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In email advice, the IRS has concluded that because the section 6038D penalty is not itself part of a deficiency it cannot be subject to deficiency procedures. The section 6038D penalty is not calculated on the basis of a tax that is itself subject to deficiency procedures; instead, the penalty is in specific amounts set forth in the statute. As a result, the section 6038D penalty is assessable by the IRS without following deficiency procedures first.

• Partnership Agreements (G5 IGAs as the BBA comment was submitted prior to the Swiss and Japanese Frameworks);
• Limited FFIs;
• Draft FFI Agreement;
• Documentation and Due Diligence;
• Withholding Requirements;
• FATCA Scope;
• Self-Verification;
• U.S. Financial Institution obligations;
• Miscellaneous issues.

Appendices included: (A) Additional Detailed Comments on Self Verification; (B) Detailed information relating to low-risk products in the UK; (C) Types and tax implications of trusts operating in the UK.

Observed in the section on Partnership Agreements:

6. There is a lack of clarity regarding the interaction of partnership agreements and the requirement, or otherwise, for an FFI to enter into a direct agreement with the Internal Revenue Service (“IRS”). In order to provide certainty for FFis, the BBA’s preferred approach would be as follows:

1. The single model partnership agreement, as developed by the Joint Statement negotiations, is adopted by the partner Government, thereby establishing an Inter­governmental relationship between the U.S. and the adopting partner country.
2. Upon publication of a joint Memorandum of Understanding (“MoU”) between the U.S. and a partner Government, FFis operating in these territories would then be required under local law to obtain an FFI Employer Identification Number (“EIN”) from the IRS. As a consequence, these FFis would be immediately treated as deemed compliant under FATCA.
3. A country specific attachment could then be established if required with the partnership Government which would deal with any jurisdictional variations.
4. The IRS will build and maintain a central FFI register, identifying participating FFIs (“PFFis”) and deemed compliant FFIs.
5. Obtaining an FFI EIN from the IRS will establish a relationship between the FFI and IRS which will ensure the requirements of the responsible officer sign off are consistent across multiple partner jurisdictions.

We envisage that this process would provide clarity and certainty for FFIs, withholding agents, foreign governments and the IRS while the FATCA intergovernmental and legislative framework is finalised.

Observed in the section on Limited FFIs:

9. The BBA also recognises the challenge of concluding the partnership agreements in the timescale envisaged. The partnership agreement forms the legal basis on which FFis can adopt and comply with FATCA reporting requirements. In the event of any unexpected delay in implementing the legislative changes, we would request that transitional arrangements are extended for FFis in affected jurisdictions.

Observed in the section on Draft FFI Agreement:

14. Notwithstanding the Joint Statement approach, there remains a problem with the current FFI agreement, as envisaged in the proposed regulations. As passthru has been ‘reserved’ in the proposed regulations, FFis would be unable to sign an FFI agreement in the absence of a legal resolution to the withholding issue and data protection concerns.

Observed in the section on Documentation and Due Diligence:

 Observed in the section on Self-Verification:

28. The proposed regulations envisage that where a material deficiency in an FFis verification processes is identified an FFI could engage an external auditor to assess and report on the problem area. The BBA believes that in this situation, under the FATCA partnership agreement, an external auditor will be appointed and provide a report to the IRS. The tax authority in the partner country will not be involved in the assurance process.

30. A With reference to paragraph 28 above, the BBA would like to clarify its position on the verification process insofar as we do not ant1cipate the involvement of the local tax authority in a partner country Our major concern IS that for FFIs operating in several countries there may be multiple standards of audit process, documentation requirements and verification procedures To ensure consistency across the FFI group and allow effective control by the lead FFI it is essential that FFIs are able to self-verify their compliance with their requirements under FATCA. The BBA has provided further detail on how a self-verification process might be established at Appendix A.

Observed in the section on U.S. Financial Institution obligations:

31. The BBA notes that the timeline for the requirements imposed on U.S. financial institutions differ from those for FFIs. FFIs are required to enter into an agreement with the IRS effective from July 2013 and as such responsible officers of these organisations would also expect the U.S. financial institution requirements to commence from July 2013 at the earliest. We would propose that these are aligned so that international financial institutions operating in the U.S. are able to align systems and process modifications to a single timetable.

