World Council Engages the U.S. Internal Revenue Service on FATCA - May 1, 2012
May 1, 2012
The World Council of Credit Unions (World Council) yesterday filed a detailed comment letter with the Internal Revenue Service (IRS) – the tax agency that is a bureau of the United States Department of the Treasury – in response to the IRS’s proposed regulation to implement the Foreign Account Tax Compliance Act (FATCA). The World Council today also filed a separate, formal request to make oral comments during an IRS public hearing regarding the FATCA proposal that is scheduled for May 15, 2012.
Our comment letter urged the IRS to make significant changes when it finalizes the FATCA regulation later this year, including expanding the definition of “nonregistering local banks” (which are virtually exempt from FATCA) to include most non-U.S. credit unions. The World Council’s comment letter can be accessed at this link and our long and short summaries of the FATCA proposed regulation can be accessed here.
The U.S. Congress enacted FATCA in order to make it harder for U.S. taxpayers to avoid U.S. income taxation by placing funds in overseas accounts. The proposed FATCA rules would regulate “foreign financial institutions” (FFIs) including non-U.S. credit unions (as well as U.S. credit unions to some degree) and would subject international electronic fund transfers that involve not-yet-taxed investment and interest income earned by U.S. citizens and residents to a 30% “withholding” for U.S. income tax compliance purposes. Although the proposed FATCA rules do not yet include the exact definitions of all types of transfers that will be subject to FATCA withholding (the IRS says that it will issue a separate proposal to address this issue at a later date), presumably interest and dividend income as well as income from the sale of investments earned by U.S. citizens and residents would be subject to FATCA withholding unless estimated U.S. federal income taxes have already been withheld from those funds.
Regarding the proposed “nonregistering local bank” exemption from FATCA, the IRS proposed that banks without international operations that are under US$ 175 million in assets be exempt from virtually all FATCA requirements. We opposed this proposed “nonregistering local bank” definition because it would not apply to credit unions and we urged the IRS to expand the definition so that similarly-sized local credit unions would also enjoy this exemption. As proposed, the “nontregistering local bank” definition does not include credit unions because it specifically references a provision of the U.S. tax code that applies to banks only. We strongly urged the IRS in our letter to expand this definition to include also the U.S. tax code provision that applies to credit unions. In addition, we urged the IRS to revise the “nonregistering local bank” definition to include credit unions and banks up to US$ 1 billion in assets (instead of the proposed US$ 175 million in assets) and to allow “nonregistering local banks” to provide information about U.S. dollar denominated financial products on their websites.
We also urged the IRS to amend the proposed definition of semi-exempt “local FFIs” in several respects to reduce regulatory burdens on non-U.S. credit unions and prevent unintended consequences. The IRS’s proposed definition of “local FFI” would apply to most credit unions that only have offices in their home country and have at least 98% of their accounts held by local residents (whether or not those residents are also U.S. citizens or U.S. residents). “Local FFIs” would be required to register with the IRS but would be exempted from most other FATCA requirements. Unless the IRS expands the definition of “nonregistering local bank” to include credit unions – as we requested in our comment letter – most non-U.S. credit unions would be required by the FATCA regulation to register with the IRS as “local FFIs” regardless of their asset size. In addition, we suggested that the IRS revise the “local FFI” definition so that only 95% or more of the credit union’s accounts must be held by local residents rather than the proposed 98% threshold, and requested that the IRS modify the proposed FATCA regulations to allow national or provincial credit union associations to register with the IRS on behalf of their member credit unions that meet the “local FFI” definition.
Our comment letter also addressed many other key aspects of the proposed FATCA regulation that could impact credit unions in positive or negative ways, such as
- We strongly supported the proposed definition of “U.S. account” to not include accounts under US$ 50,000 even when a “U.S. person” holds such an account.
- We urged the IRS to revise the proposed rule to permit institutions to receive refunds of money withheld erroneously under FATCA even in the case of a “nonparticipating FFI.”
- We asked the IRS to exempt expressly international workers’ remittances from FATCA coverage in order to promote financial inclusion for underserved immigrant populations and their families.
Although it is too early to know whether the IRS will definitely grant our request to make oral comments at the May 15th public hearing, the IRS usually honors such requests. We will use the public hearing to reinforce the points made in our comment letter – especially regarding expanding the definition of “nonregistering local bank” to include credit unions – and help address any questions that the IRS public hearing panel members may have about credit unions.
IRS public hearing panels typically include the IRS lawyer who drafted the proposed regulation and will draft the final version of the regulation, a U.S. Treasury Department lawyer who specializes in tax policy matters, and other IRS staff who are involved in deciding what to include in the final regulation. The public hearing therefore represents a unique opportunity to engage directly the policymakers who will be personally finalizing the FATCA rules and help make them better aware of how to minimize FATCA’s negative effects on credit unions as well as make them better aware of credit unions’ important role in the world financial system.
For more information or if you have questions, please see our press release regarding the FATCA comment letter or contact me by email or phone using the below contact information. Thank you very much and have a nice day.
Michael S. Edwards
Chief Counsel and VP for Advocacy & Government Affairs
World Council of Credit Unions (WOCCU)
+1-202-508-6755 (office) | firstname.lastname@example.org | www.woccu.org