The US Internal Revenue Service has gone back on its policy of insisting on the total withholding of payments to compel compliance with the Foreign Accounts Tax Compliance Act by introducing a so-called transition period.' This could save many banks and high-net-worth individuals millions in terms of withholding charges.

The US Internal Revenue Service has gone
back on its policy of insisting on the total withholding of payments to compel
compliance with the Foreign Accounts Tax Compliance Act by introducing a
“transition period.” This has led to speculation that the offshore lobby has
used its muscle to weaken the effect of the Act.

Earlier this month, the tax authority
issued an innocent-looking document entitled “Further Guidance on the
Implementation of FATCA and Related
Withholding Provisions Notice 2014-33.” The document starts with a stunning
admission: “2014 and 2015 will be regarded as a transition period for purposes
of IRS enforcement and administration with respect to the implementation of FATCA by withholding agents, foreign
financial institutions, and other entities with chapter 4 responsibilities.”

The deadline for observance with no
exceptions was destined to be 1 July, but this seems to have been weakened.

The notice goes on: “With respect to this
transition period, the IRS will take into account the extent to which a
participating or deemed-compliant FFI...has made good faith efforts to comply
with the requirements of the chapter 4 regulations and the temporary
co-ordination regulations.

“For example, the IRS will take into
account whether a withholding agent has made reasonable efforts during the
transition period to modify its account opening practices and procedures to
document the chapter 4 status of payees, apply the standards of knowledge
provided in chapter 4, and, in the absence of reliable documentation, apply the

presumption rules of §1.1471-3(f). Additionally, for example, the IRS will consider the
good faith efforts of [an] FFI to identify and facilitate the registration of
each other member of its expanded affiliated group as required for purposes of
satisfying the expanded affiliated group requirement under §1.1471-4(e)(1). An entity that has not made good faith efforts to
comply with the new requirements will not be given any relief from IRS
enforcement during the transition period.”

On 3 May the Wall Street Journal breathed a
sigh of relief: “The Treasury Department will temporarily relax enforcement of
a new law aimed at discouraging offshore tax dodging, at least for financial
institutions that are making good-faith efforts to comply.”

Perhaps one day the IRS will come out with
some definition of the illiterate term ‘good-faith effort’, but such an
explanation is not on offer in the paper. Later on it refers to such an effort
as a ‘reasonable effort’. It also insists that FATCA is not being ‘postponed’ but crucially includes the exemption
for companies of ‘good faith’ in the transition period.

The suspicion is that smaller firms with a
presence offshore that have no leverage on the US Government will be unable to
benefit from the loophole, whereas the largest, globally politically connected
ones will.

Other loopholes abound. In the words of
Senator Carl Levin in his latest report on the subject: “Among other problems,
the FATCA regulatory loopholes will
require disclosure of only the largest dollar accounts; they will permit banks
to ignore, in most cases, bank account information that is kept on paper rather
than electronically; they will allow banks to treat accounts opened by offshore
shell entities as non-US accounts even when the entity is owned by a US
taxpayer; and the remaining disclosure requirements can be easily circumvented
by US persons opening accounts below the reporting thresholds at more than one
bank.”