Yesterday, the IRS and Treasury Department issued Announcement 2012-42 (the “Announcement”), which delays certain FATCA compliance deadlines and identifies three new classes of “grandfathered obligations.” Key changes noted in the Announcement include the following:
- “Gross proceeds” withholding will only apply to sales or dispositions occurring after December 31, 2016. Previously, “gross proceeds” withholding was to be effective for sales or dispositions occurring after December 31, 2014.
- FATCA’s grandfathering deadline (currently December 31, 2012) will be extended for “obligations” that could be subject to FATCA withholding solely because future guidance treats them as generating either: (i) “foreign passthru payments” or (ii) U.S.-source “dividend equivalent” payments. Such instruments will be grandfathered if they are “outstanding” on the date that is six months after the date when final guidance that would otherwise subject them to FATCA withholding is issued.
- Obligations to make payments with respect to collateral posted to secure an obligation under a grandfathered notional principal contract will also be eligible for grandfathering from FATCA.
- As discussed in additional detail below, the timeframes under which “foreign financial institutions” (“FFIs”) and other withholding agents will need to review their accounts under FATCA will be modified and generally extended. The new timelines generally harmonize the timelines for FFIs in jurisdictions with and without FATCA intergovernmental agreements (“IGAs”).
- FFIs in countries that do not sign IGAs will be required to file their first FATCA account reports on March 15, 2015 (the same date when the first such reports from FFIs in IGA countries are due under the model IGAs), rather than the earlier proposal of September 30, 2014.
The Announcement does not modify the January 1, 2014 date on which FATCA withholding will commence on U.S.-source “withholdable payments.” In addition, the Announcement observes—in an appendix—that withholding and reporting will need to begin with respect to any documented account, even if the deadline for reviewing that account has not yet expired.
The timeline below illustrates key FATCA dates under the Announcement and other current guidance:
To view timeline click here.
FATCA, which was enacted by the U.S. Congress in March 2010, is intended to prevent U.S. citizens and residents from evading their U.S. tax obligations by holding assets offshore. To accomplish this objective, FATCA encourages: (i) FFIs to sign agreements to report information regarding their U.S. account holders to the IRS (such FFIs, “Participating FFIs”) and (ii) other foreign entities to provide information regarding their beneficial owners to U.S. withholding agents, including Participating FFIs. The U.S. Treasury Department and the IRS are negotiating IGAs that will allow FFIs to report U.S. account holders to their local governments (which will share the information with the IRS) in lieu of reporting directly to the IRS.1 FATCA requires withholding agents to collect a 30% withholding tax on U.S.-source “withholdable payments” made to non-compliant entities. FATCA also generally requires Participating FFIs to withhold on certain “passthru payments” made to “recalcitrant account holders” and to FFIs that have not signed a reporting agreement with the IRS.
Prior to the Announcement, the timetables for implementing FATCA were included in proposed regulations (the “Proposed Regulations”) issued in February 2012, and an IRS Notice (“Notice 2011-53”) issued in July 2011.2 Slightly modified timetables (for FFIs in IGA jurisdictions) were announced in the model IGAs, which were released in July 2012.
The Announcement includes new guidance on four principal topics: (i) account due diligence and U.S.-source income withholding, (ii) account reporting, (iii) gross proceeds withholding, and (iv) grandfathered obligations.
A. ACCOUNT DUE DILIGENCE AND U.S.-SOURCE INCOME WITHHOLDING
The Announcement prescribes new deadlines for Participating FFIs and other withholding agents (such as U.S. financial institutions) to conduct their account due diligence and withhold on preexisting accounts. In many cases, these new dates extend the deadlines in the Proposed Regulations by six months, and are consistent with the requirements under the model IGAs. Equally significantly, the Announcement harmonizes the FATCA deadlines for withholding agents that make U.S.-source payments with those established under the general rules applicable to Participating FFIs.
The following table illustrates the new deadlines and compares them with the timeframes that had been announced in prior guidance:
To view table click here.
These dates do not change the January 1, 2014 effective date for FATCA withholding on U.S.-source “withholdable payments.” Furthermore, an appendix to the Announcement observes that withholding and reporting will need to begin with respect to an account immediately after it has been documented, even if the deadline for reviewing that account has not yet expired.
B. ACCOUNT REPORTING
The Announcement also postpones the deadline for Participating FFIs in non-IGA jurisdictions to file their first FATCA reports to March 15, 2015 (from September 30, 2014), a date that is harmonized with the first reporting date in the model IGAs. The Announcement specifies that these reports must be filed for both the 2013 and 2014 calendar years, notwithstanding the fact that it also postpones the effective date of FFI Agreements to January 1, 2014.
C. GROSS PROCEEDS WITHHOLDING
In addition, the Announcement delays the effective date of “gross proceeds” withholding, which was previously scheduled to take effect on January 1, 2015, to January 1, 2017.
D. GRANDFATHERED OBLIGATIONS
The Announcement also states that the final FATCA regulations will specify three new classes of “grandfathered obligations.” Under the Proposed Regulations, a “grandfathered obligation” is any “obligation” (a term that includes indebtedness and most other legal agreements, including many derivative contracts and credit facilities, but excludes, among other things, any instrument that is treated as equity for U.S. federal income tax purposes, any agreement that lacks a stated expiration date or term, and any custodial arrangements) that could produce a “passthru payment” and is “outstanding” on January 1, 2013.3
1. Obligations Generating Foreign Passthru Payments
The Announcement provides that “grandfathered obligations” will include any obligation that: (i) produces (or could produce) a “foreign passthru payment,” (ii) cannot produce a U.S.-source “withholdable payment” and (iii) is outstanding as of the date that is six months after the date when final regulations defining “foreign passthru payments” are filed with the Federal Register.4
This change will permit FFIs that issue, for example, indebtedness and other fixed-term instruments that pay foreign-source income, to continue issuing grandfathered obligations after the end of 2012. The Announcement does not express an intent to modify the definition of an “obligation.” Accordingly, equity instruments and other agreements that do not have a definitive term will remain ineligible for grandfathering.
2. Obligations Paying U.S.-Source Amounts Under Section 871(m)
In addition, the Announcement states that “grandfathered obligations” will include any instrument that gives rise to U.S.-source “withholdable payments” solely because it is treated as making a “dividend equivalent” payment under Section 871(m),5 so long as it is outstanding on the date that is six months after the date on which instruments of its type first become subject to “dividend equivalent” treatment.
3. Collateral Arrangements
Finally, the Announcement provides that “grandfathered obligations” will also 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.6