FATCA Regulation Release Delayed . . . Again

Number 8
December 21, 2012

FATCA Regulation Release Delayed . . . Again

The U.S. Internal Revenue Service (IRS) will not meet its end-of-year 2012 deadline to issue the final version of its Foreign Account Tax Compliance Act (FATCA) regulation, according to Reuters. This will be the second deadline for publishing the final version of the FATCA rules which the agency has missed, after having also missed its original deadline of September 2012.

World Council's sources in Washington, D.C., believe that the reason for this delay of the final FATCA rule is because other jurisdictions are not agreeing to FATCA-related Intergovernmental Agreements (IGA) with the United States Treasury as quickly as expected. The IRS issued the proposed FATCA regulation in February 2012, and World Council responded by filing a detailed comment letter and testifying at an IRS public hearing to request changes that would help limit regulatory burdens on credit unions.

There is also speculation in Washington that this latest delay could signify that FATCA is "in trouble" and could be a target for repeal. Many U.S. expatriates have complained that FATCA is making it hard for them to maintain access to banking services and, earlier this year, four Republican senators wrote to Treasury Secretary Timothy Geithner questioning how the Treasury is implementing FATCA.

While we do not believe that FATCA repeal is imminent, World Council and the Credit Union National Association (CUNA) continue to monitor the situation and will push for FATCA repeal in the U.S. Congress if a realistic legislative opportunity to do so presents itself.

Ireland and Mexico Sign FATCA Agreements with U.S.; Canada Opens FATCA Public Consolidation

The Republic of Ireland and the United Mexican States have finalized FATCA IGAs with the United States of America. The Irish IGA was agreed to on December 5 and has not been released publicly at the time of this writing; the Mexican IGA was agreed to November 19 and is available here. Ireland and Mexico join the United Kingdom and Denmark in a small but presumably growing group of jurisdictions that have finalized FATCA IGAs with the United States to share tax information. The United Kingdom has also recently concluded a public consultation on implementation of the U.K.'s FATCA IGA in Great Britain and Northern Ireland. Other jurisdictions are in the process of negotiating FATCA IGAs with the U.S. Treasury; for example the Canadian Department of Finance in early November opened a public consultation on whether Canada should agree to a FATCA IGA with the U.S.

The U.S. Treasury also has released three styles of "model" FATCA IGA: (1) Model IA: which involves reciprocal account and tax information sharing by the U.S. and the other jurisdiction's government; (2) Model IB: in which the jurisdiction's government provides account information to the U.S. without reciprocity; and (3) Model 2: where credit unions and banks would report directly to the IRS but the form of that reporting would be determined by the jurisdiction's authorities rather than by the IRS FATCA regulation.

Non-U.S. credit unions in jurisdictions that enter into FATCA IGAs will not be required to comply with the IRS FATCA regulation, which, as noted above, has not yet been released in final form. Other non-U.S. credit unions will be expected to comply with the IRS final rule and therefore report directly to the IRS.

U.S. credit unions will be subject to related IRS regulations concerning reporting of accounts held by non-U.S. residents, such as via the new Form 1099-INT reporting requirements issued by the IRS in Revenue Procedure 2012-24 earlier this year (click here for the CUNA Final Rule Analysis if you have access to

It is not yet clear whether FATCA IGAs will necessarily reduce credit unions' compliance burdens compared to compliance with the IRS FATCA regulation. FATCA IGAs would give national (as opposed to U.S.) authorities control over the FATCA compliance process as long as their procedures were consistent with the applicable IGA. In addition, credit unions in Model IA and Model IB jurisdictions would not be required to deal directly with the IRS but would instead report information about U.S. taxpayers via existing anti-money laundering or tax information reporting procedures.

The IRS's proposed FATCA regulation, however, would exempt "small banks" with less than the equivalent of US$175 million in assets from FATCA compliance, whereas the IGAs executed to date do not have any "small bank" exemption. World Council has urged the IRS to clarify that the definition of "small bank" includes credit unions and also to increase the asset threshold for "small banks" to US$1 billion in the final version of the FATCA rule.

