The Wolf Growls ….. The Sheep Howl ….. New IRS Notice on Foreign Account Compliance (FATCA)

19 May

IRS Notice 2014-33 announces that calendar years 2014 and 2015 will be regarded as a transition period, for purposes of enforcement of the dreaded Foreign Account Tax Compliance Act (FATCA) by withholding agents and foreign financial institutions (FFIs).

The Hiring Incentives to Restore Employment Act of 2010 added section 1471 through 1474 to the Internal Revenue Code (Chapter 4 of Subtitle A). Chapter 4 generally requires agents to withhold at a 30 percent rate on certain payments to an FFI, unless the FFI has entered into an agreement to obtain status as a participating FFI and to report information with respect to accounts held by or for U.S. persons.

Chapter 4 also imposes on withholding agents certain withholding, documentation, and reporting requirements with respect to payments made to non-financial foreign entities (NFFEs).

In 2013, Treasury and the Service published final regulations under chapter 4, and issued Notice 2013-43 to preview a revised timeline for implementation of the FATCA requirements. In February 2014, Treasury and the Service released temporary regulations that clarify and modify the final regulations.

The temporary chapter 4 regulations require that withholding agents (including participating FFIs, qualified intermediaries, withholding foreign partnerships, and withholding foreign trusts) begin withholding with respect to payments on or after July 1, 2014, unless the withholding agent can reliably associate the payment with documentation to treat the payment as exempt from withholding under chapter 4 (as opposed to general tax withholding on certain payments to non-residents).

Treasury has released Model 1 and Model 2 intergovernmental agreements (IGAs) to facilitate the implementation of FATCA and to avoid legal impediments under local law that would otherwise limit an FFI’s ability to comply. IRS Announcement 2014-17 provides that the jurisdictions treated as having an IGA in effect would include jurisdictions that, before July 1, 2014, have reached agreements in substance with the United States on the terms of an IGA, and that have consented to be included on the Treasury/IRS lists of such jurisdictions, in addition to jurisdictions that have already signed IGAs. An FFI that is resident in, or organized under the laws of, a jurisdiction that is included on the lists, is permitted to register on the FATCA registration website and certify to a withholding agent its status as an FFI covered by an IGA. As of May 1, 2014, Treasury had signed 30 IGAs, and had agreements in substance with 29 jurisdictions.

2014 and 2015 will be regarded as a transition period for purposes of IRS enforcement and administration of the chapter 4 due diligence, reporting, and withholding provisions, and certain other provisions modified by the temporary coordination regulations. The Service will take into account the extent to which a participating or deemed-compliant FFI, direct reporting NFFE, sponsoring entity, sponsored FFI, sponsored direct reporting NFFE, or withholding agent, has made good faith efforts to comply with the requirements of the regulations.

For example, the Service 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. The Service will also consider the good faith efforts of a participating FFI, registered deemed-compliant FFI, or limited FFI to identify and facilitate the registration of each other member of its expanded affiliated group as required.
Entity obligations issued on or after July 1, 2014

Under the chapter 4 regulations, withholding agents (other than participating FFIs and registered deemed-compliant FFIs) are generally required to implement new account opening procedures beginning on July 1, 2014. A participating FFI is required to implement new account opening procedures on the later of July 1, 2014, or the effective date of its FFI agreement. A registered deemed-compliant FFI is required to implement new account opening procedures on the later of July 1, 2014, or the date on which the FFI registers as a deemed-compliant FFI and receives a global intermediary identification number (GIIN).

Comments, growls and howls have disclosed practical problems in implementation. Treasury and the Service intend to amend the chapter 4 regulations, to allow a withholding agent or FFI to treat an obligation held by an entity that is issued, opened, or executed on or after July 1, 2014, and before January 1, 2015, as a preexisting obligation for purposes of implementing chapter 4. A withholding agent would otherwise be required to document the entity by the earlier of the date a withholdable payment is made, or within 90 days of the date the obligation is issued.

The proposed amendments will not be available for obligations held by individuals, because the procedures for documenting individual accounts are “less complex” than those for documenting entities, and Form W-8BEN (for withholding agents to document individuals) has been published in final form.
Intergovernmental agreements

The Model 1 and Model 2 IGAs contain a provision that allows a partner jurisdiction that has entered into an IGA to receive the benefit of certain more favorable terms that are set forth in a later signed IGA or Annex.

Annex I of future Model 1 and Model 2 IGAs will, for an entity account opened on or after July 1, 2014, and before January 1, 2015, allow an FFI to treat such an account as a preexisting entity account, but without permitting application to such accounts of the $250,000 exception for accounts that are not required to be reviewed, identified, or reported.

