Extension of “Deemed Compliant” Status for Countries Associated with FATCA
Included with the passage of the HIRE Act of 2010, the Foreign Account Tax Compliance Act has a strict requirement that states that foreign financial institutions are required to report the financial holdings of all United States taxpayers to the Internal Revenue Service. Failure to comply with this requirement may result in a hefty penalty that could be as high as 30 percent of the U.S.-based income for those individuals. With a considerable penalty possible for non-compliance, financial institutions receive some pressure to comply.
On the other hand, some individuals, including London Mayor Boris Johnson who holds dual citizenship status, have stated that they have no intention to comply with this law. While some foreign countries are deemed compliant with this regulation through the U.S. Treasury Department, the fact is that others may benefit from a new extension that has been granted by the IRS in this area. The extension may decrease the burden associated with reporting holdings by U.S. taxpayers held in other countries.
How the IRS Is Dealing With Objections
The objection of the London Mayor to this rule is just one of many that the Internal Revenue Service is being bombarded with. In an effort to deal more efficiently with the objections and to overcome some of the most significant objections that have been made, the U.S. Treasury Department has been actively working to streamline and simplify this process for many parties involved.
Through intergovernmental agreements negotiated by the Treasury Department, 19 different countries could transfer tax information to the IRS under their existing agreements and treaties, and this would effectively decrease the burden on many taxpayers and financial institutions. Many other countries may also benefit from this type of agreement for compliance, but they have not yet acted on the offer extended by the IRS or the U.S. Treasury Department.
A Limited Time Offer
While many existing agreements and treaties are already in place, not every country that could be impacted by the FATCA has signed an intergovernmental agreement, or IGA, to establish the deemed compliant status. The IRS and Treasury Department recognize that the FATCA can be burdensome to comply with, but it is nonetheless important in what it accomplishes. Because of this, the IRS and Treasury Department recently issued a joint statement with Announcement 2014-38.
This announcement stated that the “deemed compliant” option for FATCA compliance will be extended to countries until December 31, 2014. The countries must have an IGA in place and in full effect before this date in order to benefit from the deemed compliant status option available.
Other Extensions Possible
While some have stated that the extension for the deemed compliant option is firm and must be complied with, others have stated that the IRS and the Treasury Department may continue to be willing to negotiate and to sign an IGA after this date if there is true motivation and desire by the country to do so.
The fact is that there are approximately 64 countries that have tentatively agreed to an IGA on this matter but that have not yet pulled the trigger and moved forward in executing the IGA. While the deadline may have been issued in an effort to motivate some of these slower-moving governments to pull the trigger and to make the passage or approval of the IGAs a priority, the purpose of the deadline is not to limit the ability of these countries to obtain a deemed compliant status.
What Financial Institutions Should Do
For financial institutions located in these foreign countries, it is important to note that the IRS and the Treasury Department have already granted one extension in this area. While it is reasonable and likely to expect another extension to be granted or for exceptions to be made if necessary, the fact is that there is no firm requirement by the IRS or the Treasury Department to do so.
Therefore, it is certainly in the best interest of the governments that have verbally committed in this area to act quickly to ensure that they will be deemed compliant with the outstanding regulations.
Proof of a Willingness to Comply
After the December 31 deadline, the IRS and the Treasury Department are not necessarily obligated to agree to an IGA with other countries. While they may still be able to do so, it is reasonable to expect any exceptions or extensions going forward beyond this date to be granted to governments that are showing an active desire to approve the IGA.
It is true that the approval of an IGA in some countries may be slower than the approval process in other countries, and governments that are struggling with a slow process may be more willing to be granted an exception than those that are delaying or dragging their feet intentionally due to other factors or issues.
While there is some benefit to the United States to continue to keep the FATCA in place, the fact is that this is not a popular piece of legislation. Because the IRS and the Treasury Department recognize how unpopular and burdensome the act is to carry out, it has been lenient in allowing a deemed compliant exception to the FATCA legislation.
All IGAs regarding this legislation must be in place before December 31. If not, there is no requirement for the Treasury Department or the IRS to make an exception and to pass an extension of this exception.
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