Taxpayers Still Facing Big Challenges One Year After FATCA Goes Into Effect
June 30 — Taxpayers continue to wrestle with big questions a year after the Foreign Account Tax Compliance Act opened for business.
Acknowledging that the Internal Revenue Service is doing its best to implement a complex law, issues still remain as the reach of FATCA goes global, practitioners told Bloomberg BNA in a series of interviews.
The law—which was enacted in 2010 but didn’t take active effect until July 1, 2014—requires foreign financial institutions to report their U.S.-owned accounts to the IRS or face, in some cases, a 30 percent withholding tax on their U.S.-source income.
“Both taxpayers and the government are facing a huge challenge implementing such a massive undertaking, and it’s so novel,” said John Harrington, a partner at Dentons in Washington. “It’s hard to do something like this right that’s never been done before.”
The unique nature of FATCA is having ramifications all around the world, as dozens of countries enter into intergovernmental agreements (IGAs) with the U.S. to allow for the exchange of account information between taxing authorities. More reporting is coming down the pike as many jurisdictions sign on to create even broader requirements under the Organization for Economic Cooperation and Development’s common reporting standard.
Practitioners welcomed the network of more than 100 IGAs the U.S. has negotiated. But many countries have yet to put the pacts into local law or provide guidance, and some of the existing guidance may leave questions when compared to U.S. regulations, attorneys said. Differing treatment of investment entities such as trusts and funds may be leading to problems, they said.
Complex Nuts and Bolts
In addition to global uncertainties, the nuts and bolts of FATCA compliance—determining what institutions are covered by the FATCA rules, what types of account information and accounts need to be reported and how that reporting should be done—is a tremendously complicated enterprise.
A broad swath of banks that do business around the world are affected, including Citigroup Inc., JP Morgan Chase & Co., State Street Corp., Brown Brothers Harriman & Co., Bank of America Corp., UBS Group AG and Barclays Plc.
While many multinational financial institutions and other taxpayers have spent years putting compliance mechanisms in place, the question now is whether they will actually work, said John Staples, managing partner at the U.S. office of Burt, Staples & Maner LLP.
With the first major wave of reporting set to begin in September, “We’re dealing with essentially operationalizing hundreds and hundreds of pages of guidance,” he said. “As you struggle with real issues, you can very quickly run into situations that the regulations don’t address.”
Acknowledging that the IRS “can’t think of every single possible permutation,” Staples said, taxpayers are nonetheless making “a plea to the government that they really, truly have to go easy.”
Questions remain about what the government will do with what may soon become a “tidal wave” of information, he said, while FATCA compliance may become “a very big issue on audit starting next year.”
However, several attorneys acknowledged that the IRS is trying to be flexible by extending deadlines and offering answers to frequently asked questions. Some things are going well, they said, with the IRS system for banks to register for FATCA drawing praise and U.S. withholding agents generally able to meet the initial requirements for reporting.
“The IRS is trying really hard to resolve things as quickly as possible,” Candace Ewell, a principal with PricewaterhouseCoopers LLP, said. “From my side, I think things are going as well as can be expected.”
Despite some positives, nearly all the practitioners interviewed said they have concerns about the IGA network. Although more than 60 agreements have been signed, nearly 50 pacts have only been agreed in substance and have yet to be formalized. Four major jurisdictions that have yet to sign agreements, according to the June 30 version of a Treasury list, include China, India, Taiwan and Saudi Arabia.
The IRS’s original deadline to get all the IGAs signed was Dec. 31, 2014, but the government ended up giving jurisdictions with agreements in substance more time. On Dec. 1, 2014, the IRS said in Announcement 2014-38 that it would consider such IGAs to be in effect as long as those jurisdictions can demonstrate “firm resolve” to get them signed.
The agency said it would conduct monthly reviews to ensure those efforts continue.
Even for those that have been signed, many countries have yet to formally implement them in local law, and the lack of guidance is creating major uncertainties, practitioners said.
“It’s a really terrible situation,” said Michael Plowgian, a principal in the international tax group of KPMG LLP’s Washington National Tax Practice. “Multinational financial institutions are sort of in the worst spot. Figuring out how to adjust to that is a tremendously complicated process,” he said, and one that requires “very substantial FATCA teams.”
Plowgian stressed, however, that the U.S. government is doing its best in a difficult situation. “Treasury is trying to figure out how to improve the process and increase the speed of getting IGAs in place,” he said. “But at the end of the day, Treasury has very limited tools.”
Questions on Investment Entities
Some key jurisdictions where guidance has been issued are Canada, the U.K., the Cayman Islands, Australia and New Zealand. However, in some cases, even where there is IGA guidance, differences between those rules and the U.S. regulations can lead to difficulties, attorneys said.
“There are disconnects between the [U.S.] regs and the IGAs and I think that’s causing a lot of confusion,” said Alan Granwell, of counsel with Sharp Partners P.A. in Washington. “Why can’t it all be synchronized?”
One key issue, Granwell and other practitioners said, is what types of investment entities will be subject to FATCA reporting, For example, the U.S. and countries such as Canada have different definitions of trusts, with Canada’s definition much narrower than the one set out by the IRS.
“The U.S. takes a very strong position that trusts are foreign financial institutions,” Denise Hintzke, global tax leader for the Foreign Account Tax Compliance Initiative at Deloitte Tax LLP. “Some countries are taking a position that trusts may not be FFIs. There are a number of differences.”
Plowgian said the “majority view” is that a trust is an investment entity subject to FATCA if it is managed by another financial institution, an investment manager or something similar. The Canadian view, however, is that the trust itself would have to be a financial institution regulated in Canada.
Differences on New Accounts
In another example, controversy surrounds the U.S. view that foreign banks must get new customers to certify whether or not they are U.S. tax residents before they can open an account.
Both the U.K. and Canada have issued guidance saying that under their IGAs, banks can open the accounts even if they can’t get those “self-certifications,” as long as they treat the accounts as reportable.
At the same time, the U.S. has issued guidance in the form of a frequently asked questions and answers (FAQs) specifically saying that without those certifications, banks aren’t allowed to open the accounts or have to close them. Treasury officials have said the U.S. plans to stand by that view.
Joel Swearingen, an associate with Squire Patton Boggs US LLP in Washington, said the FAQ “leaves a lot of uncertainty” as to whether a U.S. withholding agent can rely on a certificate from the U.K. or Canada as a basis for providing a withholding rate of zero. In these cases, he said, it could be a matter for debate whether the agent has “actual knowledge” that the FFI isn’t complying with the terms of the IGA as the U.S. understands them to be.
Granwell said as work goes forward on the IGAs, the nature and protection of the data that will go back and forth between jurisdictions remains a worry.
“I think a number of these countries, and taxpayers in the countries, are wondering what’s going to be exchanged. That’s a very important issue,” Granwell said. “This has come up with India.”
Treasury Department and IRS officials have said on multiple occasions that data confidentiality is a baseline priority in negotiating IGAs and that no information is going to other countries unless the U.S. is confident it will be protected.
Common Reporting Standard Closer
Banks and other financial entities need to be aware that even though they are on board to comply with FATCA, the OECD’s common reporting standard is on the horizon and getting closer, practitioners said.
Dozens of countries have signed on to participate in a standard that calls for each jurisdiction to share information on financial accounts with many others. The OECD standard doesn’t have the same de minimis account balance of $50,000 required under FATCA, meaning that it could apply to more accounts than FATCA. But at the same time, it doesn’t carry the threat of withholding.
Even though the U.S. hasn’t signed up to be part of the common reporting standard, U.S. multinational banks will need to worry about it as soon as next year in those jurisdictions that are on board. “It’s an immediate issue for any large global bank,” Staples said. “It’s not like an abstract thing for the United States.”
Practitioners See Overlap
“I think one of the things that we’re seeing now, is that a lot of the bigger financial institutions were of the opinion that they’ve done all of this work for FATCA and don’t have to be as concerned about CRS,” Deloitte’s Hintzke said. “But there’s enough differences in the definitions and requirements for CRS that you can’t rely on FATCA.”
Hintzke said that the U.S. fund industry “could be affected to the extent they have investment entities outside the United States.”
Susan Grbic, a tax partner at WeiserMazars LLP in New York, said she is worried that with the IGA process potentially “flatlining a little bit,” it is possible that the U.S.’s IGA counterparts will become less concerned with FATCA compliance as their focus moves ahead to the new OECD standard. She said there is a question of, “Will CRS start to be the dominant concern of the various countries?”
Progress on Compliance
Practitioners said that even as difficulties stem from differences in IGAs and international guidance, taxpayers have made significant progress in getting ready to implement FATCA on the ground in the U.S.
