On September 18, 2015, the Internal Revenue Service (IRS) issued Notice 2015-66, in which Treasury and the IRS announced that they intend to extend certain transition rules and modify certain other reporting rules under the Foreign Account Tax Compliance Act (FATCA). Specifically, the Treasury and the IRS intend to adopt the following rules:
- No withholding on gross proceeds until January 1, 2019;
- No withholding on foreign passthru payments until, at least, January 1, 2019;
- Extension of time until January 1, 2017, to use limited branches and limited foreign financial institutions (FFIs) statuses;
- Extension of time until January 1, 2017, to rely on the Global Intermediary Identification Numbers (GIINS) of sponsoring entities with respect to sponsored entities;
- No mandatory application of the pro rata rule with respect to collateral that secures both grandfathered obligations and obligations that are not grandfathered; and
- Extension of time to September 30, 2016, for a Model 1 intergovernmental agreement (IGA) partner to complete the reporting of 2014 information.
Under prior guidance, withholding on gross proceeds from the sale or other disposition of any property of a type that can produce interest or dividends that are U.S. source fixed, determinable, annual, or periodical (FDAP) income was to begin for sales or other dispositions occurring after December 31, 2016. To continue facilitating an orderly phase-in of FATCA withholding, Treasury and the IRS, under Notice 2015-66, announced that they intend to amend the regulations under Section 1473 to extend the start date of gross proceeds withholding to sales or other dispositions occurring after December 31, 2018. The change will be effected by amending the definition of the term “withholdable payment” to “any payment of U.S. source FDAP income, and for sales or other dispositions occurring after December 31, 2018, any gross proceeds from the sale or other disposition of any property of a type that can produce interest or dividends that are U.S. source FDAP income.”
Treasury and the IRS also intend to amend the regulations under Section 1471 to extend the start date of withholding on foreign passthru payments to the later of January 1, 2019, or the date of the publication in the Federal Register of final regulations defining the term foreign passthru payment. A participating FFI does not have to withhold tax on a foreign passthru payment made to a recalcitrant account holder or a nonparticipating FFI until the new start date.
Some jurisdictions that have not been able or willing to agree to an IGA continue to impose legal restrictions that prevent FFIs resident or organized in those jurisdictions, or branches located there, from complying with the terms of an FFI agreement. In these jurisdictions, an FFI will no longer be able to obtain or maintain status as a participating or deemed-compliant FFI once the limited branch and limited FFI status exceptions expire. As such, in order to provide FFIs with additional time to determine whether to continue operating in jurisdictions where limited branches or limited FFIs exist, Treasury and the IRS, under Notice 2015-66, announced that they intend to amend the regulations under Section 1471 to extend the availability of limited branch and limited FFI statuses until December 31, 2016. After December 31, 2015, all limited FFI and limited branch registrations will be placed in “registration incomplete” status on their online FATCA accounts. Entities that seek to continue such statuses during the 2016 calendar year will be required to edit and resubmit their registrations after December 31, 2015.
Treasury and the IRS also intend to extend the time to register sponsored entities and to allow withholding agents to rely on the GIINs of sponsoring entities for the purpose of allowing sufficient time for sponsored entity registration. Treasury and the IRS announced that they intend to amend the regulations under Sections 1471 and 1472 to provide that sponsoring entities must register their sponsored registered deemed-compliant FFIs and sponsored direct reporting non-financial foreign entities (NFFEs) by January 1, 2017, and to provide that withholding agents can continue to rely on withholding certificates from sponsored entities that have only the sponsoring entity’s GIIN for payments made prior to January 1, 2017. Beginning on January 1, 2017, sponsoring entities must use the GIIN of the sponsored entity when reporting on Form 8966 with respect to the sponsored entity and must provide that GIIN to withholding agents making payments to the sponsored entity, and withholding agents must obtain the GIIN of a payee that is a sponsored entity.
Treasury and the IRS also modified the FATCA treatment of collateral under the grandfathered obligation rule under Notice 2015-66. Based on comments stating that it would be burdensome for financial institutions to comply with the pro rata rule described in Treas. Reg. Sec. 1.1471-2(b)(2)(i)(A)(3) for collateral that secures both grandfathered obligations and obligations that are not grandfathered, Treasury and the IRS announced that, in order to ease the administrative burdens when the collateral that secures both types of obligations, they intend to amend Treas. Reg. Sec. 1.1471-2(b)(2)(i)(A)(3) to provide that the pro rata rule is not mandatory. Treasury and the IRS also announced that they intend to amend the definition of grandfathered obligation under Treas. Reg. Sec. 1.1471-2(b)(2)(i)(A) to include any obligation that gives rise to substitute payments and that is created as a result of the payee posting collateral that otherwise is treated as a grandfathered obligation under Treas. Reg. Sec. 1.1471-2(b)(2)(i)(A)(1). Treasury and the IRS intend to make this change in response to the comment that substitute payments made with respect to a grandfathered obligation that has been posted as collateral should also be treated as a payment made under a grandfathered obligation, and therefore should not be subject to withholding under Sections 1471 or 1472.
Finally, for Model 1 IGAs that have not yet entered into force on September 30, 2015, Treasury and the IRS intend to continue to treat the FFIs covered by the IGA as complying with, and not subject to withholding under, FATCA so long as the partner jurisdiction continues to demonstrate firm resolve to bring the IGA into force, and any information that would have been reportable under the IGA on September 30, 2015, is exchanged by September 30, 2016, together with any information that is reportable under the IGA on September 30, 2016. For Model 1B IGA jurisdictions that have an IGA in force, Treasury and the IRS will treat FFIs covered by an IGA as complying with, and not subject to withholding under, FATCA even if the relevant partner jurisdiction has not exchanged 2014 information by September 30, 2015, as long as the partner jurisdiction notifies the U.S. competent authority before September 30, 2015, of the delay and provides assurance that the jurisdiction is making good faith efforts to exchange the information as soon as possible. Treasury and the IRS are extending these deadlines so that partner jurisdictions have time to develop and implement the systems needed for automatic information exchange and to enact legislation to implement their IGAs.