According to a November 8 release from the U.S. Treasury, the U.S. is in the process of engaging at least 50 jurisdictions in negotiations or discussions about FATCA IGAs, including Argentina, Australia, Belgium, Bermuda, Brazil, the British Virgin Islands, the Cayman Islands, Chile, the Czech Republic, Cyprus, Estonia, Finland, France, Germany, Gibraltar, Guernsey, Hungary, India, Isle of Man, Israel, Italy, Japan, Jersey, Korea, Lebanon, Luxembourg, Liechtenstein, Malaysia, Malta, the Netherlands, New Zealand, Norway, Romania, Russia, Seychelles, Singapore, Sint Maarten, Spain, the Slovak Republic, Slovenia, South Africa, Sweden and Switzerland. Of this group, France, Germany, Italy, Japan, Spain and Switzerland have agreed in principle to FATCA IGAs but have not yet finalized those agreements.

Meeting with Basel Committee Representatives about CU Shares as Capital

On December 5, World Council President and CEO Brian Branch and Chief Counsel and VP for Advocacy and Government Affairs Michael Edwards, as well as CUNA SVP of Research and Policy Analysis and Chief Economist Bill Hampel, met with Basel Committee Deputy Secretary General Karl Cordewener and Secretariat Member Noel Reynolds at the Bank for International Settlements in Basel, Switzerland.

The meeting was a follow-up to World Council's submission to the Basel Committee earlier this year of a white paper on why credit union shares should be able to qualify as regulatory capital under Basel III as long as they have terms and conditions that make the shares permanent or near permanent, and as long as the shares can absorb losses on a going concern basis.

Among other things, we learned the secretariat staff's opinion that credit union capital shares that are at-risk of loss and can only be "redeemed" upon a member's retirement from a credit union could likely qualify as "common equity Tier 1" capital — the most desirable form of capital under Basel III — if the "redemption" is paid for solely out of the proceeds of new shares and is not technically considered a "withdrawal" (since withdrawability is a feature of debt instruments, not equity instruments).

In other words, a member wishing to quit the credit union and redeem his or her "common equity Tier 1" capital shares would need to declare his or her intention to retire from membership and then "get in a queue" to be paid cash in exchange for his or her capital shares once the credit union has issued an equal or greater number of new shares (and all retiring members further ahead in the "queue" had already been paid). This would be similar to how credit union shares can be redeemed by retiring members in the Dominican Republic.

Shares with more liberal "redemption" options could nonetheless likely qualify as regulatory capital under Basel III as "additional Tier 1" or as "Tier 2" capital, depending on their terms and conditions. If a share is "withdrawable," it could count as "Tier 2" capital if it has at least a five-year call period before the funds are disbursed to the member (there is no similar waiting period for "redemption" of shares, however).

World Council will continue to engage the Basel Committee, regulators, and other stakeholders regarding credit union shares as capital under Basel III as the protocol comes into force in most of the world beginning next year.

IASB IFRS for SMEs Consultation

On November 30, World Council filed a comment letter with the International Accounting Standards Board (IASB) in response to its comprehensive review of International Financial Reporting Standards for Small and Medium Enterprises, which is often called IFRS for SMEs.

Currently, IFRS for SMEs states that it cannot be used by financial institutions, but the IASB consultation asked whether the standard should be amended to recognize expressly that jurisdictions have the option to allow credit unions to utilize the standard.

We strongly supported this proposed revision to allow an IFRS for SMEs option for credit unions and noted that accounting authorities in Great Britain and Ireland have already decided that credit unions of any asset size in those jurisdictions will follow IFRS for SMEs beginning in 2015. We also noted that federally insured credit unions in the United States with less than US$10 million in assets have a long record of following less stringent Regulatory Accounting Principles (RAP) and argued that the experience of small U.S. credit unions under RAP supports the proposition that credit unions can safely and soundly utilize the IFRS for SMEs standard.

Please do not hesitate to contact me if you have any questions about these international regulatory recent developments. Thank you very much and have a Happy New Year.

Michael S. Edwards
Chief Counsel and VP for Advocacy & Government Affairs
World Council of Credit Unions (WOCCU)
601 Pennsylvania Ave., NW, Washington, DC 2004-2601 USA
Office: +1-202-508-6755 | Mobile: +1-215-668-5240 | Fax: +1-202-638-3410 |

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