“Within the U.S., I think we’re over the worst of it and now it’s just part of our day,” said Deborah Pflieger, FATCA lead and principal for tax information reporting and withholding services at EY LLP. “In the U.S. it’s becoming what we expected it to become—an additional business-as-usual requirement that we seem to be absorbing.”
However, she said, the issues affecting U.S. withholding agents make up just one of three worlds, with the other two being withholding agents outside the U.S. and foreign financial institutions themselves. Those two worlds continue to face difficulties and uncertainties, Pflieger said.
Pflieger and others said although most withholding hasn’t begun yet, that day is coming and huge questions remain about how and when the IRS will implement withholding on gross proceeds, the specter now hovering over most other withholding that will need to be done.
Gross proceeds withholding is currently set to start on Jan. 1, 2017—what Pflieger called “Judgment Day.” She said that will be “such a significant date. A huge game-changer. The transition relief will be over, the due diligence will be over, the rubber is going to hit the road.”
Swearingen said the treatment of gross proceeds “remains the biggest component yet to be determined” under FATCA. When the provision first came out, many withholding agents thought it would be eliminated at some point and delayed planning based on that belief, he said. Those who took this path “are running out of time,” he said.
Difficult Forms Criticized
Many attorneys told Bloomberg BNA that complex forms are one of the biggest headaches of FATCA and that even though the IRS has extended deadlines where possible, they remain a steep hurdle.
PwC’s Ewell and others said the series of W-8 forms involved in FATCA compliance are complicated and a major challenge. Some of those forms include the W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), and the W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities).
Ewell and several other practitioners said the IRS’s process for financial institutions to register for FATCA and get a Global Intermediary Identification Number (GIIN) is working well.
However, they said an upcoming requirement that “sponsored entities” get their own GIINs may represent a challenge.
Sponsored Entity Rules
A sponsoring entity is one that performs FATCA responsibilities—such as due diligence, reporting and withholding—on behalf of those they sponsor, which might be investment entities or controlled foreign institutions. Currently, these sponsoring entities can share their GIINs with their sponsored entities
By Jan. 1, 2016, however, the sponsored entities must get their own GIINs. Jonathan Jackel, a partner with Burt, Staples & Maner LLP in Washington, said in the context of FATCA, sponsored entities are “another population with distinct concerns.”
Jackel said on a broader scale, IRS flexibility will be welcome as taxpayers put FATCA into practice.
“It’s clear that as you move into a more operational mode, you can see that some of the rules that were developed in a vacuum don’t necessarily work as well in the real world,” he said. “We’re hopeful that the IRS will sort of make it easier.”
He and other practitioners said while the IRS practice of providing guidance using frequently asked questions and answers is helpful, that also raises concerns.
The FAQs are useful, and “sometimes I just want to know I’m on the right track,” Jackel said. “I’m glad we have them and I wouldn’t want anybody to take them down.”
At the same time, he said, it is frequently difficult to tell when things change or the IRS puts up new items and the process seems somewhat “ephemeral.”
As the guidance process moves forward, Jackel said, it may be important to find “a better balance between the convenience and quickness of FAQs and the accountability of the people who are putting them up. I’d like there to be slightly more process surrounding the FAQs. A couple of safeguards would make me feel much better.”
Burt, Staples & Maner’s Staples said even though the government has said it will be flexible with enforcement, it is possible that IRS examiners might be less sympathetic than taxpayers would like.
In May 2014, the IRS said in Notice 2014-33 that it was providing a two-year period of light enforcement for FFIs making a good-faith effort to comply.
Staples said, however, that “people in the field might not have the same flexibility” and taxpayers should continue working hard. “There’s a question of, ‘What is a good-faith effort to comply?’ ” he said.
An official from Bancolombia SA told Bloomberg BNA that the bank has faced big hurdles in getting FATCA off the ground but for the most part, has been able to navigate them.
“So far so good,” said Jaime Alberto Villegas Gutierrez, Bancolombia’s vice president of service delivery and customer experience. He said international banks must often rely on special digital platforms to assist with difficult implementation issue across jurisdictions and Bancolombia’s solution has been provided by AxiomSL.
“The biggest challenge has been preparing ourselves and our data to begin reporting,” Gutierrez said. “We have to do the same process for different regulators.” While that process is “cumbersome but doable,” he said, “as a bank, we’re worried that FATCA will begin to happen in other countries.”