Certain FATCA Effective Dates Delayed by Six Months and Other Guidance Provided
On July 12, 2013, in Notice 2013-43 (the "Notice"), the Internal Revenue Service ("IRS") announced a six-month extension of the effective dates for certain key requirements under the Internal Revenue Code ("Code") provisions known as the Foreign Account Tax Compliance Act ("FATCA"). In addition, the IRS and the Treasury Department have provided additional guidance concerning the ongoing negotiations of Intergovernmental Agreements ("IGAs") with foreign jurisdictions (including the Cayman Islands and British Virgin Islands) that will provide an alternative method for funds located in such jurisdictions to comply with FATCA.
FATCA was added to the Code in 2010 and requires withholding agents to withhold 30 percent of certain payments to an offshore investment fund or other category of foreign financial institution (collectively, "FFIs") unless the FFI has entered into an agreement with the IRS to, among other things, report certain information with respect to its U.S. accounts. FATCA also imposes on withholding agents certain withholding, documentation and reporting requirements with respect to certain payments made to certain non-financial foreign entities.
In January 2013, The Treasury Department and IRS published final Regulations under FATCA, which provided for a phased implementation of the FATCA requirements, beginning on January 1, 2014, and continuing through 2017. However, Treasury and IRS have now decided that FFIs and withholding agents will need more time to comply with the FATCA regulations and the IGAs, many of which have not yet been finalized.
II. Revised FATCA Implementation Timeline
Set forth below is a summary of the important changes to FATCA implementation as described in the Notice:
A. FATCA Withholding Commencement Dates.
The final Regulations provided that FATCA withholding with respect to certain U.S.-source fixed or determinable ("FDAP") income would begin on January 1, 2014, and that withholding on gross proceeds from the disposition of U.S. stocks and debt instruments would begin on January 1, 2017. The Notice postpones the date for such withholding on FDAP income by six months to July 1, 2014. The commencement date for withholding on gross proceeds is not affected and thus remains January 1, 2017.
B. Definition of Grandfathered Obligations.
The final Regulations provided that FATCA withholding would not apply to debt instruments and certain other obligations (not including stock) which are outstanding on January 1, 2014, or which are issued pursuant to agreements in place on January 1, 2014 ("Grandfathered Obligations"). The Notice now provides that the term Grandfathered Obligations includes such obligations outstanding on July 1, 2014.
C. Registration of FFIs.
The final Regulations provided that offshore funds and other FFIs would be required to register with the IRS through an online website ("Portal"), obtain a Global Intermediary Identification Number ("GIIN") and, unless exempted under an applicable IGA or an exemption in the Regulations, enter into an FFI Agreement online with the IRS. The Portal was expected to be open by July 15, 2013. The IRS was to publish its first list of compliant FFIs (and their GIINs) on December 2, 2013. In order to be on such list, an FFI would have to register with the IRS by October 25, 2013. The Notice postpones the opening of the Portal until August 19, 2013. The IRS posting of the first electronic list of compliant FFIs has been postponed to June 2, 2014. In order to be on the first IRS list of compliant FFIs, an FFI must now complete its registration no later than April 25, 2014. Between August 19th and December 31, 2013, clients can use the Portal to input preliminary information and organize their registration efforts. No submissions will be treated as final, however, until the registrant updates and finalizes the submission in 2014.
D. Timeline for Implementing New Account Opening Procedures.
The deadlines for implementing new account opening procedures has been postponed six months to July 1, 2014.
E. Timeline for Completing Due Diligence for Preexisting Accounts
The deadlines for performing required due diligence on "preexisting accounts" has also been postponed six months, and thus will now be July 1, 2015 for preexisting high value accounts and July 1, 2016 for other preexisting accounts. The term "preexisting account" is also modified to mean accounts maintained as of June 30, 2014.
F. Expiration of Forms W-8 and Certain Other Forms Delayed.
The Notice provides that withholding certificates and documentary evidence that would otherwise expire on December 31, 2013, will expire instead on June 30, 2014, unless a change in circumstances occurs that would otherwise render the withholding certificate or documentary evidence incorrect or unreliable. Similarly, Qualified Intermediary, Withholding Trust and Withholding Partnership Agreements with the IRS otherwise expiring on December 31, 2013, will now expire on June 30, 2014.
G. Due Date for First Information Reporting.
The FATCA Regulations provided that a participating FFI would be required to file information reports on its U.S. accounts with respect to the 2013 and 2014 years no later than March 31, 2015. Under the Notice, the deadline for the first filing will continue to be March 31, 2015. However, such filing will only include 2014 tax information with respect to accounts identified by the FFI as U.S. accounts by December 31, 2014. Thus, there will be no FATCA reporting with respect to the 2013 calendar year. This modification to the start date for required reporting will also apply automatically to offshore funds and other FFIs covered by Model 1 IGAs.
III. Recent Developments Relating to Intergovernmental Agreements (IGAs)
To make FATCA compliance feasible, particularly for FFIs in jurisdictions where existing laws (such as data protection issues) prohibit such reporting, the final Regulations contemplated that the United States would enter into IGAs with other countries for the implementation of FATCA. To date nine IGAs have been signed and the U.S. is reportedly in related conversations with more than 80 countries. The Treasury Department has issued two model forms for IGAs.
MODEL 1 IGAs. Under a Model 1 IGA, the FFIs resident in the jurisdiction covered by such IGA would satisfy their FATCA reporting obligations by reporting tax information about their U.S. accounts to their respective tax authorities rather than directly to the IRS. The foreign tax authority would then submit that information to the IRS. Many jurisdictions, including the Cayman Islands and British Virgin Islands, have announced that they intend to enter into a Model 1 IGA with the U.S. Investment funds resident in such jurisdictions would still be required to register on the IRS Portal and obtain a GIIN, but would not be required to enter into an FFI Agreement with the IRS.
MODEL 2 IGAs. A few jurisdictions, including Switzerland, Bermuda and Japan, have signed or indicated an intention to enter into the Model 2 IGA. Under this type of IGA, FFIs in such jurisdictions would be required to register on the IRS' Portal, obtain a GIIN, enter into the FFI Agreement with the IRS and report tax information directly to the IRS, rather than the foreign tax authority. Such FFIs would also be subject to the remaining requirements of the final FATCA regulations except to the extent such requirements are modified in the Model 2 IGA.
Changes made by the Notice. The Notice states that a jurisdiction will be treated as having an IGA in effect (meaning that funds and other FFIs that are resident in such jurisdiction may rely on the procedures set forth in such IGA) if the jurisdiction has signed an IGA, even if the IGA has not yet been brought into force (e.g., because required legislation in the foreign jurisdiction has not yet been enacted). The IRS will post and update a list of the jurisdictions that have signed Model 1 IGAs and Model 2 IGAs on its website. This list will provide needed certainty to funds and other FFIs in jurisdictions (such as Cayman and BVI) that have entered into or are in the process of entering into Model 1 IGAs with respect to their ability to register on the IRS Portal as "registered deemed compliant FFIs".
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