KPMG: Bermuda FATCA Forum
KPMG in Bermuda will be hosting a Bermuda FATCA Forum on Wednesday, March 7, 2012, from 2 to 5pm, at the Fairmont Hamilton Princess.
This will be an interactive session, discussing the newly released US Foreign Account Tax Compliance Act [FATCA] proposed regulations.
KPMG FATCA experts will consider the operational impact that the Internal Revenue Service guidelines might have on the investments, banking, fund administration, trust and insurance industries in Bermuda.
This forum follows closely on the heels of the eagerly awaited FATCA proposed regulations that were released by the IRS on February 8.
Since FATCA’s enactment in March 2010, the IRS has issued several rounds of guidance, but the most recent release has been much anticipated by taxpayers affected by the proposed FATCA withholding regime.
The proposed regulations act as guidance concerning information reporting by foreign financial institutions [FFIs] for U.S. accounts, and withholding on certain payments made to foreign financial institutions and other foreign entities under FATCA.
KPMG’s initial impressions of provisions under proposed FATCA regulations
Government-to-government reporting
The FATCA rules introduce information reporting requirements for FFIs for certain accounts. These rules have raised a number of issues for FFIs established in certain countries (including France, Germany, Italy, Spain and the United Kingdom)—for example, that FFIs established in these countries may not be able to comply with the reporting, withholding, and account closure requirements because of legal restrictions. The FATCA proposed regulations introduce a new concept of government-to-government reporting. An intergovernmental approach to FATCA implementation would address the legal impediments to compliance, simplify practical implementation, and reduce FFI costs. The U.S. would reciprocate by collecting and exchanging information on accounts held in US financial institutions by residents of these countries.
The proposed regulations provide guidance on topics that were not addressed in the earlier FATCA-related notices, including:
- An expanded scope of “grandfathered obligations”;
- Transitional rules for affiliates with legal prohibition on compliance;
- Additional categories of deemed-compliant FFIs;
- Modification of due diligence procedures for the identification of accounts;
- Guidance on procedures required to verify compliance;
- Refinement of the definition of financial account; and
- Extension of the transition period for the scope of information reporting and withholding on passthru payments.
Expanded scope of grandfathered obligations
The proposed regulations extend the grandfather relief date of March 18, 2012 by excluding, from the definition of withholdable or passthru payment, any payment made under an obligation outstanding on January 1, 2013. For purposes of this relief, the definition of an obligation set forth in earlier guidance remains substantially the same.
Transition rules for affiliates with legal prohibitions on compliance
The proposed regulations adopt a two-year transition period, until January 1, 2016, for FFIs in certain non-compliant jurisdictions to become compliant with the initial rule. In the interim period, such FFIs must, among other requirements, agree to perform the account identification procedures to identify U.S. accounts. It is important to note that these FFIs will be subject to the penal withholding on withholdable payments during this time.
Additional categories of deemed-compliant FFIs
Treasury and the IRS have now expanded the categories of entities that would be considered deemed compliant as well as loosened some of the requirements that were previously set forth. In addition, under the proposed rules, several types of entities that fall within the deemed compliant category will no longer be required to adhere to the formal registration process and, instead, will be permitted to self-certify this status.
Modification of due diligence procedures for the identification of accounts
The proposed regulations have completely eliminated the heightened scrutiny for accounts that previously fell within the broad definition of “private banking.” Instead, the heightened scrutiny is based solely on a $1 million dollar threshold.
Guidance on procedures required to verify compliance
Unlike the qualified intermediary [QI] regime that requires QIs to hire an external auditor twice in every six year agreement term to conduct a compliance review, the proposed regulations provide that FFI Agreement verification would be accomplished through internal reviews and certifications.
Refinement of the definition of financial account
The proposed regulations refine the statutory definition of a “financial account” — depository account, custodial account, or debt or equity interest in an FFI, other than those that are regularly traded—by focusing on the traditional meaning of these accounts and excluding certain retirement savings accounts and other tax favored non-retirement savings accounts.
Extension of the transition period for the scope of information reporting and withholding on passthru payments
The proposed regulations provide additional transition relief related to reporting and withholding. This phased-in approach with respect to the reporting requirements was in direct response to commentators that had voiced concerns regarding necessary system changes for the reporting of income and proceeds.
To date, the requirement for an FFI to impose withholding on passthru payments has been one of the most debated and contentious areas of the new regime. Given the complexity and legal questions surrounding this requirement, Treasury and the IRS have decided to further delay the issue by providing that this withholding would not be required on any foreign passthru payments (the portion of a passthru payment that is not a withholdable payment) before January 1, 2017.
The proposed regulations are scheduled to be published in the Federal Register on Wednesday, February 15, 2012.
For further information on the KPMG Bermuda FATCA Forum or the proposed regulations, please contact Catherine Sheridan-Moore
Partner, Tax, KPMG at [441]-294-2606 or Will McCallum, Director, Tax, at [441] 294-2645.
KPMG in Bermuda is a professional services firm of over 180 professionals delivering audit, tax and advisory services to a broad cross-section of local and international companies, with a principal focus on financial services.
KPMG in Bermuda is a member firm of the KPMG global network of independent firms which include more than 138,000 professionals in 150 countries.
