For Australian financial institutions grappling with how to comply with the U.S. Foreign Account Tax Compliance Act (FATCA) which comes into effect on 1 January 2013, the U.S. Internal Revenue Service (IRS) has delivered some good news.
In an announcement yesterday, the IRS confirmed that it would update the proposed FATCA Treasury Regulations released on 8 February 2012 (Regulations) to incorporate a number of changes, which should greatly assist Australian financial institutions in their FATCA preparation and compliance.
Of real significance, one of the key withholding dates has been extended by two years. FATCA withholding may now only be deducted from payments of gross proceeds in respect of sales or dispositions of property within the scope of the regime that occur after 31 December 2016.
Unfortunately the IRS did not extend the dates for the other FATCA withholding obligations. Consequently, FATCA withholding may still be deducted from payments of US source FDAP income paid after 31 December 2013, and in respect of "foreign pass-thru payments" made after 31 December 2016.
Due diligence and reporting
The IRS has brought the due diligence and reporting dates in the proposed Regulations into line with the requirements of the draft model intergovernmental agreement (IGA) released on 26 July 2012 (for more information about the IGA click here). For participating foreign financial institutions (FFIs), the new dates by which FFIs must have completed FATCA due diligence obligations in respect of their account holders are as follows:
- For new account holders (both individual and entity accounts), by the later of 1 January 2014 or the effective date of the relevant agreement between the FFI and the IRS (FFI Effective Date). The IRS has confirmed that the FFI Effective Date for FFI agreements entered into in 2013 will be 1 January 2014.
For pre-existing accounts (being accounts maintained by the FFI prior to the later of 1 January 2014 or the FFI Effective Date):
- Entities that are “prima facie FFIs” under the Regulations: By the later of 30 June 2014 or 6 months after the FFI Effective Date
- Entities other than “prima facie FFIs”: By the later of 31 December 2015 or two years after the FFI Effective Date
- Individuals (other than “high value accounts” (i.e. account balances or values of more than USD1 million)): By the later of 31 December 2015 or two years after the FFI Effective Date
- Individuals (“high value accounts”): 31 December 2014 or one year after the FFI Effective Date
The date for filing reports with the IRS in respect of a participating FFI’s US accounts has also moved in line with the IGA, such that reports in respect of US accounts maintained during the 2013 and 2014 calendar years must now be filed by 31 March 2015.
Australian financial institutions have been in a position of uncertainty in respect of FATCA since the government announced its intention to negotiate an IGA with the US, given the different requirements set out in the Regulations and the IGA. These changes should assist Australian financial institutions in continuing to prepare for the FATCA due diligence requirements, irrespective of whether or not an IGA is negotiated. For further details about the impact of an Australian IGA, see our submission. The changes should also assist financial institutions with offshore branches or affiliates that wish to adopt uniform account opening and due diligence procedures across their groups.
Concessional grandfathering changes
In addition, the IRS has clarified the scope of grandfathering under FATCA. Grandfathering will now also apply to obligations that may give rise to “foreign pass-thru payments” that are executed prior to the issue of the final Regulations that define such term. Further, an obligation to make payments in respect of collateral posted pursuant to a grandfathered derivatives transaction will also be grandfathered.
Status of final Regulations
There has been no further indication as to when the final Regulations may be expected, although we anticipate that they will be issued before the end of the year.
For more information in relation to the work we’re doing on FATCA, please visit our FATCA homepage.