Volume 2, Number 1
January 18, 2013

IRS Issues FATCA Final Regulation

The U.S. Internal Revenue Service (IRS) on Thursday released the final version of its regulation to implement the Foreign Account Tax Compliance Act (FATCA), which will apply to non-U.S. credit unions in many jurisdictions. The U.S. Treasury's press release accompanying the final regulation can be accessed here.

The 554-page final rule makes several key changes from the IRS's original proposal, which World Council urged in its comment letter and oral testimony at an IRS public hearing on the proposed FATCA rules last year. These key changes include clarifying that credit unions and similar credit cooperatives fall within the definition of FATCA-exempt "non-registering local banks" and also an amendment to allow non-U.S. credit unions to list U.S. dollar denominated accounts on their websites without losing FATCA-exempt status.

The IRS's proposed FATCA regulation included a definition of "non-registering local bank," which referenced the definition of "bank" in Internal Revenue Code section 581 ("credit unions" are defined under section 501(c)(14)(A) of the Code, not under section 581). The final regulation deletes the reference to section 581 and expressly mentions credit unions and credit cooperatives in the definition of "non-registering local bank."

The change to allow credit unions outside the U.S. to provide U.S. dollar denominated accounts is also very important to institutions in dollarized economies such as Ecuador and El Salvador, as well as jurisdictions where U.S. dollars are in widespread circulation and/or credit union members find U.S. dollar denominated accounts to be convenient and useful, such as in Canada as well as many Caribbean and South American jurisdictions.

The final rule, however, keeps the asset threshold for "non-registering local bank" at US$175 million in assets or less, which is based on the U.S. Small Business Administration's definition of "small bank." World Council and other commenters had urged the IRS to increase this asset threshold to US$1 billion.

Credit unions with more than US$175 million in assets which: (1) only have offices in their home jurisdiction and (2) which have at least 98% of their savings and other deposits which are held by residents or citizens of the credit union's home jurisdiction (whether or not those persons are U.S. citizens or taxpayers) will be able to qualify as "registering deemed compliant¬ local Foreign Financial Institutions (FFIs)," which will be exempt from FATCA in many respects. Registering deemed compliant FFIs will be required to register with the IRS using an IRS website and renew the registration every three years, but will only be subject to a few other FATCA regulatory requirements.

Importantly for non-U.S. credit unions, the final regulation treats non-resident citizens of the credit union's home jurisdiction the same as local residents and also changes the calculation of the 98% resident account threshold from the IRS's proposed approach so that the 98% is calculated based on the total value of the credit union's accounts rather than the number of accounts. These are significant changes from the proposed regulation, which should significantly reduce credit union regulatory burdens since the proposed regulation would have calculated the 98% threshold based only on the number of accounts held by local residents, without regard to the value of those accounts or whether the non-resident was in fact a citizen of the jurisdiction.

In addition, for non-U.S. credit unions that do not fall within the "non-registering local bank" or "deemed compliant local FFI" exemptions and will have to enter into FATCA compliance agreements with the IRS, the final rule exempts from FATCA compliance pre-existing accounts where the member's total funds held by the credit union are less than US$250,000. This is a major increase from the proposed regulation, which would have only exempted pre-existing accounts when a member's total funds held by the credit union were US$50,000 or less. This change will significantly decrease FATCA's regulatory burdens on larger non-U.S. credit unions that do not fall within the "non-registering local bank" or "deemed compliant FFI" exemptions and will be required to enter into FATCA compliance agreements with IRS unless their jurisdiction enters into a FATCA Intergovernmental Agreement (IGA) with the United States of America.

The IRS FATCA regulation will not apply to credit unions in jurisdictions that have entered into FATCA IGAs with the United States. So far the United Kingdom, the Republic of Ireland, the United Mexican States and Denmark have entered into FATCA IGAs with the U.S., which have been released publicly. Other jurisdictions — including Argentina, Australia, Bermuda, Brazil, the British Virgin Islands, Canada, the Cayman Islands, Chile, Estonia, the Republic of Korea, New Zealand, Romania, Russia, Sint Maarten and South Africa — are in discussions with the U.S. Treasury to enter into FATCA IGAs, but may or may not actually execute these IGAs with the U.S.

Jurisdictions that agree to FATCA IGAs will have considerable discretion on how to implement FATCA locally. The United Kingdom's HM Revenue and Customs has recently issued a draft legislative package and accompanying guidance to implement FATCA which are open to public comment until Feb. 13, 2013. Other jurisdictions' local FATCA implementations pursuant to IGAs are likely to be relatively similar to the U.K.'s proposed legislative package, which will apply to credit unions in Great Britain and Northern Ireland when it is finalized.

World Council will be issuing a more detailed summary of the IRS final FATCA regulation early next week and will also write a FATCA compliance guide for institutions subject to the IRS regulation that will be available to World Council members this spring. FATCA compliance will be phased in stages over a period of years with reporting requirements beginning in 2015 and full compliance required by 2017.

Please do not hesitate to contact me if you have any questions about the IRS's FATCA final regulation. Thank you very much and have a great 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
medwards@woccu.org | www.woccu.org