FATCA Reporting – Are Trusts And Trustees Caught In The Net?

The US Congress enacted the Foreign Account Tax Compliance Act (FATCA) shortly after the first so-called 'voluntary disclosure program' had begun to reveal the unanticipated extent of US persons' undisclosed non-US financial holdings. Congress sought a way to catch even the most obscure unreported financial account. Enter FATCA. When first enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010, private practitioners, banks, and other deposit institutions were slow to understand the potential extent of FATCA's reach. The statute, which seeks to coerce beneficial owner disclosure on penalty of a 30 percent withholding tax on certain US-source payments, appeared impossible to implement, and many practitioners (and even some in government) doubted whether FATCA could ever come to fruition. However, the Internal Revenue Service (IRS) and Department of Treasury (Treasury) have worked tirelessly (and some would say ruthlessly) to ensure that FATCA reporting begins in some form by 2014 (which is the current date for initial implementation, although it could again slide, as it has before).

In January 2013, the IRS published the much anticipated final regulations to the Internal Revenue Code that will govern the US implementation of FATCA. In spite of their length (nearly 500 pages), the final regulations have been widely criticised as lacking clear guidance on key points, including, in particular, the classification of non-US trusts and their trustees for purposes of the disclosure and withholding regime (unless otherwise indicated, this article uses 'trustee' to mean 'corporate trustee' or 'trust company'). On the international front, Treasury, realising there was much to gain and little to lose by getting its principal trading partners to join the disclosure effort, has begun to negotiate two types of 'Inter-Governmental Agreements' (IGAs), which offer a way to either circumvent the regulations entirely (Model I IGAs), or at least trump them when conflict exists (Model II IGAs). Though the terms of the model IGAs are only marginally more 'user friendly' than the regulations, some countries see them as an opportunity for obtaining greater clarity and, in some cases, achieving reciprocity of potential tax avoidance disclosure reporting from the United States. To date, five countries have entered into an IGA with the United States, and numerous other countries are in the midst of negotiations. This article chiefly addresses...

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