May 4 — Foreign banks doing mergers and acquisitions with other banks now have new and valuable guidance on registering under legislation requiring them to disclose U.S.-owned accounts to the IRS—but some say questions remain.
Banks face major challenges under the Foreign Account Tax Compliance Act, which could impose a 30 percent withholding tax on their U.S.-source income if they don't comply with the reporting rules. Those rules require participating banks to register with the Internal Revenue Service—a task done by tens of thousands of banks already.
The guidance offers welcome answers to high-stakes issues of when and how financial institutions need to register, terminate their registration, or get special identification numbers after combining with other banks, a practitioner told Bloomberg BNA May 4.
Another said while the guidance is helpful, more is needed on how taxpayers should file reports of these deals and whether they need to certify the accounts that are acquired.
Banks have raised big questions on registration requirements for parties involved in mergers or what's known as “bulk acquisitions.”
In these acquisitions, one bank buys all of another bank's accounts or a line of its business, said John Harrington, a partner with Dentons USA LLP. He said the same thing effectively happens with a merger, where the surviving entity winds up with the accounts of the entity it merged with.
“Considering the stakes, financial institutions should be comforted by the clear answers” given by the IRS, Harrington said.
Those stakes include not only withholding taxes, but the possibility that the bank could get in trouble with its home country under “intergovernmental agreements” that dozens of nations have worked out with the IRS, he said.
The guidance came in a May 3 addition to the agency's frequently asked questions and answers under FATCA.
In general, the IRS said in acquisitions where the buyer keeps its name, that acquirer wouldn't need to change its registration or get a new FATCA ID number, known as a Global Intermediary Identification Number (GIIN). If there's a name change, the acquiring financial institution would have to change its registration, but not its ID number.
In a case where the acquired bank wants to become a member of the acquiring institution, the buyer can update its registration to include the member and the acquired entity would have to get a new ID number.
In some cases the acquired bank can initiate a transfer to become a member. In that circumstance, it would have to get a new ID number, but wouldn't need to end its FATCA registration.
While these answers are welcome, big questions remain on mergers and bulk acquisitions, according to Tara Ferris, a principal with EY LLP.
For example, she said May 4, banks don't know how they should file the IRS Form 8966, FATCA Report, following these transactions. Most taxpayers, Ferris said, hope the IRS will allow combined reporting similar to that in Revenue Procedure 99-50.
Taxpayers also need to know whether an acquirer should provide reporting known as “preexisting account certifications” for accounts acquired in a merger or bulk acquisition. It's not clear, she said, whether taxpayers need to do that to show they finished their “due diligence” on time.
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Requirements for bulk acquisition and merger events are found in the discussion on Question 18 under the General Compliance section of the FATCA FAQs at https://www.irs.gov/Businesses/Corporations/Frequently-Asked-Questions-FAQs-FATCA--Compliance-Legal.
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