The Foreign Account Tax Compliance Act (“FATCA”) was enacted in 2010 as part of an effort to combat tax evasion by U.S. taxpayers holding investments in offshore accounts and through offshore intermediaries. FATCA creates a new tax information reporting and withholding regime for payments made to certain foreign financial institutions (“FFIs”) and other foreign persons. It generally requires such FFIs to enter into agreements with the IRS and report information about accounts held by U.S. taxpayers to the IRS or to their governments (i.e., become “participating FFIs” or “PFFIs”) or face a 30 percent withholding tax on withholdable payments. Withholdable payments include any payment of interest, dividends, rents, and other fixed or determinable annual or periodical gains, profits, and income (“FDAP income”), if from sources within the U.S. Withholdable payments also include gross proceeds from the sale or disposition of any property of a type that can produce interest or dividends from U.S. sources after a certain date.
On October 24, 2012, the IRS released Announcement 2012-42 (the “Announcement”), which modifies several aspects of the proposed regulations issued earlier this year.1 The IRS intends to incorporate the guidance in the Announcement into the final regulations, which are expected by year-end.
Highlights of the Announcement
- Extended Deadlines for FATCA Reporting and Withholding
Under the final regulations, PFFIs will be required to file information reports for the years 2013 and 2014 no later than March 31, 2015. This is a change from the filing deadline of September 30, 2014 (for the year 2013 only) contained in the proposed regulations.
The term “withholdable payment” will be modified to include 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. This delays withholding on gross proceeds to January 1, 2017, rather than the proposed regulations’ date of January 1, 2015.
- Implementation of New Account Opening Procedures and the Definition of “Preexisting Obligation”
Withholding agents generally must implement new account opening procedures by January 1, 2014. This is an extension from the earlier deadline of January 1, 2013. To facilitate this process, the Announcement modifies the proposed regulations’ definition of “preexisting obligation” to include:
- For withholding agents that are PFFIs, any account, instrument, or contract maintained or executed by the PFFI prior to the later of (i) January 1, 2014; or (ii) the date that the PFFI’s agreement with the IRS 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);
- For registered deemed-compliant FFIs, 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 (i.e., the later of January 1, 2014, or the date on which it registers as a deemed-compliant FFI); and
- For all other withholding agents, any account, instrument, or contract maintained or executed by the withholding agent prior to January 1, 2014.
- Transition Rules for Due Diligence on “Preexisting Obligations”
The Announcement also extends the deadlines for withholding agents to document the FATCA status of account holders with respect to “preexisting obligations.” The new deadlines vary based on the identities of the withholding agent and the account holder, and, for individual accounts, the value of the account.
Withholding agents that are PFFIs will be required to perform the requisite identification procedures and obtain documentation to:
- Determine whether a prima facie FFI payee is a PFFI, deemed-compliant FFI, or non-PFFI within six months after the effective date of its FFI agreement (i.e., by June 30, 2014, for FFIs that enter into FFI agreements by December 31, 2013);
- Determine whether an entity payee, other than a prima facie FFI, is a PFFI by the later of December 31, 2015, or two years after the effective date of its FFI agreement;
- Identify preexisting high-value individual accounts by the later of December 31, 2014, or one year after the effective date of its FFI agreement; otherwise, PFFIs must treat any preexisting high-value individual account as held by a recalcitrant account holder after this date; and
- Identify preexisting individual accounts, other than high-value accounts, by the later of December 31, 2015, or two years after the effective date of its FFI agreement; otherwise, PFFIs must treat any preexisting individual account, other than a high-value account, as held by a recalcitrant account holder after this date.
Withholding agents other than PFFIs will be required to:
- Document payees that are prima facie FFIs by June 30, 2014. The final regulations will provide that, unless a withholding agent has documentation establishing the payee’s status as a non-PFFI, a withholding agent will not be required to withhold on payments made to prima facie FFIs before July 1, 2014. Beginning on July 1, 2014, a withholding agent must treat any prima facie FFI payees as non-PFFIs until the withholding agent obtains sufficient documentation to establish the payee’s status.
- Document entity payees, other than prima facie FFIs, by December 31, 2015. Beginning on January 1, 2016, a withholding agent must treat any foreign-entity undocumented payees, other than prima facie FFI payees, as non-PFFIs until the withholding agent obtains sufficient documentation to establish the payee’s status.
- Expanded Definition of “Grandfathered Obligations”
“Grandfathered obligations” are generally outside the scope of FATCA. The final regulations will include the following, in addition to the categories enumerated in the proposed regulations, as grandfathered obligations:
- 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 the final regulations defining the term “foreign passthru payment” are filed with the Federal Register;
- Any instrument that gives rise to a withholdable payment solely because the instrument is treated as giving rise to a “dividend equivalent” under Code 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; and
- 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.