Last Substantial Package of FATCA Regulations Released; Deadlines Approaching
On February 20, 2014, the U.S. Department of the Treasury and Internal Revenue Service (IRS) released the last substantial package of regulations necessary to implement the Foreign Account Tax Compliance Act (FATCA). The proposed and temporary regulations make additions and clarifications to previously issued FATCA regulations and provide guidance to coordinate FATCA rules with preexisting due diligence, reporting, and withholding requirements under other chapters of the U.S. Internal Revenue Code (Code).
Background. FATCA, enacted in 2010, added a chapter to the Code that generally 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. On January 28, 2013, final FATCA regulations were published. The Treasury Department and the IRS have also 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 the new 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.
The proposed and temporary regulations. The proposed and temporary regulations signify a large step towards implementing FATCA in advance of compliance deadlines, and provide a great deal of clarity with respect to certain reporting and diligence requirements, as well as coordination with other parts of the Code. For example:
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The temporary regulations provide certain NFFEs with elections to be treated as direct reporting NFFEs or sponsored direct reporting NFFEs, in which case they will report information about their substantial U.S. owners directly to the IRS rather than to withholding agents, and be treated as an excepted NFFE. Therefore, an account held by a direct reporting NFFE will not be treated as a U.S. account.
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Existing life insurance contracts that contain a provision permitting a substitution of an insured are eligible for grandfathered status.
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A withholding agent, with respect to a preexisting account that it maintains, is allowed to rely on documentation furnished by a payee for a preexisting account held at another branch of the withholding agent or a branch of another expanded affiliated group member solely to determine the FATCA status of the account holder if: (i) the withholding agent obtains and reviews copies of such documentation supporting the FATCA status of the payee and (ii) the withholding agent has no reason to know that, when the documentation is obtained by the withholding agent, the documentation is unreliable or incorrect.
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A participating FFI may satisfy its FATCA withholding obligations for certain withholdable payments by electing for backup withholding to apply.
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The temporary regulations clarify the treatment of a disregarded entity when such an entity is treated as a branch of an FFI. For example, the Global Intermediary Identification Number (GIIN) verification procedures that apply with respect to a branch of an FFI also apply with respect to a disregarded entity that is owned by an FFI.
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The new temporary regulations remove the grantor trust rule in the definition of account holder in the final regulations so that the general rule for treating an entity as an account holder will apply to treat a grantor trust as the account holder. Accordingly, a grantor trust that holds an account must provide documentation of its FATCA status as an FFI or NFFE.
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The final regulations provide that an entity is a custodial institution if at least 20 percent of the entity’s gross income is attributable to holding financial assets for others and related financial services. The temporary regulations modify the final regulations to define income attributable to holding financial assets to include fees for providing financial advice with respect to financial assets held in (or to be held in) custody by the entity.
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Certain investment advisors and investment managers that do not maintain financial accounts have been added as entities eligible for treatment as certified deemed-compliant FFIs.
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In determining whether a person is a “substantial U.S. owner” that owns, directly or indirectly, more than 10% of a foreign corporation, partnership, or trust, a person must have direct or indirect ownership in the entity before the aggregation rules apply, such that a substantial U.S. owner does not include an individual with no ownership interest other than an interest attributed to him from a related person.
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The temporary regulations provide that certain withholding certificates or documentary evidence that would otherwise expire under certain general withholding tax rules on December 31, 2013, will not be treated as invalid until January 1, 2015, unless a change in circumstances occurs before that date.
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A withholding certificate generally must include a taxpayer identification number (TIN) in order for a withholding agent to treat the withholding certificate as valid. The temporary regulations provide an exception from the TIN requirement for a withholding certificate on which a beneficial owner claims treaty benefits and instead provides its foreign TIN, as an alternative to providing a U.S. TIN.
Future guidance is still forthcoming regarding, for example, certain forms that will need to be delivered pursuant to FATCA and verification requirements of sponsoring entities.
We also note that the regulations have been submitted to the Office of the Federal Register (OFR) for publication and are currently pending placement on public display at the OFR and publication in the Federal Register. The version of the regulations that were released may vary slightly from the published document if minor editorial changes are made during the OFR review process. The document published in the Federal Register will be the official document.
Deadlines approaching. Notwithstanding that some guidance is still forthcoming, withholding agents and domestic and foreign companies alike should be aware that FATCA deadlines are approaching. The registration portal (for financial institutions) has been open for such institutions to obtain their GIINs, with April 25, 2014, being the final day to register for guaranteed inclusion on the first registered FFI list (to avoid withholding). Starting July 1, 2014, a 30% U.S. withholding tax will apply to payments of certain U.S. source income (e.g., dividends, interest, insurance premiums) made to certain FFIs and NFFEs. For examples of other approaching deadlines, please refer here.
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