U.S. Treasury Announces Six Month Delay in Implementing FATCA

by Denis Kleinfeld *

The U.S. Treasury announced on July 12, that due to overwhelming concern from countries around the world, the implementation of FATCA (the Foreign Account Compliance Tax Act) would be deferred from January 1, 2014 to June 30, 2014.

IRS Notice 2013-43 provides that this additional time is to:

  1. revise timelines for implementation of FATCA; and
  2. provide additional guidance concerning the treatment of foreign financial institutions (FFI) whose countries have signed an Inter-Governmental Agreement (IGA) or where the Treasury will treat the country as if they had.

The IRS has not yet established its on-line registration portal which would allow foreign participating institutions to begin the process of registering by creating an account and entering the FATCA-required information.  The registration portal is now expected to be open on August 19, 2013.

In order to ensure that a FFI would be included on the IRS FFI list, the FFI would need to finalize their registration by April 25, 2014.

To date, only ten IGAs have been signed, although discussions have been ongoing with dozens of countries. Consequently, FATCA compliance may differ significantly depending on whether the FFI is in a country with an IGA or in a not-yet-compliant non-IGA country.  There will also be differences if the IGA is in the form of a Model 1 IGA or Model 2 IGA, and whether the IGA has provisions requiring U.S. reciprocity in reporting U.S. financial institution information.

Although the IRS has issued a draft of IRS Form W-8BEN-E (an eight page form containing 20 different types of FATCA categories reflecting the enormous complexity of FATCA), it is expected that the IRS will finalize the W-8BEN-E by sometime in the fall of 2013.  It is expected that guidance will be finalized so affected taxpayers will be able to confidently prepare and file it.

There is a significant amount of controversy surrounding the IGAs and the potential for having the U.S. being committed to provide reciprocity. The Treasury Department in its IGA negotiations had promised in some manner that the information reporting thru an IGA or by the account holders directly would work as a two-way street.  Some of the foreign governments will sign only where the U.S. provides "equivalent levels of reciprocal automatic exchange" with foreign "FATCA partners."

Treasury has acknowledged that it does not have the statutory power to make any such promise of reciprocity. It has requested such power in the Administration's Budget for Fiscal Year 2014 that has been sent to Congress to overcome what would be a fatal flaw in FATCA.

If such statutory authority is given to the Treasury, the consequences would be that every FATCA-type financial institution in the United States would become a FFI to the other IGA countries. The U.S. financial institutions would then have to go through the same registration process and information reporting on their customers that the FFIs from IGA countries must deal with now.

The question then becomes, will Congress pass the necessary legislation?

At this point, there are opponents in the House of Representatives where the tax bills originate. Congressman Bill Posey (R-Florida, 8th) a key member of the House Financial Services Committee has written a letter to Jack Lew, Secretary of the Treasury, pointedly turning down any thought of imposing FATCA-like requirements on U.S. institutions.

As Congressman Posey has stated, "...it is difficult to conceive of any circumstance that would justify imposing such an expensive and counterproductive domestic mandate."  In addition to getting approval from the House Financial Services Committee, approval will be needed from the House Ways and Means Committee.

Without the IGAs being widely accepted among the financial centers of the world, FATCA may well be effectively unenforceable. 

It is even possible that non-signing countries will recognize the financial advantage they will gain from having account holders move their accounts from IGA signatory countries to their own, non-IGA signatory, financial centers. 

Clearly, it can be reasonably observed that FATCA is not yet the done deal that many thought it was.

* Contributing Author, LexisNexis® Guide to FATCA Compliance. Author of Langer on Practical International Tax Planning. Miami, Florida. E-mail: deniskleinfeld@kleinfeld.com.