On May 2, 2014 the U.S. Department of the Treasury and the Internal Revenue Service (IRS) issued Notice 2014-33, which promised to soften the implementation of FATCA in respect of IRS enforcement and administration obligations, good faith actors and also specifically in respect of pre-existing entity accounts.  Withholding agents and FFIs should welcome this news given the significant operational challenges to ensure compliance with new or even non-existent laws, regulations, forms and/or regulatory guidance in time for FATCA’s effective date on July 1, 2014.

First, withholding agents and Foreign Financial Institutions (FFIs) that act in “good faith” to comply with their FATCA obligations will be sheltered from IRS enforcement and administration obligations during an 18-month transition period from July 1, 2014 to December 31, 2015.

Second, withholding agents and FFIs now have until June 30, 2016 to complete FATCA customer due diligence obligations regarding entity accounts opened before January 1, 2015.  The balance or value is irrelevant if the account is opened from July 1, 2014 to December 31, 2014.  The balance or value is only relevant for entity accounts that exist on June 30, 2014[1].  Entity accounts closed prior to that date are irrelevant. Entity accounts opened from January 1, 2015 onwards must be documented by the earlier of the date a withholdable payment is made with respect to the account or within 90 days of the date the account is opened.

Immediate effect

Taxpayers and IGA partner jurisdictions may rely upon the Notice with immediate effect pending the Treasury’s proposed amendments to the FATCA regulations and IGAs.  IGA partner jurisdictions include countries that have signed Intergovernmental Agreements or which the Treasury recognizes as having reached agreement in substance on an IGA.

Rationale

These changes are intended to address concerns expressed by various financial institutions and organizations such as the U.S. Securities Industry and Financial Markets Association (SIFMA).  The IRS has previously provided similar transition periods for compliance with new or significantly revised due diligence, reporting, and withholding rules.

Soft-opening for good faith actors

The IRS will regard calendar years 2014 and 2015 as a transition period for the purposes of IRS enforcement and administration of obligations under FATCA and the temporary coordination regulations modifying Chapter 3 – non-resident aliens, Chapter 61 – Information and Returns, and 3406 – backup withholding.   The IRS will take into account the extent to which entities with FATCA obligations have made “good faith” efforts to comply.  The IRS will not give any enforcement relief to an entity with FATCA obligations that has not made good faith efforts to comply with FATCA during the transition period.

The meaning of “good faith”

FFIs must take their GIIN registration obligations seriously and FFIs and withholding agents must implement a FATCA compliance program.   We infer this from the Treasury’s two examples of good faith.  First, an FFI must make reasonable efforts to identify and facilitate the registration of each other member of its expanded affiliated group because the “EAG” concept requires a more nuanced understanding of FATCA’s implications.  Second, a withholding agent must make reasonable efforts to modify its account opening practices and procedures to document payees’ FATCA status, apply the prescribed standards of knowledge, and, in the absence of reliable documentation, apply the prescribed presumption rules for account holder classification.  The IRS already has detailed rules for determining whether a taxpayer acted in “good faith” in the context of tax liabilities (26 CFR  1.6664-4).

Soft opening for pre-existing entity obligations

Withholding agents and FFIs may treat any obligation held by an entity that is issued, opened, or executed on or after July 1, 2014, and before January 1, 2015, as a pre-existing obligation for purposes of the due diligence and withholding requirements applicable to pre-existing obligations.

A withholding agent is not required to withhold or report on pre-existing obligations to entities in respect of the following payments:

  1. A payment prior to January 1, 2015 to an entity that is not a prima facie FFI[2] unless the withholding agent has documentation indicating that payee is a passive NFFE with one or more substantial US owners.
  2. A payment made prior to January 1, 2016 to an entity that is a prima facie FFI if the withholding agent has obtained documentation sufficient to establish payee is not an NPFI.

Two exclusions: individuals and other withholding obligations

Withholding agents and FFIs must recognize that their FATCA obligations apply to all new individual accounts opened on or after July 1, 2014 because there is no change to the definition of pre-existing individual accounts. Withholding agents must also recognize that the Notice does not affect any pre-FATCA withholding requirements not modified by the temporary regulations designed to coordinate Chapter 4 (FATCA) with Chapters 3 and 61, and 3406 of the Internal Revenue Code.

The Notice does not affect obligations held by individuals because the Treasury regards FATCA’s  procedures for documenting individual accounts as less complex than those for documenting entities and the IRS Form W-8BEN (for withholding agents to document individuals) and its accompanying instructions were published in final form on March 3, 2014.

Calendar years 2014 and 2015 will not be regarded as a transition period with respect to any requirements of chapters 3 and 61, and 3406 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