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Global IRW Newsflash The new proposed FATCA regulations ... ... Global IRW Newsbrief Information reporting and withholding (IRW) February 27, 2012 The new proposed FATCA regulations:

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  • Global IRW Newsflash The new proposed FATCA regulations: Overview

    February 27, 2012

  • www.pwc.com

    Global IRW Newsbrief Information reporting and withholding (IRW)

    February 27, 2012

    The new proposed FATCA regulations: Overview

    On October 27, 2009, members of the U.S. Senate Finance Committee and the U.S. Ways and Means Committee unveiled the Foreign Account Tax Compliance Act of 2009 ("FATCA"), which was a comprehensive proposal to clamp down on U.S. tax evasion and improve taxpayer compliance by providing the Internal Revenue Service ("IRS") with new administrative tools to detect and deter offshore tax abuses. The provisions of FATCA were ultimately enacted on March 18, 2010, as part of the Hiring Incentives to Restore Employment Act of 2010, Pub. L. 111-147 (H.R. 2847) (the "Act"). Section 501(a) of the Act added chapter 4 (sections 1471 - 1474) to Subtitle A of the Internal Revenue Code. Chapter 4 expands the U.S. information reporting regime by imposing documentation, withholding, and reporting requirements on payments to and received by Foreign Financial Institutions ("FFIs") and Non-Financial Foreign Entities ("NFFEs").

    FATCA's statutory provisions were intentionally broad and gave considerable discretion to the U.S. Department of the Treasury ("Treasury") and the IRS to narrow its scope in the implementing regulations. Notice 2010-60, released in August 2010, provided the first directional thinking on how the provisions of FATCA would operate. Treasury and the IRS subsequently issued two additional Notices (collectively these three Notices are referred to as the "Notices") that provided additional guidance on how FATCA's provisions would operate.

    On February 8, 2012, Treasury and the IRS issued proposed regulations that provide details on many of the principles introduced in the Notices. The proposed regulations also incorporate some of the ideas and suggestions received from various stakeholders. The regulations also include several provisions that were not included in the Notices.

  • PwC Global IRW Newsbriefs 2

    PwC Observation: Although these regulations are only proposed and do not have the authority of final regulations, they provide enough detailed guidance for financial institutions and NFFEs to understand and assess their current FATCA readiness. These assessments should focus on what information gaps exist, what system changes and process enhancements will need to be made, and how to communicate with internal and external stakeholders, such as customers and third-party service providers.

    The following is an overview of the proposed regulations. Given the number of significant concepts and provisions in the proposed regulations and the related preamble, PwC will issue subsequent insights that will provide additional information on certain areas covered by the proposed regulations. PwC's thought leadership materials related to FATCA can be found at http://www.pwc.com/us/fatca.

    In addition to distributing written materials explaining FATCA's provisions and how they will operate, PwC also will host a series of webcasts on FATCA-related topics. These webcasts will be hosted by a panel of PwC specialists who have been assisting financial institutions and other clients around the globe with FATCA implementation projects. The first webcast, which addressed the highlights of the proposed regulations, took place on February 21, 2012 (if you missed the webcast it can be replayed by visiting http://event.on24.com/r.htm?e=397562&s=1&k=BCEC1CF013FF5FF713472CF5184 27E0F). Our next webcast will take place on March 7, 2012, and will focus on some of the technology-related issues that will arise as financial institutions implement FATCA. To register for the next webcast, please visit http://www.meetpwc.com/event/m2c53c-120RCSJ795RUO.

    Executive Summary

    FATCA's rules are set forth in chapter 4 of the Internal Revenue Code ("Code") and generally apply after December 31, 2012, although the withholding obligations have been delayed in the proposed regulations. Generally, these provisions require withholding agents (including U.S. Financial Institutions ("USFIs")) to withhold 30- percent tax on any "withholdable payment" made to an FFI or NFFE if the FFI or NFFE fails to comply with FATCA's new reporting, disclosure, and other related requirements. Withholdable payments include certain U.S.-source fixed or determinable annual or periodic ("FDAP") income (such as dividends and interest paid by U.S. persons) and gross proceeds from the sale of a security that could generate U.S.-source dividends or interest. Additionally, FFIs generally are required to withhold 30- holders or to other FFIs that do not enter into an agreement with the IRS, or qualify as exempt or "deemed compliant" (referred to as non-participating FFIs).

