Washington’s introduction of the Foreign Account Tax Compliance Act is creating additional concerns for offshore entities. Here, the implications of greater tax cooperation and transparency are explored.
On March 18, 2010, the US enacted the Hiring Incentives to Restore Employment Act of 2010 (HIRE Act). As adopted, the HIRE Act includes a slightly modified version of another previously proposed bill, the Foreign Account Tax Compliance Act (FATCA), and adds new sections 1471 through 1474 to the US Internal Revenue Code. The FATCA provisions within the HIRE Act are intended to close perceived gaps in information reporting to the Internal Revenue Service (IRS) and curb perceived abuses relating to the use of offshore accounts by US taxpayers.
Generally speaking, the FATCA provisions will implement a new 30 percent withholding tax on all “withholdable payments” to a “foreign financial institution” (FFI) once the legislation is fully phased in on January 1, 2015, unless certain requirements are met.
Defining FATCA’s remit
Under the new law, an FFI is defined broadly to include virtually all types of businesses that deal primarily in financial products. A “withholdable payment” generally includes (i) any US sourced payment—for example interest, dividends, premiums or compensation—and (ii) the gross proceeds from the sale of any asset that could produce US-sourced dividends or interest.
"The treasury and IRS intend to issue regulations that exempt from the definition of FFI entities whose business consists soley of issuing insurance and reinsurance contracts without cash value."
In general, to avoid FATCA’s 30 percent withholding tax, an FFI will need to enter into agreements with the IRS, whereby the FFI agrees to: (i) collect sufficient information on all account holders to enable the FFI to determine whether the account holder is a US or foreign person; (ii) report information about US accounts to the IRS annually; (iii) withhold 30 percent of withholdable payments made to the FFI that are allocatable to account holders that fail to comply with reasonable requests for identifying information (termed “recalcitrant account holders”) or non-compliant FFIs; (iv) close any accounts where identifying information about the owner of the account cannot be obtained within a reasonable period of time; and (v) comply with IRS requests for additional information.
Since the initial passage of the HIRE Act in 2010, the IRS and US Department of the Treasury have issued three separate notices intended to provide interim guidance before final regulations are put into place; as of the date of this publication, we tentatively expect that final regulations will be issued by mid-2012. In the meantime, both the initial legislation and subsequent guidance have raised questions within the insurance industry, and several industry groups have responded to IRS requests for comments in order to ensure that the final regulations target perceived abuses without imposing undue burden on the insurance industry.
In the first IRS notice to provide guidance on FATCA (Notice 2010- 60), the Treasury and the IRS acknowledged that the definition of FFIs is broad enough to include insurance companies, but stated that insurance and reinsurance contracts without cash value do not implicate the tax evasion concerns that FATCA was adopted to address. As a result, the Treasury and IRS intend to issue regulations that exempt from the definition of FFI entities whose business consists solely of issuing insurance and reinsurance contracts without cash value. This is a significant positive development, particularly for captive insurance companies, because it essentially exempts non-life insurers and life insurers which issue only term life policies without cash value from otherwise potentially costly and burdensome FATCA withholding and compliance requirements.
For companies that continue to be potentially affected by FATCA, even after the exemption in Notice 2010-60 (in other words those companies that issue life insurance policies with cash value or an annuity component), the second IRS notice (Notice 2011-34) re-wrote procedure initially announced in Notice 2010-60 for the identification of pre-existing individual accounts, and requested comments from the industry regarding alternative procedures for insurance companies.
In general, non-US commentators have pointed out that account holder information-gathering in the insurance industry is likely to be much more complicated than in, for example, the banking industry, because insurance companies do not have contact with their policyholders as frequently as banks generally do. In addition, non-US commentators pointed out that limitations on withdrawals, loans, and other means of accessing a life insurance policy’s cash value tend to reduce the ability of a US policyholder to use a non-US life insurance policy for tax evasion purposes.
To date, however, the Treasury and IRS have not announced any additional exemptions from FATCA such as the one in Notice 2010- 60 for companies that issue insurance or reinsurance policies without cash value, and have not officially addressed the data-gathering concerns expressed in industry comments following Notice 2011- 34. These issues are of particular importance to reinsurance companies, which may be authorised to reinsure both life and property and casualty business. As a result, it will be important for these companies to monitor additional guidance from the Treasury and IRS to determine whether reinsuring both types of products simultaneously will bring the company within the scope of FATCA’s withholding and reporting requirements.
The final piece of guidance on FATCA that has been issued to date is Notice 2011-53, which provided some transition relief for foreign companies that will be subject to FATCA’s withholding and reporting requirements. This notice pushed back the implementation dates for some key FATCA requirements, and essentially now provides for a phased implementation of FATCA, from June 30, 2012 to January 1, 2015. While this guidance is welcome relief, it only delays the effective date of some of FATCA’s provisions, and does not answer important questions that remain for the offshore insurance industry.
While the offshore insurance industry awaits additional guidance from the Treasury and IRS, it is important that, given the relatively short amount of time to become compliant with FATCA’s requirements, offshore insurers begin to address the question of whether, under the statute and guidance issued thus far, they are likely to be impacted by FACTA.
Jonathan Treadway is a tax services senior manager at Deloitte. He can be contacted at: firstname.lastname@example.org
FATCA: A new disclosure and withholding regime
Under newly proposed US Treasury Code Sections 1471 through 1474, effective for payments after December 31, 2012, all foreign financial institutions (FFIs) will be required to enter into disclosure compliance agreements with the US Treasury, and all non-financial foreign entities (NFFEs) must report and/or certify their ownership or be subject to the same 30 percent withholding. This new reporting and withholding regime will ultimately impact current account opening processes, transaction processing systems and “know your customer” procedures utilised by foreign banks. Chief compliance officers, tax reporting heads and other key players within your organisation will need to evaluate the potential impact of these regulations and develop a plan for managing and remediating any potential risk associated with FATCA non-compliance.
Relevance and Impact
The legislative intent of FATCA is to ensure there is no gap in the ability of the US government to determine the ownership of US assets in foreign accounts. As such, this revenue raising provision, which was originally enacted as a part of the Hiring Incentives to Restore Employment (HIRE) Act, is expected to significantly impact the systems and operations of both US and non-US companies. While the regulations have not been finalised to date, companies are likely to need to make modifications to their internal systems, control frameworks, processes and procedures for timely compliance with these regulations on or before their effective date of January 1, 2013.
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