Prior to the publication of the proposed amendments to the chapter 4 regulations, a partner jurisdiction may rely on the Notice to permit a reporting Model 1 or 2 FFI to apply the due diligence procedures for documenting entity accounts.
Modification of the standards of knowledge rules

The temporary coordination regulations revised the reason-to-know standard under the general withholding tax regulations, to provide that a withholding agent will have reason to know that documentation establishing the foreign status of a direct account holder is unreliable or incorrect, if the withholding agent has a current telephone number for the account holder in the United States and no telephone number for the account holder outside the United States, or has a U.S. place of birth for the account holder. Treas. Reg. § 1.1441-7(b). The addition of rules concerning a U.S. telephone number and a U.S. place of birth was made to coordinate with chapter 4. The temporary coordination regulations provide a transitional rule to allow a withholding agent that has previously documented the foreign status of a direct account holder for general withholding tax purposes, prior to July 1, 2014, to continue to rely on such documentation without regard to the telephone number or place of birth. The withholding agent would, however, have reason to know that the documentation is unreliable or incorrect, if the withholding agent is notified of a change in circumstances.

Treasury and the Service intend to amend the temporary coordination regulations to provide that a direct account holder will be considered documented prior to July 1, 2014, without regard to whether the withholding agent obtains renewal documentation for the account holder afterwards. Therefore, a withholding agent that has documented a direct account holder prior to July 1, 2014, is not required to apply the new reason to know standards relating to a U.S. telephone number or U.S. place of birth until the withholding agent is notified of a change in circumstances or reviews documentation that contains a U.S. place of birth.
Revision of definition of reasonable statement

A withholding agent may rely on the foreign status of an individual account holder for general withholding tax purposes, irrespective of certain U.S. indicia, if, in certain cases, the account holder provides a reasonable explanation supporting the account holder’s claim of foreign status. A reasonable explanation supporting a claim of foreign status for general withholding tax purposes can be a written statement prepared by an individual, or a checklist provided by a withholding agent stating that the individual meets the regulatory requirements.

The FATCA regulations also describes a reasonable explanation supporting a claim of foreign status. It is substantially similar to the description in the general withholding tax regulations, except that it limits the contents of a reasonable statement to the explanations permitted on the checklist, and does not permit an individual to provide a written explanation other than an explanation that the individual meets the requirements described in the regulations. Treasury and the Service intend to amend the final chapter 4 regulations, to adopt the broader description of a reasonable explanation of foreign status provided in the temporary coordination regulations.
Limited FFIs and limited branches

For any member of an “expanded affiliated group” to obtain status as a participating FFI or registered deemed-compliant FFI, each FFI member must have a chapter 4 status of a participating FFI, deemed-compliant FFI, exempt beneficial owner, or limited FFI. The final regulations also provide that an FFI or branch of a participating FFI must be registered with the Service and agree to certain conditions in order to be treated as a limited FFI or limited branch. Conditions include that the FFI or branch must not open accounts that it is required to treat as U.S. accounts, or accounts held by nonparticipating FFIs, including accounts transferred from any member of its expanded affiliate group.

The Service’s FATCA registration website serves as the primary way for FFIs to register as a participating FFI, registered deemed-compliant FFI, or limited FFI. FFIs that are members of an expanded affiliated group may designate a lead financial institution (Lead FI) to identify member FFIs that will register as participating FFIs, registered deemed-compliant FFIs, or limited FFIs and to perform certain functions with respect to member FFIs.

Howls and moans were heard from jurisdictions that are slow to engage in IGA negotiations and that have legal restrictions impeding their ability to comply with FATCA, including the conditions for limited FFI or limited branch status. The restrictions imposed by the regulations hinders the ability of an FFI to agree to the conditions of limited status due, for example, to requirements under local law to provide individual residents with access to banking services, or to the business needs of the FFI to secure funding from another FFI in the same jurisdiction with similar impediments to complying with the requirements of FATCA.

Treasury and the Service intend to amend the final chapter 4 regulations to permit a limited FFI or limited branch to open U.S. accounts for persons resident in the jurisdiction where the branch or FFI is located, and accounts for nonparticipating FFIs that are resident in that jurisdiction, provided that the FFI or branch does not solicit U.S. accounts from persons not resident in, or accounts held by nonparticipating FFIs that are not established in, that jurisdiction. The FFI (or branch) must not be used by another FFI in its expanded affiliated group to circumvent the regulations.

Certain jurisdictions are explicitly prohibiting an FFI resident in, or organized under the laws of, the jurisdiction, from registering with the Service and agreeing to any status, including as limited FFI. Treasury and the Service intend to amend the final chapter 4 regulations to provide that such a prohibition will not prevent the members of its expanded affiliated group from obtaining status as participating FFIs or registered deemed-compliant FFIs, if the ill-fated FFI is identified as a limited FFI on the FATCA registration website by a member of the expanded affiliated group that is a U.S. financial institution or an FFI seeking status as a participating FFI. If the Lead FI is prohibited from identifying the limited FFI by its legal name (why and by whom??), it will be sufficient if the Lead FI uses the term “Limited FFI” in place of its name and indicates the FFI’s jurisdiction of residence or organization.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: