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FATCA Timelines Announced by IRS for Withholding Agents, Foreign Financial Institutions in Announcement 2012-42; 2012-47 IRB

Posted in Real Estate, Tax

Announcement 2012-42 (10/24/2012) sets forth timelines for withholding agents and foreign financial institutions (FFIs) to meet the requirements set forth under the Foreign Account Tax Compliance Act (“FATCA”). The rules prescribed in Announ. 2012-42 are to be incorporated in pending final FATCA regulations to Sections 1471 thru 1474.

In general, withholding agents, including participating FFIs and registered deemed-compliant FFIs, must implement new account opening procedures by January 1, 2014. That is approximately 16 months from now. The definition of the term “preexisting obligation” will be modified in the final regulations in an effort to distinguish between a participating FFI, a registered deemed-compliant FFI, and a withholding agent other than a participating FFI or a registered deemed-compliant FFI.

 

Transition Relief for “Pre-existing Obligations”

Announcement 2012-42 includes transition rules for completing due diligence on pre-existing obligations. Withholding agents, except participating FFIs, will be required under the final regulations to have appropriate records in place by June 30, 2014, which payees are ‘rima facie FFIs. A withholding agent will not be required to withhold on payments made to a prima facie FFI regarding a pre-existing obligation before July 1, 2014, unless the withholding agent has documentation establishing the payee’s status as a non-participating FFI. Commencing July 1, 2014, a withholding agent must treat a payee that is a prima facie FFI as a non-participating FFI until the date the withholding agent obtains documentation establishing that the payee should have a different status.

The final regulations, as explained in the Announcement, will provide that within six months after the effective date of its FFI agreement, a participating FFI will be required to perform the requisite identification procedures and obtain the appropriate documentation to determine whether a prima facie FFI payee is itself a participating FFI, a deemed-compliant FFI, or a nonparticipating FFI.

 

FATCA: Enacted Into Law As part of the “HIRE Act” of 2010

 

On March 18, 2010, the Hiring Incentives to Restore Employment Act of 2010, Pub. L. 111-147 (H.R. 2847), added Sections 1471 through 1474 (chapter 4), i.e., the Foreign Account Tax Compliance Act, or FATCA. Chapter 4 requires withholding agents to withhold 30% of certain payments to an FFI unless the FFI has entered into a formal written agreement (FFI agreement) with the IRS to, among other things, report certain information with respect to U.S. accounts. Sections 1471-1474 set forth additional rules applicable to a withholding agent’s withholding, documentation, and reporting obligations for certain payments made to certain other foreign entities.

 

Proposed Regulations under FATCA were issued in February 2012. (REG-121647-10, 77Fed. Reg. 9022). On July 26, 2012, the Treasury Department released a model for bilateral agreements with other jurisdictions (in both reciprocal and nonreciprocal versions) under which FFIs would satisfy their FATCA obligations by reporting information about U.S. accounts to their respective tax authorities, followed by the automatic exchange of that information on a government-to-government basis with the United States. Such agreements were necessary to satisfy bilateral income tax convention partners who felt that strict compliance with FATCA would be costly and burdensome. The model agreement outlines time frames for FFIs in partner jurisdictions to complete the necessary due diligence to identify U.S. accounts. On June 21, 2012, the Treasury Department announced its desire to set forth a second model agreement, under which financial institutions in the partner jurisdiction would report specified information directly to the IRS in a manner consistent with the FATCA regulations, supplemented by government-to-government exchange of information on request. The Treasury Department intends to conclude bilateral agreements (“Intergovernmental Agreements”) based on the model agreements.

Those of us who have been following developments in this area are aware of the concerns and criticisms that the FATCA provisions and proposed regulations have raised. Many of the comments are highly technical in nature but still have dramatic practical impacts once the final regulations are issued and the reporting obligations are triggered. The Announcement attempts to readjust the timelines in response to the problems in coping with the new rules.

 

Timeline for Implementing New Account Opening Procedures and the Definition of Preexisting Obligations

Withholding agents, including participating FFIs and registered-deemed compliant FFIs, generally will be required to implement new account opening procedures by January 1, 2014. Accordingly, the definition of the term “preexisting obligation” (currently set forth in Prop. Reg. § 1.1471-1(b)(48)) will be modified in the final regulations to include:

(i) as to a withholding agent other than a participating FFI or a registered deemed-compliant FFI: any account, instrument, or contract maintained or executed by the withholding agent prior to January 1, 2014;

(ii) as to a  participating FFI: any account, instrument, or contract maintained or executed by the participating FFI prior to the later of January 1, 2014, or the date that the participating FFI’s FFI agreement becomes effective (the final regulations will provide that an FFI agreement entered into prior to January 1, 2014, will have an effective date of January 1, 2014); and

(iii) as to a registered deemed-compliant FFI: any account, instrument, or contract maintained or executed by the FFI prior to the date on which the FFI implements its required account opening procedures. A registered deemed-compliant FFI must implement any required account opening procedures by the later of January 1, 2014, or the date on which the FFI registers as a deemed-compliant FFI.

 

Transition Rules for Completing Due Diligence on Preexisting Obligations

Withholding and Documentation for Prima Facie FFIs

Withholding Agents other than Participating FFIs.  

