, the requisite paper search for U.S. indicia [of ownership] for these accounts has also been scaled back to include only more recent account data (as opposed to a search of every paper document on file).”