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FATCA FINAL REGULATIONS PRIMER

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The Foreign Account Tax Compliance Act (“FATCA”) became law in March 2010 and will enter into effect on July 1, 2014. The policy rationale is to reduce U.S. tax evasion by improving the information available to the IRS about the offshore accounts of U.S. persons. FATCA’s goal is to require foreign financial institutions (“FFI”s) and all other non-financial foreign entities (“NFFE”s) to provide information to the IRS identifying U.S. persons invested in non-U.S. banks and securities accounts. To achieve this goal, FATCA imposes a new 30% withholding tax on U.S. source interest, dividends, other U.S. source passive type income (so-called fixed, determinable, annual, periodical (“FDAP”) income) and gross proceeds from the disposition of any property of a type that can produce U.S. source interest or dividends.

On January 17, 2013, the U.S. Treasury and Internal Revenue Service published the final Foreign Account Tax Compliance Act regulations (the “Final Regulations”). The Final Regulations adopted many industry comments, apply a risk-based approach, and simplify administration by allowing many institutions to leverage off existing information reporting rules. Specifically, the Final Regulations (i) coordinate the obligations for financial institutions under the regulations and the governmental agreements, (ii) align the timelines for due diligence, reporting and withholding with the intergovernmental agreements (“IGAs”), (iii) expand and clarify the scope of payments not subject to withholding – notably regarding the grandfathered obligations, (iv) refine and clarify the treatment of investment entities, low-risk institutions or passive investments entities and, (v) clarify the compliance and verification obligations of FFIs such as group of financial institutions.

It is important to assess your needs and related expenditures for FATCA compliance. Significant lead time is required to properly perform a compliance risk assessment and evaluate any required modifications to your existing systems.

FATCA Updates

Notice 2014-33
May 13, 2014

On May 2, 2014, less than two months before the implementation of withholding and due diligence requirements mandated by FATCA, the Department of Treasury and the Internal Revenue Service released Notice 2014-33 announcing limited transitional relief.

Calendar years 2014 and 2015 will be treated as a transition period for purposes of IRS enforcement and administration of withholding agents and foreign financial institutions. As a result, for the first 18 month period of FATCA implementation, audited entities will be treated leniently, provided they have proof of making best efforts to comply with FATCA.

Such good faith efforts to comply must be well documented with respect to each of the applicable obligations: due diligence, withholding and reporting. An entity that has not taken administrative action will still be subject to potential penalties for FATCA underreporting and/or withholding. Written procedures and policies as well as the ability to provide proof of concept for a FATCA implementation project will advocate in favor of the entity’s diligence to comply.

In addition to providing a transitional period, Notice 2014-33 announces modifications to the regulations regarding the extension of obligations treated as pre-existing obligations; the conditions that an entity must meet to register as a limited FFI or branch; and new definitions for “standard of knowledge” and “reasonable explanation of foreign status.”

IGA Status Update
May 12, 2014

As we approach FATCA’s July 1st, 2014 deadline, there has been a notable increase in IGAs. More than 30 have been officially signed thus far, including Belgium, Luxembourg, Australia and Austria. During the same period, the IRS has acknowledged more than 30 agreements that have been reached in substance and will be given the same effect as signed agreements. The most recent addition to this ever-growing list of countries is Hong Kong.

FFIs organized in the jurisdiction of one of these countries will be able to register as Model 1 or Model 2 reporting FIs, gaining the major benefit of avoiding Limited FI or Non-Participating FI FATCA status. An FI in a Model 1 jurisdiction also benefits from the extended deadline of January 2015 to provide a GIIN (6-month delay for registration).

View the growing list of IGAs here.

Canada Signs a Model 1 IGA
February 5, 2014

On February 5, 2014, Canada became the 22nd nation to enter into an intergovernmental agreement (“IGA”) with the United States to implement FATCA. The signed agreement is a Reciprocal Model 1, meaning Canadian financial institutions will report to the Canadian Revenue Service (“CRS”), which will in turn report to the IRS. In addition, the reciprocal nature of the agreement calls for the U.S. to exchange information with CRS regarding the U.S. accounts of Canadian nationals. This particular IGA has been hotly anticipated, as Canadian opposition to FATCA has been vocal. Interestingly, the resultant IGA is very similar to those previously negotiated, despite claims by the Canadian Minister of Finance that significant exemptions have been obtained. Ultimately, the IGA will provide exemption for retirement-type accounts and tax-advantaged accounts, as well as removing from scope certain small deposit-taking institutions.

IGA Status Update
February 5, 2014

With registration open and FATCA going into effect on July 1, 2014, the rate of nations signing International Governmental Agreements (“IGAs”) with the IRS has steadily increased. Since November, 2013, the following Governments have signed an IGA:

  • Model 1: Canada, Cayman Islands, Costa Rica, Denmark, France, Guernsey, Hungary, Isle of Man, Italy, Jersey, Malta, Mauritius, and the Netherlands.
  • Model 2: Bermuda

These nations join the existing signatories of Germany, Ireland, Mexico, Norway, Spain, the United Kingdom, Japan (Model 2), and Switzerland (Model 2) for a total of 22 nations. In addition, at least 9 countries have reached an agreement in substance, and numerous others are reported to be in negotiation with the U.S.

Tax Forms Issued or Modified to Implement FATCA: Form W9
August 30, 2013

In August 2013, the updated Form W-9 was released incorporating the representations required for FATCA purposes. This new W-9 will have to be populated and provided by U.S. persons to their foreign financial institutions (“FFI”) which maintain their account(s) to certify their status as a U.S. person. In the wake of this identification, the participant FFI will report to the IRS on the new Form 8966 by March 31, 2015 the U.S. accounts held with the name, address, and taxpayer identification number (TIN) of the holders as well as their account number(s), account(s) balance or value, and, as required by the IRS, gross receipts and gross withdrawals or payments from the account. In case the U.S. account holder is exempt from FATCA reporting, it will complete the field “Exemption from FATCA reporting code (if any)”. Among the exempt payees, it is worth noting the following: code D - corporation which stock is regularly traded on one or more established securities markets, code E - the corporation of an expanded affiliate group, code F - dealer, code G - real estate investment trust, code H - regulated investment company, code I - common trust fund, code J - bank and code K - broker. This Form W-9 will also be required to document an account maintained in the U.S., outside the scope of FATCA, in such a case, the field regarding the exemption from FATCA reporting will be left blank. To comply with such changes requires updates to internal processes and procedures along with technical training. Please, reach out for more details on cost-effective and tailor-made solutions.

Further FATCA Information

FATCA Regulations

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