Pre-existing Obligations. As to pre-existing obligations, the final regulations will provide that withholding agents, other than participating FFIs, must document document payees that are prima facie FFIs by June 30, 2014. See  Prop. Reg. § 1.1471-2(a)(4)(ii)( as modified in the final regulations a withholding agent will not be required to withhold on payments made to a prima facie FFI with respect to a preexisting obligation prior to July 1, 2014, unless the withholding agent has documentation establishing the payee’s status as a nonparticipating FFI).  Beginning on July 1, 2014, a withholding agent will be required to treat a payee that is a prima facie FFI as a nonparticipating FFI until the date the withholding agent can document a different status for application of the FATCA rules.

Participating FFIs. With respect to a preexisting obligation, the final regulations will provide that a participating FFI will be required to perform the requisite identification procedures and obtain the appropriate documentation to determine whether a prima facie FFI payee is itself a participating FFI, deemed-compliant FFI, or nonparticipating FFI within six months after the effective date of its FFI agreement (that is, by June 30, 2014, for any FFI that enters into an FFI agreement on or before December 31, 2013). The rule set forth in Prop. Reg. § 1.1471-4(c)(3) will be modified accordingly. In addition, the final regulations will provide that the presumption rules set forth in Prop. Reg. § 1.1471-3(f) will begin to apply to a prima facie FFI payee with respect to a preexisting obligation six months after the effective date of the payor FFI’s FFI agreement.

 

Withholding and Documentation for other Preexisting Entity Obligations

Withholding Agents other than Participating FFIs. The Announcement provides that the final regulations will require that withholding agents, other than participating FFIs, will be required to document payees that are entities other than prima facie FFIs by December 31, 2015. Prop. Regs. §§ 1.1471-2(a)(4)(ii) and 1.1472-1(b)(will be modified accordingly).  Beginning on January 1, 2016, a withholding agent will be required to treat any undocumented payee that is treated as a foreign entity but that is not a prima facie FFI as a nonparticipating FFI until the date the withholding agent obtains documentation sufficient to establish a different chapter 4 status of the payee.

Participating FFIs. The final regulations will modify Prop. Reg. § 1.1471-4(c)(3) to provide that a participating FFI will be required to perform the requisite identification procedures and obtain the appropriate documentation to determine whether an entity, other than a prima facie FFI, is itself a participating FFI by the later of December 31, 2015, or the date that is two years after the effective date of its FFI agreement. The final regulations will also provide that a participating FFI will not be required to apply the presumption rules (currently set forth in Prop. Reg. § 1.1471-3(f)) to such accounts until the day after the date (described above) by which the participating FFI is required to perform the identification procedures and obtain the appropriate documentation.

Withholding and Documentation Requirements of Participating FFIs for Preexisting Individual Accounts

Preexisting High-Value Accounts. A participating FFI has a greater standard of due diligence in documenting and identifying  preexisting individual accounts that are “high-value accounts” (see Prop. Reg. § 1.1471-4(c)(8)(i)) by the later of December 31, 2014, or the date that is one year after the effective date of the FFI’s FFI agreement. Final regulations will modify the rule set forth in Prop. Reg. § 1.1471-5(g)(3)(i)(B) to provide that after the date described above, a participating FFI must treat any preexisting account that is a high-value account as held by a recalcitrant account holder unless the participating FFI has performed the requisite identification procedures and obtained the appropriate documentation.

Preexisting Accounts other than High Value Accounts. A participating FFI must perform the required identification procedures and receive the required documentation to identify preexisting individual accounts (other than high-value accounts) prior to the later of December 31, 2015, or the date that is two years after the effective date of the FFI’s FFI agreement. See  Prop. Reg. § 1.1471-5(g)(3)(i)(A)(a participating FFI must treat any pre-existing individual account, other than a high-value account, as held by a recalcitrant account holder unless the participating FFI has performed the requisite identification procedures and obtained the appropriate documentation.

 

Due Date for First Report of a Participating FFI With Respect to U.S. Accounts

 

The Announcement states that final regulations will modify the rule set forth in Prop. Reg. § 1.1471-4(d)(7)(v)(B) to provide that a participating FFI will be required to file the information reports with respect to the 2013 and 2014 calendar years not later than March 31, 2015.

 

Gross Proceeds Withholding

 

The Announcement states that final regulations will modify Prop. Reg. § 1.1473-1(a)(1)(ii) to provide that the term “withholdable payment” includes gross proceeds from any sale or other disposition occurring after December 31, 2016, of any property of a type that can produce interest or dividends that are U.S. source FDAP income.

 

Clarification of Application of FATCA to Grandfathered Obligations

 

The final regulations will be revised to set forth added categories of obligations. The Announcement states that Prop. Reg. § 1.1471-2(b)(2) will be amended to provide that the term “grandfathered obligation” includes any obligation that produces or could produce a foreign passthru payment and that cannot produce a withholdable payment, provided that the obligation is outstanding as of the date that is six months after the date on which final regulations defining the term “foreign passthru payment” are filed with the Federal Register.  Another revision will be that the term “grandfathered obligation” will include any instrument that gives rise to a withholdable payment solely because the instrument is treated as giving rise to a dividend equivalent pursuant to Section 871(m) and the regulations thereunder, provided that the instrument is outstanding on the date that is six months after the date on which instruments of its type first become subject to such treatment. Finally, the term “grandfathered obligation” will include any obligation to make a payment with respect to, or to repay, collateral posted to secure obligations under a notional principal contract that is a grandfathered obligation.

 

The Annoucement ends with a summary of the various effective dates based on the nature of the obligation and withholding agent, etc.