As we discussed in our previous article, 2016 has been an important year in the U.S. government’s implementation of the Foreign Account Tax Compliance Act, commonly known as FATCA. Digital information exchanges have begun between the U.S. and its FATCA-ready partners (e.g., the U.K. and Australia), and the IRS is receiving foreign account information that previously would have been wholly unattainable.
Many of the 80-plus FATCA partner countries and their foreign financial institutions have made substantial efforts to become FATCA compliant, knowing that otherwise they and their account holders may become subject to a 30% withholding tax on U.S.-source payments such as interest and dividends – a potentially devastating penalty for foreign institutions, such as banks, with significant portfolios of U.S. investments. Some countries, however, are still finding it difficult to enact the domestic legislation needed in order to bring their intergovernmental agreements (“IGAs”) with the U.S. into force.
Patience is an International Virtue
For the most part, the U.S. government has been patient with partner countries trying to implement FATCA locally based on its understanding that domestic legislation takes both time and political will. FATCA was legislated back in 2010 with the goal of full participation within the next several years. FATCA deadlines, however, have been pushed back a number of times, both with respect to the participation requirements and the implementation of penalties. In fact, the U.S. has pushed back the start of withholding for many types of transactions until 2019.
With respect to bringing IGAs into force, the U.S. has treated late countries as if their IGA is in effect, but has required that late countries they assurances of imminent compliance. An IRS Announcement earlier this year regarding IGA implementation is perhaps the strongest signal that the U.S. government’s patience is running out, and that it’s finally time for countries to get with the program or suffer the consequences.
Patience Running Thin
In the Announcement, the U.S. government stated that each FATCA partner with an IGA that is not yet in force and that wants to continue to be treated as having an IGA in effect must provide, by the end of this year, an expected implementation date that is in the near future, a detailed explanation as to why it has failed to bring its IGA into force through domestic measures, and a detailed plan for bringing the IGA into force, including mini-deadline’s for each phase of the plan.
If these steps aren’t taken by the December 31 deadline, the FATCA partner could essentially lose its status as FATCA compliant and potentially suffer significant adverse economic consequences. In this regard, the Announcement asserts that once the December 31 deadline passes, it will begin updating its current list of IGAs to reflect the countries who have not met their obligations and are therefore being treated as having an IGA that is not in effect.
With the end of the year fast approaching, countries that are serious about their FATCA participation have relatively little time left to comply with the U.S. government’s demands. It remains to be seen whether the added pressure of an end-of year- deadline will be effective in finalizing FATCA’s international implementation.
After spending the majority of their respective careers at two of the largest accounting firms (PwC and Ernst & Young), Joshua Ashman ([email protected]) and Ephraim Moss ([email protected]) founded Expat Tax Professionals, a firm specializing in the needs of U.S. citizens living abroad. You can visit the firm’s website at www.expattaxprofessionals.com.