Treasury Proposes to Ease Pending Tax Regulations Impacting Citizens Abroad

Last week the Treasury Department proposed rules to ease two pending regulatory burdens of the Foreign Account Tax Compliance Act (FATCA). On paper, FATCA was ostensibly designed to prevent so-called “fat cats” from evading U.S. taxes by depositing money in offshore accounts. In part, the law requires foreign financial institutions (FFIs) to disclose information on U.S. taxpayer accounts to the IRS or face a penalty.

In practice, however, the harm inflicted by FATCA impacts Americans overseas regardless of their earning level. Many U.S. citizens abroad have lost access to basic and essential banking because FFIs have decided that it is easier to cut off services rather than comply with FATCA’s onerous regulations. The law also extends to “accidental Americans” who were born in the U.S. to non-citizens, even in cases when they have moved abroad and never even earned a penny of income in the U.S.

The Treasury Department and the Internal Revenue Service issued the proposed rules pursuant to Executive Orders 13777, “Enforcing the Regulatory Reform Agenda,” and 13789, “Identifying and Reducing Tax Regulatory Burdens,” issued by President Trump to eliminate unduly burdensome regulations.

Starting on January 1, 2019, a 30 percent withholding tax will take effect on certain U.S.-sourced gross proceeds of FFIs that are not in compliance with FATCA’s reporting requirements. This tax was originally to have gone into effect at the start of 2017 but was delayed due to concerns about its compliance burdens. The IRS continues to receive comments on the difficulties of implementing the withholding tax on the millions of potential transactions, which in many cases are overseen by brokers and agents that do not currently obtain tax documentation. The Securities Industry and Financial Markets Association warned in a letter to U.S. officials that the withholding tax is also expected to increase the administrative burden of the IRS in order to process the increased number of refund requests that would likely be triggered, especially in cases where the broker or agent had incorrect information regarding the compliance status of FFIs.

Because these concerns remain unaddressed, the new proposed rule would eliminate the gross proceeds tax altogether. The Treasury further argues that current withholding requirements under existing intergovernmental agreements (IGAs) that the U.S. has with 113 jurisdictions are sufficient, and the additional withholding requirements on gross proceeds are not necessary to ensure enforcement under FATCA.

A second proposed rule would further delay the implementation date of a withholding tax on “foreign pass-thru payments” of certain U.S.-sourced income made by FFIs to either non-compliant account holders or non-compliance FFIs. This requirement was previously delayed because of stakeholder concerns about of the burdens and complexities involved with establishing the withholding system, and that it may not be necessary given the IGAs. Currently, the withholding is to become effective upon the latter of either January 1, 2019 or the date of publication of final regulations in the Federal Register. The new proposal would delay implementation until two years after the final regulations are published. This would provide additional time to consider the feasibility of the rule. The IRS and Treasury “request additional comments from stakeholders on alternative approaches [emphasis added] that would serve the same compliance objections ... .”

The proposal to remove the withholding tax on gross proceeds is a seemingly small yet significant regulatory remedy from an onerous law. Deferring the target dates for implementation of FATCA's tax penalty on passthru payments is otherwise just another temporary patch to cover the glitches in a law that fails to meet basic cost-benefit tests. Texas A&M University Law Professor William Byrnes calculated last year that repeal of FATCA would reduce revenues by $150 million annually while cutting compliance costs on the economy by $200 million.

It is also important to note that in this case the Trump Administration has been responsive to the public’s concerns about the regulatory burdens of the measure. This is in stark contrast to other policy areas in which the overwhelming number of public comments are in opposition.

It is positive to see that the administration is taking steps to prevent pending FATCA compliance burdens. If they become effective, they would be piled on top of its onerous existing burdens that are driving record number of Americans abroad to renounce citizenship. The entire existing law remains ripe for review. In August, a report from the Treasury Inspector General for Tax Administration revealed that the IRS has spent $380 million implementing FATCA but there is “no ongoing compliance impact” and the IRS is not “taking appropriate enforcement action on FATCA compliance activities or measuring its performance.” Meanwhile, taxpayers abroad await relief.