• Bilateral Agreements (at the time the IIF comments were submitted only the G5 IGA had been outlined);
• Withholding and Payment Systems Issues including issues related to DVP/COD transactions and trade finance;
• Capital Market Transactions including potential gross-up liabilities;
• FFI Agreements;
• “All or Nothing” Rule for Affiliates;
• Data Collection and Data Privacy Issues;
• Due Diligence and Reporting;
• Special Issues for Insurance Companies;
• Need for Market Education in consideration of the complexity of FATCA and the U.S. tax rules.

The comments state in the Executive Summary: “Timing is still a problem as FFIs cannot begin implementation of FATCA  with any certainty as to its requirements until the final regulations have been published, the final text of FFI agreements is released and Bilateral Agreements are ratified, although some firms have nonetheless already started major implementation programs in order to meet FATCA  deadlines.”

Key dates to note:

• UK/US Agreement unlikely until end of July (rather than June);
• IRS negotiators were to meet with OECD and EU countries in Paris to present the outline of the G5 IGA;
• UK may require minor legislation which will be proposed by year-end;
• Final regulations will be delayed until the Fall (as opposed to the end of the summer).

Other notes:

• Do not expect much to change in the proposed regulations;
• Three attachments to each country IGA: definitions, due diligence requirements, and deemed-compliant/exempt entities;
• About 50 countries are looking into using IGAs;
• No reciprocity of information sharing on a multilateral basis, only with the U.S.

* As reported by Jeremiah Coder in Tax Notes Today, June 28, 2012.

Non-U.S. real estate funds which do not receive U.S. source income directly may still need to comply with FATCA. Investments into other offshore funds or depositing funds with other entities who are themselves FFI’s will most likely require disclosure of information by such other funds or depositories. In this case a non-U.S. real estate fund may be viewed as either a nonparticipating FFI or a recalcitrant account holder if it does not provide the requested information, resulting in its indirect share of U.S. source income being subject to 30% withholding tax. Although the effective date for withholding in general has been deferred until January 2014, the date for withholding on these indirect payments, referred to as “foreign passthru payments” has been deferred to January 2017 in recognition of the administrative complexity associated with identifying and computing the withholding on such payments.

Notwithstanding these phased in dates, time is short. FATCA is generally effective beginning in 2013. Persons investing in U.S. real estate funds and those who manage U.S. real estate funds will need to understand when such investments give rise to withholdable payments and be able to analyze the application of the FATCA provisions and exemptions to the various structures used and the types of investors who are contributing capital. Within U.S. and non-U.S. real estate fund organizations, the scope of FATCA can impact investor relations, operations, legal, compliance and tax.

Real estate fund managers should analyze the impact of FATCA on their organizations by examining their structure, their investor base and their operations. Some of the specific action items to consider when developing a FATCA compliance program are:

• Review current fund structures to understand the requirements and potential withholding obligations imposed by FATCA, including classification of legal entities into FATCA categories, to determine which components of existing processes and withholding systems can be leveraged and enhanced to support FATCA requirements;
• Analyze fund legal documents, including offering documents and subscription agreements to determine proper scoping and disclosure of FATCA impacts, as well as identifying investor rights and obligations under FATCA;
• Communicate with business partners and service providers to determine division of responsibilities, develop a “FATCA readiness plan,” and consider whether service provider agreements may also need to be modified to require FATCA compliance;
• Manage the impact on investor relations processes, including updating processes for new investor onboarding;
• Develop a plan and approach for communicating with existing investors; determine the FATCA classification of each investor; determine the roles and responsibilities of the fund and each investor; obtain waivers and/or additional information required under FATCA; understand foreign investor plans for FATCA compliance;
• Analyze current KYC and AML practices both internally and externally with fund administrators, distributors, and other third party intermediaries to determine if any expansion or enhancement is required of these practices;
• Coordinate communications with investors and manage various vendor communications to maintain a consistent and cohesive client experience; and
• Manage the process for identifying, recording, reconciling, and reporting the new withholding information to the IRS;
• Educate teams on the impact to their business units or functions, and appropriately identify the impact to existing processes or technology platforms;
• Review and update internal policies and procedures to help monitor FATCA compliance, and establishing controls and governance structure to monitor and resolve FATCA issues (e.g., non- FATCA compliant investors).

March 5, FinCEN may require account owner identification by U.S. banks - U.S. banks may be required to identify the beneficial ownership of their account holders and perform other due diligence on accounts under rules published by FinCEN in a February 28 notice of proposed rulemaking. “Requiring U.S. financial institutions to obtain similar ownership information would put the United States in a better position to work with foreign governments to combat offshore tax evasion and other financial crimes.”

