The U.S. government is offering Canadian and other non-U.S. financial institutions more time to comply with regulations requiring them to report on their U.S. accountholder clients.
The U.S. Treasury Department and the Internal Revenue Service together announced plans on Thursday to phase in the requirements of the Foreign Account Tax Compliance Act, known as FATCA, giving firms, in effect, an extra year before the withholding tax regimen kicks in.
FATCA is intended to better target U.S. taxpayers who are failing to identify to the U.S. tax authorities accounts they hold with foreign financial institutions.
FATCA imposes a 30% withholding tax on foreign institutions that hold these U.S. account assets. Under FATCA, U.S.-source income (e.g., interest, dividends, rent) and the gross proceeds from most U.S. property sales received by foreign financial institutions (such as Canadian banks with U.S. operations), as well as non-financial foreign entities, would be subject to the withholding tax.
In order to avoid the withholding tax, a foreign financial institution must come to an agreement with the U.S. Treasury Department to provide the IRS with the names of all U.S. account holders who hold more than US$50,000 in deposits with that institution.
Under the original guidelines for FATCA, the withholding provisions would have kicked in Jan. 1, 2013. With Thursday’s announcement, the U.S. authorities would begin withholding on Jan. 1, 2014.
“Today’s notice is a reflection of our serious commitment to implementation of the statute, but also a serious commitment to listen to the implementation challenges of affected financial institutions and make appropriate adjustments to ensure a smooth and timely roll-out,” said IRS Commissioner Doug Shulman in a statement announcing the update.
According to the new notice:
• Foreign financial institutions must enter an agreement with the IRS by June 30, 2013, to ensure that they will be identified as participating institutions and to allow withholding agents to refrain from withholding beginning on Jan. 1, 2014.
• Withholding on U.S. source dividends and interest paid to non-participating FFIs will begin on Jan. 1, 2014, and withholding on all withholdable payments (including on gross proceeds) will be fully phased in on Jan. 1, 2015.
• Due diligence requirements for identifying new and pre-existing U.S. accounts (including certain high-risk accounts) will begin in 2013. Reporting requirements will begin in 2014. And for purposes of the notice, high-risk accounts include private banking accounts with a balance that is equal to or greater than US$500,000.