The Treasury Department has taken a number of steps recently to continue its implementation of the Foreign Account Tax Compliance Act (“FATCA”), which was passed in March 2010. Recent developments include the release of model agreements for intergovernmental information sharing and draft forms that will be required for individuals and financial institutions to comply with FATCA’s detailed and burdensome requirements.

Generally effective for payments beginning January 1, 2013, FATCA established new rules for withholding taxes on certain payments made to certain foreign financial institutions and other foreign entities. The new rules aim to enforce new reporting requirements related to foreign financial accounts owned by U.S. persons or entities. A withholding agent must withhold 30% of certain payments of U.S. source income made to foreign financial institutions that do not either enter an agreement with the IRS or qualify for alternative exemptions from withholding.

Model Intergovernmental Agreements

The U.S. first entered into an information sharing agreement with France, Germany, Italy, Spain, and the United Kingdom in February 2012, and this initial agreement will form the basis of future intergovernmental agreements. There is a reciprocal model agreement for countries with which the U.S. has a tax treaty or tax information exchange act in effect, and a similar nonreciprocal agreement for other countries. This approach is meant in part to make it easier for foreign financial institutions to comply with FATCA without running afoul of local law.

Japan and Switzerland signed separate agreements with the U.S. in June, and over forty other countries are reportedly interested in entering into similar agreements, including Australia, Brazil, Canada, the Cayman Islands, Ireland, Luxembourg, the Netherlands, New Zealand, and Russia. The Organisation for Economic Co-operation and Development (“OECD”) praised the model agreement approach and warned against the proliferation of different systems. The OECD will work with interested countries to adapt the terms of the agreement to meet their needs.

Among other things, the agreements explain financial institutions’ responsibilities in reviewing and reporting accounts based on the balance of the account and the identity of the account holder. They allow foreign financial institutions to report certain financial account information to their domestic tax authority, which will then exchange that information with the U.S. under existing tax treaties and information exchange agreements. They also suspend certain requirements related to account holders who do not provide information regarding their U.S. or non-U.S. tax status.

Draft Forms Released

While the Treasury Department has been working to put into place the above intergovernmental agreements to facilitate FATCA reporting, the IRS has also been working on preparing the actual forms that financial institutions and individuals will need to comply with the new requirements.

The first set of new forms includes those used by foreign individuals and entities to certify their foreign status to U.S. withholding agents and to claim treaty benefits. Form W-8BEN (for individuals) and Form W-8BEN-E (for entities) have been released in draft form, with changes made to address the new FATCA requirements. A draft version has also been released for a similar form used by foreign intermediary or flow-through entities. Instructions have not yet been released for any of these forms.

The IRS also released the long-awaited draft of the revised Form 8621, which is used to report foreign mutual funds and other “Passive Foreign Investment Companies” (“PFICs”). The FATCA rules changed the Form 8621 reporting requirements so that a U.S. citizen or income tax resident who owns foreign mutual funds now needs to file this form each year. Before 2011, the form had to be filed only when the taxpayer received distributions from the funds, realized a gain on the sale of funds, or made a reportable election with respect to a fund.

The draft Form 8621 requests more information than the previous form. Newly requested information includes the following:

  • A description of each class of shares held by the taxpayer in the fund;
  • Dates fund shares were acquired during the year;
  • Number of shares in the fund held at the end of the year; and
  • The value of the fund shares held at the end of the year.

A separate Form 8621 must be filed to report each foreign mutual fund, and failure to file the form prevents the closing of the period in which the IRS could audit a return. Instructions for the new form have not been released. As we have noted in previous articles, the new reporting will also retroactively apply to fund shares owned in 2011: this information will likely be reported on an additional Form 8621 attached to the 2012 tax return. It is important for U.S. citizens and income tax residents to keep complete records of their ownership of, and transactions involving, foreign mutual funds for 2011 and 2012 so that they can file a complete and accurate Form 8621 for those years.


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