March 14, IRS proposed regulations requiring any person assigned an employer identification number (EIN) to provide updated information to the IRS -  The proposed regulations are intended to enhance the IRS’s ability to maintain accurate information as to the persons assigned EINs, and determine the ownership details for such persons.

With  increasing frequency, EIN applicants authorize certain individuals (sometimes referred to as ‘‘nominees’’) to act on the EIN applicants’ behalf. These nominees are listed on the EIN application as principal officers, general partners, grantors, owners, and  trustors. The IRS stated that the authority of these nominees to act on behalf of the EIN applicant is often temporary and  expires after the application is processed. The listing of such a nominee prevents the IRS from gathering correct ownership information with respect to the EIN applicant once the nominee is no longer authorized to act on behalf of the EIN applicant.

The proposed regulations require any person issued an EIN to provide updated information to the IRS in the manner and  frequency required by forms, instructions, or other appropriate guidance, which the IRS will  issue in the near  future. Requirements will include updated application information regarding the name and taxpayer identifying number of the responsible party, and covers those persons who  previously applied for an EIN by listing a person other than the applicant’s responsible party. Such updated information will allow the IRS to ascertain correct ownership details for persons who have an EIN. The IRS also stated that it will be able to use the information “… to help combat schemes that abuse the tax system through the use of nominees.”

April 17, U.S. Treasury released final regulations on the reporting of interest paid to nonresident aliens - The U.S. Treasury released final regulations requiring Form 1042-S reporting of certain deposit interest paid to certain nonresident alien individuals (NRAs). The final regulations permit financial institutions to limit reporting to payments on deposits maintained at U.S. offices that are held by those NRAs who are residents of countries that have entered into treaties, or other tax information exchange agreements, with the U.S.

The preamble states that the revenue procedure listing the countries to which the new rule applies will also include a second list identifying the countries with which the Treasury Department and the IRS have determined that it is appropriate to have an automatic exchange relationship with respect to the information collected under these regulations. The preamble states that a country will be added to this list only after further assessment of the country’s confidentiality laws and practices, as well as further analysis of the extent to which the country is willing and able to reciprocate.

In the preamble to the regulations, the Treasury Department said it believes that the final regulations “will facilitate intergovernmental cooperation on FATCA implementation by better enabling the IRS, in appropriate circumstances, to reciprocate by exchanging information with foreign governments for tax administration purposes.”

May 31, Draft, modified Forms W-8BEN for individuals and entities were released - The IRS split the Form W-8BEN into two forms: one for individuals (Form W-8BEN) and another for non-individuals (Form W-8BEN-E). The W-8BEN for individuals would require a foreign (non-U.S.)  taxpayer identification number.

I.      Intergovernmental Approach to Implementing FATCA

…

C.        Discussion

…

3. When Treasury begins to negotiate a FATCA implementation agreement with a partner country, Treasury may wish to consider offering to treat those FFIs in the partner country that are prohibited under local law from becoming PFFIs as deemed-compliant until such time as the country concludes good faith negotiations and the relevant legal prohibitions are lifted.

Foreign governments will have substantial incentives to enter into FATCA agreements with the United States.  First, such agreements are likely to alleviate what would otherwise be significant compliance burdens under FATCA for many FFIs in a partner country.  Second, such agreements would entitle foreign governments to data generated by U.S. financial institutions to detect and prosecute tax evasion by their own citizens and residents.  Such data will extend well beyond  the  information  that  partner  countries  now  receive  from  the  United  States  and  its residents on a routine or automatic basis under current treaties and information exchange agreements. 14     As  an  additional  incentive  to  strengthen  a  partner  country’s  commitment  to negotiating and observing the terms of an implementation agreement, Treasury in appropriate cases may wish to consider offering temporary relief from full compliance with FATCA to any FFI in the partner country that is prohibited under local law from complying with the provisions of chapter 4.

For  example, if a partner  country agrees during negotiations that it will  pursue  the relevant changes in local law promptly after execution of an implementation agreement, then Treasury may wish to consider granting temporary but immediate deemed-compliant status to FFIs that (1) are organized in or have a branch in that country and (2) are prohibited under local law from complying with one or more requirements imposed on PFFIs until a short period beyond the date of the agreement to allow sufficient time for such changes to become effective. In such a case, the affected FFIs would not be subject to FATCA withholding pending execution of the FATCA implementation agreement.

