On July 12, 2013, the Department of the Treasury (“Treasury”) and the Internal Revenue Service (the “IRS”) issued Notice 2013-43 (the “Notice"), which provides extended timelines and other guidance for the implementation of the requirements of sections 1471 through 1474 of the Internal Revenue Code of 1986, as amended, commonly referred to as the Foreign Account Tax Compliance Act or FATCA.
The Notice provides that Treasury and the IRS intend to amend the Treasury Regulations under FATCA to, among other things, extend the timeline for (i) implementing FATCA withholding and (ii) complying with certain registration and due diligence provisions under FATCA. The Notice states that taxpayers may rely on the provisions of the Notice until Treasury Regulations are amended to reflect such provisions. This update summarizes certain key provisions of the Notice that may be relevant to your business.
FATCA was added to the Code on March 18, 2010, and requires withholding agents to withhold 30 percent of certain payments to a foreign financial institution (an “FFI”) unless the FFI has entered into an agreement with the IRS to, among other things, report certain information with respect to 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.
On January 17, 2013, Treasury and the IRS published final regulations (the “final regulations”) under FATCA. The final regulations provided for a phased implementation of the requirements of FATCA, beginning on January 1, 2014, and continuing through 2017. However, Treasury and the IRS have received comments indicating that certain elements of the phased timeline for the implementation of FATCA have presented practical problems for both withholding agents and FFIs. The Notice indicates that, in order to allow for a more orderly implementation of FATCA, Treasury and the IRS intend to amend the final regulations to (i) postpone the start of FATCA withholding, (ii) make corresponding adjustments to various other time frames provided in the final regulations, and (iii) expand the circumstances in which an FFI is permitted to rely on the provisions of an intergovernmental agreement to implement FATCA.
II. Revised FATCA Implementation Timeline
The following is a summary of the important changes to FATCA implementation timeline (but does not discuss all such changes) described in the Notice:
- Timeline for Withholding
The final regulations provided that withholding with respect to certain U.S. source fixed or determinable income would begin on January 1, 2014, and that withholding on gross proceeds from the disposition of property of a type which can generate U.S. source dividend or interest income would begin on January 1, 2017. The Notice postpones the date for such withholding on U.S. source fixed or determinable income to July 1, 2014. The date for withholding on gross proceeds is not affected.
The final regulations provided that FATCA would not apply to certain obligations (not including stock) which are outstanding on January 1, 2014, or which are issued pursuant to agreements in place on January 1, 2014. The Notice states that FATCA will not apply to such obligations outstanding and agreements in place on July 1, 2014. Under both the final regulations and the Notice, obligations or agreements which are materially modified after the relevant date will not be “grandfathered” and thus may be subject to FATCA after they are so modified.
In the preamble to the final regulations, Treasury and the IRS announced their intent to create a FATCA registration website, which would serve as the primary way for FFIs to interact with the IRS to ensure compliance with certain FATCA requirements. The portal was expected to be open by July 15, 2013. The first electronic list of complying FFIs was expected to be posted on December 2, 2013. In order to be on the list, an FFI would have had to register by October 25, 2013. The Notice postpones the opening of the portal until August 19, 2013, the posting of the first electronic list until June 2, 2014, and the date by which an FFI would have to register until April 25, 2014.
- Due Diligence
The final regulations provide complicated rules for due diligence, applicable to withholding agents and FFIs, with respect to accounts. The deadlines for implementing such due diligence procedures have been generally extended.
III. Intergovernmental Agreements
The final regulations contemplated that the United States would enter into intergovernmental agreements (“IGAs”) with other countries for the implementation of FATCA. Under one model, FFIs would satisfy their FATCA obligations by reporting information about U.S. accounts to their respective tax authorities, followed by the automatic exchange of that information on a government-to-government basis with the United States. Under another model, FFIs would report specified information directly to the IRS, supplemented by government-to-government exchange of information on request. The Treasury Department has concluded a number of IGAs with other jurisdictions based on these model agreements. The Notice provides that a jurisdiction will be treated as having an IGA in effect (meaning that 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. However, a jurisdiction will cease to be treated as having an IGA in effect if the jurisdiction fails to perform the steps necessary to bring the IGA into force within a reasonable period of time. In such case, FFIs that are residents of such jurisdictions will no longer be entitled to the status that would be provided under the IGA, and such FFIs must update their status with the IRS accordingly.