Final Regulations Under FATCA Address Phased-In Due Diligence, IGAs, Compliance Obligations and More

January 18, 2013 — 2 Comments

The Treasury and IRS released long-awaited final regulations late on January 17 under the Foreign Account and Tax Compliance Act (FATCA), enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010 (P.L. 111-147). FATCA targets noncompliance by U.S. taxpayers using foreign accounts, the Treasury said in a news release. The issuance of the final regulations marks a key step in establishing a common intergovernmental approach to combating tax evasion, the Treasury said.

“These regulations give the administration a powerful set of tools to combat offshore tax evasion effectively and efficiently,” Deputy Treasury Secretary Neal Wolin said in a written statement. “The final rules provide important clarity for foreign and U.S. financial institutions.”

“Institutions need detailed guidance in final form regarding the application of all of the requirements of FATCA in order to be able to move forward with the systems and process changes that will be necessary for compliance with the new regime,” former Treasury International Tax Counsel Barbara Angus of Ernst & Young commented. “The regulations provide additional certainty for financial institutions and [foreign] government counterparts by finalizing the step-by-step process for U.S. account identification, information reporting, and withholding requirements for foreign financial institutions, other foreign entities, and U.S. withholding agents,” the Treasury said.


FATCA was enacted in 2010 by Congress as part of the HIRE Act. FATCA requires certain foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers. FFIs must also report financial information concerning accounts held by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

FFIs seeking to avoid a 30-percent withholding tax on certain U.S.-connected payments must enter into an agreement with the IRS to identify U.S. accounts and report certain information to the IRS regarding those accounts.

The Treasury previously released guidance in the form of notices in August 2010, August 2011 and July 2011 and had received hundreds of comments on those notices, which were used in crafting the extensive proposed regulations released in February 2012 (IR-2012-15; NPRM REG-121647-10). “Those proposed regulations established a detailed and comprehensive road-map to FATCA implementation,” a Treasury official said in a phone call with reporters.

Final Regulations

The final regulations comprise more than 540 pages. “The final regulations do not depart in any significant way from the proposed regulations,” the Treasury official said. “They reinforce the operational framework and acknowledge the importance of the intergovernmental agreements.”

The regulations provide for phased-in diligence reporting obligations over an extended transitional period, relief for certain prospective grandfathered obligations, treatment of certain low-risk institutions, definitions of investment entities covered by the reporting requirements and other topics. The final regulations also accomplish the following:

  • Build on intergovernmental agreements that foster international cooperation;
  • Phase in the time-lines for due diligence, reporting and withholding and align them with the intergovernmental agreements;
  • Expand and clarify the scope of payments not subject to withholding;
  • Refine and clarify the treatment of investment entities; and
  • Clarify the compliance and verification obligations of FFIs.

“The regulations are operational guidelines,” the official said. “There was a significant demand for Treasury to provide details about institutions’ reporting obligations. We received hundreds of comments from financial institutions, foreign governments, and representatives of U.S. citizens abroad. The process of filling in the details and shaping the operational guidelines to implement FATCA is what we have been engaged in over the past two years,” the official added.

Intergovernmental Agreements

Over the past year, the Treasury has collaborated with foreign governments to develop two alternative model intergovernmental agreements (IGAs) to facilitate the effective and efficient implementation of FATCA. “The model agreements represent alternatives for implementing FATCA, but are not required,” the Treasury official stated. They do not exempt any jurisdiction from FATCA, the Treasury noted.

There are three possible ways in which an FFI may participate in FATCA, the official said:

  • Participating directly with the IRS through the final regulations, without any involvement by a foreign government;
  • The Model One IGA—the partner jurisdiction requires due diligence by its own institutions. The institutions report to the foreign government which in turn enters into an automatic exchange of information with the IRS; and
  • The Model Two IGA—the foreign government encourages financial institutions to work with the IRS, and it supplements the information provided.

“In all three categories, the IRS will get the necessary information,” the official said. “The guidance provided with these regulations is one of three critically important elements,” Angus noted. “The other two are the series of agreements the United States is entering into with other countries to help facilitate the operation and application of the FATCA regime for financial institutions located in these partner countries and the IRS forms and agreements that are needed for the day-to-day operation of the new rules.”

The United States has entered into IGAs with seven countries and announced a new agreement with Norway. The Treasury is engaged in negotiations with more than 50 countries to curtail offshore tax evasion, and more agreements should follow in the near future, Treasury said.

By Brant Goldwyn and Jennifer J. Rodibaugh, CCH News Staff

Treasury Department News Release, Treasury and IRS Issue Final Regulations to Combat Offshore Tax Evasion, TDNR TG-1825, 2013FED ¶46,249

T.D. 9610, 2013FED ¶47,010

Other References:

  • Code Sec. 1471
  • CCH Reference – 2013FED ¶32,885AC
  • CCH Reference – 2013FED ¶32,885AG
  • CCH Reference – 2013FED ¶32,885AJ
  • CCH Reference – 2013FED ¶32,885AM
  • CCH Reference – 2013FED ¶32,885AP
  • CCH Reference – 2013FED ¶32,885AS
  • CCH Reference – 2013FED ¶32,885AV
  • Code Sec. 1472
  • CCH Reference – 2013FED ¶32,890AC
  • Code Sec. 1473
  • CCH Reference – 2013FED ¶32,895AC
  • Code Sec. 1474
  • CCH Reference – 2013FED ¶32,899AC
  • CCH Reference – 2013FED ¶32,899AE
  • CCH Reference – 2013FED ¶32,899AG
  • CCH Reference – 2013FED ¶32,899AM
  • CCH Reference – 2013FED ¶32,899AP
  • CCH Reference – 2013FED ¶32,899AS
  • CCH Reference – 2013FED ¶32,899AV
  • CCH Reference – 2013FED ¶32,899AX
  • Tax Research Consultant
    • CCH Reference – TRC FILEBUS: 9,108
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