We anticipate that such relief might be offered principally or exclusively when the relevant legal prohibition was in effect prior to enactment of FATCA, since prohibitions of this kind are likely to serve national policy goals of the partner country that are not related in any way to the FATCA regime.  We also anticipate that a temporary accommodation of the type described above might be granted by the United States with a fixed and publicly announced end date, in order to discourage potential partner countries from attempting to achieve de facto permanent deemed-compliant status for their resident FFIs by protracted negotiations not carried out in good faith.  Treasury might also reserve for itself the discretion to extend the fixed date in appropriate cases.

If Treasury were to decide in a particular case to grant deemed-compliant status to FFIs in a partner country pending the execution of an implementation agreement and changes in local law, Treasury and the IRS should also consider whether they should publicly announce the specific types of FFIs in the partner country eligible for such relief (assuming that the relevant legal prohibition does not apply to every FFI in that country).  Such an announcement should minimize any confusion regarding whether a particular FFI is entitled to deemed-compliant FFI status during this period.  Treasury and the IRS also could tailor deemed-compliant status so that, if an FFI is permitted under local law to satisfy some but not all of the requirements imposed on a PFFI, the FFI would be subject to those requirements not inconsistent with local law.

If Treasury and the IRS determine that having the flexibility to grant temporary deemed- compliant status to FFIs in a partner country is likely to facilitate the successful negotiation of some FATCA implementation agreement, then the Proposed Regulations could be modified to make reference to Treasury’s authority to do so in its sole discretion.15

We note the Proposed Regulations provide that an FFI that is a member of an expanded affiliated group of PFFIs can be a deemed-compliant FFI without entering into an FFI agreement if that FFI (1) conducts due diligence in the same manner as a PFFI on its existing accounts, (2) closes or transfers to an affiliate (which is itself a PFFI or U.S. financial institution) any existing accounts that are identified as U.S. accounts or accounts of nonparticipating FFIs and (3) establishes procedures to identify any new accounts identified as U.S. accounts or accounts of nonparticipating FFIs and transfer them to an affiliate within 90 days after opening them.16    We believe this rule does not diminish the value of offering the type of temporary deemed-compliant status  discussed  above  during  the  period  of  negotiation.    First,  the  rule  in  the  Proposed  Regulations would provide no relief during the duration of negotiations of a FATCA implementation agreement for an FFI organized in the partner country, unless the FFI is a member of a group that also includes a PFFI or U.S. financial institution.  Because the Proposed Regulations also require FFIs to differentiate between account holders based on national origin and require FFIs to close or transfer accounts without the consent of the customer, they may conflict with restrictions under the privacy, antidiscrimination and universal banking laws of some countries account holders.  Further, even if local law does not prohibit the diligence and account closure or transfer requirements mandated by Proposed Regulations section 1.1471-5(f)(1)(i)(B), we nevertheless believe the time and expense required for many FFIs to comply with these requirements will be significant.  In view of this, the prospect of a discretionary offer by the United States of temporary deemed-compliant status to FFIs in a partner country pending a change in local law is likely to be perceived as an incentive by many partner countries to negotiate an implementation agreement.

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14                    We  note  that  entry  into  intergovernmental  agreements  would  also  lessen  the  incentive  for  foreign governments to enact their own statutory counterparts to FATCA, which would potentially subject U.S. financial institutions to disparate and possibly inconsistent requirements for diligence, reporting and withholding.

15                    Although the Proposed Regulations state that an executed FATCA implementation agreement may provide for categories of deemed-compliant FFIs, they do not state that Treasury may identify temporary categories of deemed-compliant FFIs during the negotiation of these agreements. See Prop. Reg. § 1.1471-5(f)(1).

16                    Prop. Reg. § 1.1471-5(f)(1)(i)(B).

The IRS will provide a new option to help some U.S. citizens and others residing abroad who haven’t been filing tax returns and provide them a chance to catch up with their tax filing obligations if they owe little or no back taxes. The new procedure will go into effect on Sept. 1, 2012.

Taxpayers using the new procedures will be required to file delinquent tax returns along with appropriate related information returns for the past three years, and to file delinquent Reports of Foreign Bank and Financial Accounts (FBARs) for the past six years. Submissions from taxpayers that present higher compliance risk will be subject to a more thorough review and potentially subject to an audit, which could cover more than three tax years.

The IRS also announced its offshore voluntary disclosure programs have exceeded the $5 billion mark, released new details regarding the voluntary disclosure program announced in January and closed a loophole used by some U.S. citizens.