The Internal Revenue Service (IRS) issued a final rule that implements information reporting and withholding tax provisions under the Foreign Account Tax Compliance Act (FATCA). The rule describes the step-by-step process for U.S. account identification, information reporting, and withholding requirements for foreign financial institutions (FFIs), other foreign entities, and U.S. withholding agents.
As noted in a summary developed by the World Council of Credit Unions (WOCCU), FATCA purports to apply to non-U.S. credit unions as well as to U.S. credit unions that make overseas transfers of untaxed proceeds from U.S. sourced interest and investment income. U.S. credit unions will be required eventually to perform due diligence and tax withholding regarding overseas payments of not-yet-taxed U.S. sourced “passive” interest and investment income. Specifically, U.S. credit unions beginning January 1, 2017 will be required to withhold 30% of payments of not-yet-taxed U.S. investment or interest income being routed to accounts at FFIs that are not FATCA compliant (this is a significant change from the proposed rule that would have begun FATCA withholding in 2014). In addition, U.S. credit unions will likely need to perform a due diligence review of existing accounts—to determine if the credit union holds accounts for FFIs that are not FATCA compliant—by December 31, 2015, although few, if any, U.S. natural-person credit unions are likely to have such FFI accounts, according to the summary.
The IRS’s final FATCA regulation makes many changes from the agency’s proposed regulation that will help limit FATCA’s regulatory burdens on both U.S. and non-U.S. credit unions. While the long postponement in most of the compliance burden is certainly a positive reflection of the Credit Union National Association's (CUNA) advocacy efforts (click here for CUNA’s comment letter), CUNA will continue pushing the IRS on issues that still need to be improved.