FATCA’s July 1 Effective Date Has Arrived; Last-Minute Guidance Has Been Issued
July 1, 2014, marks the effective date of the Foreign Account Tax Compliance Act (FATCA). In the last several weeks, the U.S. Department of the Treasury (Treasury) and Internal Revenue Service (IRS) have released numerous pieces of additional guidance to assist in the implementation of FATCA and its coordination with other withholding and information reporting requirements under the U.S. Internal Revenue Code (Code). While transitional rules will delay certain aspects of FATCA, July 1 is still a notable deadline for instituting internal compliance procedures and starting withholding on certain types of accounts.
Background. FATCA, enacted in 2010, requires U.S. withholding agents to withhold tax on certain payments to foreign financial institutions (FFIs) that do not agree to report certain information to the IRS regarding their U.S. accounts, and on certain payments to certain nonfinancial foreign entities (NFFEs) that do not provide information on their substantial U.S. owners to withholding agents.
Since publication of final FATCA regulations on January 28, 2013, Treasury and the IRS have issued additional guidance, including Notice 2013-43 (2013-31 I.R.B. 113), which previewed revised timelines for implementation of the FATCA requirements (adopted by subsequently issued temporary regulations) and provided additional guidance concerning the treatment of FFIs located in jurisdictions that have signed intergovernmental agreements for the implementation of FATCA (IGAs) but have not yet brought those IGAs into force.
On February 20, 2014, Treasury and IRS released what was then considered the last substantial package of regulations necessary to implement FATCA. The proposed and temporary regulations (T.D. 9657 and T.D. 9658) made additions and clarifications to previously issued FATCA regulations and provided guidance to coordinate FATCA rules with preexisting due diligence, reporting, and withholding requirements under other chapters of the Code. (See “Last Substantial Package of FATCA Regulations Released; Deadlines Approaching.” )
On May 2, 2014, the IRS released Notice 2014-33 (2014-21 I.R.B. 1033), which announced that calendar years 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, FFIs, and other entities with FATCA compliance responsibilities, and with respect to certain related due diligence and withholding provisions that were revised in regulations issued earlier this year. Among other things, the Notice also announced the intention of the Treasury and the IRS to further amend the applicable regulations to provide that a withholding agent or FFI may treat an obligation (which includes an account) held by an entity that is opened, executed, or issued on or after July 1, 2014, and before January 1, 2015, as a preexisting obligation for purposes of sections 1471 and 1472 of the Code, which would mean a possible delay in FATCA withholding for those obligations.
Recent additional guidance. Several pieces of additional guidance for FATCA implementation have been released in the last few weeks, including instructions to certain withholding certificates ( Forms W-8BEN-E and W-8IMY), information returns for withholding agents ( Form 1042-S), and the FATCA Report (Form 8966).
Rev. Proc. 2014-38 (2014-29 I.R.B.) updates the agreement entered into by an FFI with the IRS to be treated as a participating FFI under section 1471(b) of the Code and Regulations section 1.1471-4.
Rev. Proc. 2014-39 (2014-29 I.R.B.) provides guidance for entering into a qualified intermediary (QI) withholding agreement with the IRS under Regulations section 1.1441-1(e)(5). The objective of the QI agreement is to allow a foreign intermediary to assume the withholding and reporting obligations for payments of income (including interest, dividends, royalties, and gross proceeds) made to its account holders or payees through one or more foreign intermediaries or flow-through entities.
The Treasury also just issued corrections to T.D. 9657 and T.D. 9658, with the corrections being effective on July 1, 2014.
July 1 is still important. Notwithstanding that Notice 2014-33 and the transitional rules in the temporary regulations delay certain aspects of FATCA, July 1 is still the applicable date for applying the grandfathering rules for certain obligations. Payments made under or with respect to grandfathered obligations are not subject to FATCA withholding.
Withholding agents and FFIs need to be instituting internal compliance and diligence procedures to be FATCA-ready.
New accounts opened between July 1 and December 31 of this year that are owned by individuals are not eligible for the expansion of “preexisting obligations” under Notice 2014-33 (and are therefore not eligible for the transitional diligence and withholding rules that apply to preexisting obligations).
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.
The IRS will not regard calendar years 2014 and 2015 as a transition period with respect to the requirements of chapters 3 and 61 of the Code, and section 3406 of the Code (i.e., other withholding and reporting rules under the Code), that were not modified by the temporary coordination regulations. For example, the IRS will not provide transitional relief with respect to its enforcement regarding a withholding agent's determinations of the character and source of payments for withholding and reporting purposes.
FFIs that have not yet registered with the IRS for a Global Intermediary Identification Number (GIIN) need to do so promptly in order to avoid future withholding. Click here for more information on FFI registration.
Please contact us if you have any questions regarding the FATCA deadlines, your compliance obligations or require assistance in your implementation of internal compliance procedures.
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