Law will require U.S. credit unions to conduct withholding and due diligence on some types of cross-border payments beginning in 2017
by. Michael S. Edwards, Vice President and Chief Counsel, World Council of Credit Unions
On Jan. 17, 2013, the Internal Revenue Service (IRS) issued a final rule to implement the Foreign Account Tax Compliance Act (FATCA). This regulation will ultimately impact both U.S. credit unions and non-U.S. credit unions, although most compliance requirements for U.S. credit unions will not take effect until Jan. 1, 2017. Credit unions all over the world are now wondering whether the U.S. Congress will repeal FATCA prior to it affecting their institutions. Some members of Congress have questioned FATCA’s wisdom, but the U.S. credit union movement will likely need to advocate for FATCA’s repeal in order to keep this new compliance burden from affecting credit unions.
Congress enacted FATCA in March 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act in order to help offset the costs of the HIRE Act’s jobs programs under Congress’s so-called PAYGO rules. FATCA is projected to increase U.S. tax revenue by about $900 million dollars a year, which is not very much money considering the U.S. federal government has an approximately $1 trillion annual budget deficit.
FATCA’s compliance costs are also likely to be higher than the amount of tax collected. The European Banking Federation and the Institute of International Bankers have estimated that FATCA compliance costs at large foreign banks will be at least $10 per account in the first year, and the per account compliance costs at smaller financial institutions such as credit unions may be higher. The Wall Street Journal has reported that FATCA is creating a “compliance gold rush” for vendors that do business with non-U.S. financial institutions because FATCA will come into effect for foreign credit unions and banks beginning in 2014, and it will cost the 30 largest non-U.S. banks alone at least $7.5 billion in compliance expenses.
FATCA compliance for U.S. credit unions is also not likely to be easy or inexpensive though the IRS delayed most compliance requirements for U.S. institutions to Jan. 1, 2017, from its originally proposed Jan. 1, 2014, compliance date. U.S. credit unions are included in the IRS rule’s definition of “withholding agent” and therefore will be required beginning in 2017 to perform due diligence and 30% tax withholding on overseas payments of not-yet-taxed U.S.-sourced “passive” interest and investment income that is being routed to financial institutions overseas that are not FATCA compliant. “Passive income” includes interest and dividends paid on credit union share accounts and banks accounts, as well as the taxable proceeds from sales of real property or other U.S.-based investments.
However, U.S. credit unions would not conduct withholding on transfers involving U.S. source wages or other payments for services, payments for goods, lease or rental payments, gambling winnings, payments in connection with transportation or freight, awards, prizes, scholarships and interest on outstanding accounts payable for goods or services rendered. U.S. credit unions would also not be required to conduct withholding if the payment is being routed to a foreign financial institution that is FATCA-compliant, or if the member has already paid taxes on that income.
Many questions about FATCA compliance remain unanswered, including how U.S. credit unions will be expected to determine whether money their members are trying to send overseas is from not-yet-taxed passive income. The IRS will also be creating a database of foreign financial institutions that have agreed with the agency to comply with FATCA. U.S. credit unions will presumably be able to check this database to determine a recipient financial institution’s FATCA-compliance status, but most foreign financial institutions with less than $175 million in assets will be exempt from FATCA and will not be included in the database. The IRS is likely to issue additional guidance, but with compliance delayed until the final days of the Obama administration in January 2017, perhaps even the government may not yet be sure how this will work in practice.
Last year a group of U.S. senators including Rand Paul (R-KY), Mike Lee (R-UT), and Saxby Chambliss (R-GA) wrote then Treasury Secretary Timothy Geithner to express disapproval of how the administration was implementing FATCA. Their letter also requested detailed information on how FATCA would impact U.S. banks and credit unions, including its estimated compliance costs, as well as information on whether FATCA would compromise the financial privacy of U.S. citizens. Larger scale opposition to FATCA in Congress, however, has not yet materialized.
FATCA does not seem to have very many supporters in Congress, but it is already the law of the land and will affect U.S. credit unions eventually unless Congress acts. World Council of Credit Unions and the Credit Union National Association are working to gain traction in Congress for such repeal, but at this juncture, repeal is far from guaranteed in a divided Congress that is concerned about deficit spending. While we will continue to advocate repealing FATCA and its unnecessary compliance burdens, we will also be pursuing regulatory relief with the Treasury and other policymakers.