The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 to combat tax evasion by Americans using Swiss bank accounts and hiding other financial assets overseas. FATCA requires Foreign Financial Institutions (FFIs), including banks, mutual funds, and hedge funds, to report information about American accounts to the Internal Revenue Service. FFIs that do not comply with reporting requirements face a 30% withholding tax on payments made to them from the United States. Similarly, there is a 40% tax penalty on wealthy U.S. taxpayers who fail to disclose their foreign assets.
In December 2016, the IRS issued new administrative guidance related to foreign financial accounts. The guidance included new regulations and new revenue procedures. The new regulations add to the existing regulations under FATCA. In particular, they modify the information reporting rules for FFIs and the withholding rules for certain payments made to FFIs. Generally, these changes simply coordinated the rules from Chapter 3 and Chapter 61, as well as Internal Revenue Code sections 871, 3406, and 6402 with the FATCA requirements under 1471-74. No significant alterations were made regarding who is required to report or what must be reported to the IRS, but the coordination is helpful for tax compliance practitioners.
The new revenue procedures were simultaneously published in the Internal Revenue Bulletin. Revenue Procedure 2017-16 provides an updated “FFI agreement” that is effective for agreements entered into as of January 1, 2017. Generally, this agreement further clarifies the reporting and withholding obligations of participating FFIs to prevent the imposition of punitive taxes on the FFIs for noncompliance. Additionally, Revenue Procedure 2017-15 provides an updated qualified intermediary agreement, or “QI agreement.” FFIs may elect to enter into this QI agreement in order to simplify the withholding obligations for amounts paid to their account holders. Like the FFI agreement, the updated QI agreement has an effective date of January 1, 2017 and replaces its expired predecessor.
To further address the particular concerns of withholding agents, the IRS provided technical clarification in an abundance of additional regulations. For example, withholding agents were reassured that they could rely on electronic documentation. Similar guidance was made available regarding backup withholding, de minimis errors, and hold mail instructions. Notably, however, the IRS did not address non-financial foreign entities or U.S. taxpayers generally. Thus, it appears the year-end release of new IRS guidance was primarily intended to benefit foreign banks, withholding agents, and the many tax compliance practitioners acting on their behalves.