    FATCA's primary goal is to provide the IRS with an increased ability to detect U.S. tax evaders concealing their assets in foreign accounts and investments by encouraging FFIs and NFFEs to comply with a new set of tax information reporting and withholding rules or suffer the consequences of non-compliance, primarily being subject to withholding tax on the receipt of withholdable payments or passthru payments. FATCA's provisions are in addition to, and do not replace, the existing non-resident alien ("NRA") withholding rules in chapter 3 of the Code ("NRA withholding"). The statute directs Treasury and the IRS to promulgate regulations that coordinate the two withholding regimes while avoiding imposing double withholding tax and preserving most of the extensive procedural rules currently in place under chapter 3 withholding.

  • PwC Global IRW Newsbriefs 3

    PwC Observation: The government recognizes that FATCA will be most effective if no one suffers the chapter 4 withholding tax -- that is, if most FFIs and NFFEs opt to comply with the documentation, due diligence, and reporting procedures. The proposed regulations, therefore, attempt to ease potentially excessive burdens of compliance. However, even with the lessening of the burdens, they can be substantial.

    On February 8, 2012, Treasury and the IRS published the highly anticipated proposed FATCA regulations. Simultaneous with the issuance of the proposed regulations, the governments of the United States, France, Germany, Italy, Spain, and the United Kingdom released a joint statement explaining that they are exploring a common approach to FATCA implementation through domestic reporting and automatic information exchange systems (the "Joint Statement"). The Joint Statement also emphasizes the willingness of the United States to reciprocate by automatically collecting and exchanging information on accounts held in U.S. financial instutitions by residents of each of the respective countries.

    PwC Observation: The goal of these potential bilateral agreements is to overcome legal restraints on FFIs providing account holder information directly to the IRS where local privacy laws restrict FFIs from doing so. It is anticipated that the government will be negotiating these agreements with many of its trading partners so that local FFIs can comply with FATCA by reporting directly to their local tax authority. It is also anticipated that FFIs in these jurisdictions will not be required to impose withholding on passthru payments.

    Treasury and the IRS have scheduled a public hearing on the proposed regulations on May 15, 2012. The IRS has requested that comments be submitted by April 30, 2012.

    Among the more notable changes in the proposed regulations from the Notices are the following:

    Expanded Definition of FFI and Additional Categories of Deemed-Compliant FFIs. The proposed regulations expand the definition of FFI to include insurance companies. In addition, the proposed regulations expand the categories of deemed-compliant financial institutions to reduce or eliminate the compliance burdens for entities that are deemed to pose a low risk of tax evasion.

    Guidance on Procedures Required to Verify Compliance. The proposed regulations modify the Notices by providing that a responsible officer of an FFI will be required to certify that the FFI has complied with the terms of the FFI agreement. In addition, verification of compliance through a third-party auditor is not required.

    Transition Rule for Affiliates with Legal Prohibitions on Compliance. The proposed regulations provide a two-year transition rule (to January 1, 2016) for certain members of an expanded affiliated group to become a participating or deemed-compliant FFI. The transition period provides FFIs located in jurisdictions that have laws that prohibit the tax withholding or reporting required under FATCA with additional time to fully implement FATCA, without preventing other FFIs within the same expanded affiliated group from entering into an FFI agreement. However, these FFIs must agree to perform due diligence to identify U.S., nonparticipating FFIs and recalcitrant accounts and maintain certain records during this transition period, and will be subject to FATCA withholding until the local law situation is resolved.

  • PwC Global IRW Newsbriefs 4

    Definition of "Financial Account." The proposed regulations refine the definition of financial account to exclude most debt and equity securities issued by banks and brokerage firms, while focusing on traditional bank, brokerage and money market accounts, and equity interests in investment vehicles including hedge and private equity funds. Moreover, the definition focuses on which types of insurance contracts are subject to FATCA.

    Modification of Due Diligence Procedures for Identifying and Classifying Financial Accounts. The proposed regulations reduce t

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