FATCA Witholding Delayed, Opposition Mounts in U.S. Congress, Courts

Volume 2, Number 4
July 12, 2013

FATCA Witholding Delayed, Opposition Mounts in U.S. Congress, Courts

Today, the U.S. Department of the Treasury announced that it was delaying the Foreign Account Tax Compliance Act (FATCA) requirement to withhold 30% of payments made to accounts at non-FATCA-compliant financial institutions for six months until July 1, 2014.

The stated reason for the delay was to provide more time for the U.S. to enter into FATCA intergovernmental agreements (IGA) with foreign governments. Jurisdictions that enter into IGAs with the U.S. would enforce FATCA using a local rulebook.

This delay, however, is yet another sign that the U.S. government does not have the capacity to enforce FATCA without marshalling the resources of other countries, and that many jurisdictions have been unwilling to agree to the IGA terms offered by the Treasury.

Opposition to FATCA within the U.S. has also been mounting because the FATCA IGAs are premised on reciprocal information exchange between the U.S. and foreign jurisdictions, meaning that U.S. credit unions and other U.S. financial institutions must become subject to FATCA-style information reporting requirements to make the IGAs work in practice.

FATCA, however, did not include legislative authority for imposing such information requirements on U.S. credit unions and banks, and it is unlikely that the U.S. Congress will establish the legal framework necessary to make reciprocal information exchange under FATCA IGAs possible.

On July 1, Rep. Bill Posey (R-Florida) wrote a letter to U.S. Treasury Secretary Jack Lew stating the Republican-controlled House of Representatives will not grant the Obama Administration's request in its FY2014 budget request for additional legislative authority to make U.S. credit unions and other U.S. financial institutions subject to more or less the same FATCA requirements as non-U.S. financial institution that would be needed for FATCA IGA reciprocity to work in practice.

Rep. Posey has also introduced a bill (HR 2299) with bipartisan support that would abolish the Internal Revenue Service's (IRS) recently established "non-resident alien" (NRA) interest income reporting regulations that are the only type of FATCA-style tax information reporting that applies to US financial institutions and could be used for FATCA IGA reciprocity purposes.

The IRS's NRA interest income reporting rules are also being challenged in the U.S. District Court for the District of Columbia by the Florida Bankers Association and the Texas Bankers Association. The court may invalidate the NRA interest income rules because Congress has not passed a law delegating to the IRS authority to establish the NRA interest income reporting requirements by regulation, and U.S. regulations are not valid unless they interpret a law passed by Congress and signed into law by the president.

International Accounts Standards Board Exposure Draft Summary

On July 5, World Council filed a comment letter with the International Accounts Standards Board (IASB) in response to its Financial Instruments: Expected Credit Losses Exposure Draft that will help form the IFRS 9 accounting standard. The IASB proposal would apply to loans and debt securities, as well as trade receivables, lease receivables and binding loan commitments.

The proposed IFRS 9 expected loss approach would be a significant change from the current IFRS standard, IAS 39, which uses an incurred loss model. This proposal would therefore be likely to require credit unions and other entities to increase their allowance for loan losses (ALL), and related ALL expenses, at least during the transition to IFRS 9. An expected loss model could therefore deplete some credit unions' regulatory capital levels and potentially make them subject to supervisory remedial actions, such as "Prompt Corrective Action" rules.

World Council's comment opposed the Financial Instruments: Expected Credit Losses exposure draft as proposed. We questioned the utility of moving to an expected loss model, especially in the case of non-stock entities like credit unions that performed well in general during the recent financial crisis under the IAS 39 incurred loss model and similar incurred loss standards established by national generally accepted accounting principles (GAAP).

We urged the IASB retain an incurred loss model or, if IASB continues its plan to transition to an expected loss model, to allow at least a three year transition period — to allow credit unions sufficient times to build up additional reserves — and also include practical expedients in the final version of the standard that accommodate the resource constraints faced by credit unions and other small and medium financial institution.

This IASB Exposure Draft differs from the Financial Action Standards Board's (FASB) approach under U.S. generally accepted accounting principles (U.S. GAAP) because the IASB model would not require credit unions to recognize lifetime expected losses until "significant deterioration in credit quality" occurs, such as a loan being in arrears for at least 30 days; rather, the IASB proposal would limit expected credit losses on financial instruments without "significant deterioration in credit quality" to a 12-month lookout period. According to the IASB:

"In July 2012, the FASB decided to revisit its previous tentative decisions on that joint [IASB-FASB] model and has since decided to develop an expected credit loss model in which no distinction has been made between those financial instruments that have deteriorated in credit quality since initial recognition and those that have not. Under the FASB's proposed Current Expected Credit Loss (‘CECL' model), expected credit losses are always recognized at what is described as ‘lifetime expected credit losses' in the IASB's proposals. This is in contrast to the IASB's proposal to measure expected credit losses for some financial instruments at an amount equal to 12-month expected credit losses."

Basel External Audit Consultative Document

World Council filed a comment letter on June 21 with the Basel Committee in response to its public consultation on external audits of banks.

Our comment urged the Basel Committee to clarify that the proposed requirement for external bank auditors to comply with the audit standards applicable to publicly traded companies should depend on the size and complexity of the financial institution and applicable statutory and regulatory requirements. Specifically, we asked the Committee to revise the proposal to limit the application of public company audit rules requirement to internationally active banks and publicly traded companies.

Please do not hesitate to contact me if you have any questions. 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
601 Pennsylvania Ave., NW, Washington, DC 2004-2601 USA
Office: +1-202-508-6755 | Mobile: +1-215-668-5240 | Fax: +1-202-638-3410 |

Previous Editions