Announcement 2012-42 Modifies and Clarifies Timelines and Scope of Grandfathered Obligations, Makes Other Changes
On October 24, 2012, the US Internal Revenue Service ("IRS") issued Announcement 2012-42 along with a table (reproduced below) that summarizes certain Foreign Account Tax Compliance Act ("FATCA") due diligence deadlines. The changes announced are limited, but they demonstrate that the IRS and the US Treasury Department continue to make modifications to the FATCA withholding and reporting rules in response to comments, especially comments focused on practical problems encountered by entities trying to implement and comply with FATCA.
In February 2012, the IRS and the US Treasury Department issued proposed regulations to implement FATCA. For an overview of those proposed regulations, please see our prior alert: US Department of the Treasury Releases Proposed Regulations Implementing FATCA. Since issuing the proposed regulations, the IRS and the US Treasury Department, working with the governments of France, Germany, Italy, Spain, and the United Kingdom, developed model intergovernmental agreements that would permit foreign financial institutions ("FFIs") to comply with FATCA by reporting information to their home governments rather than to the IRS, with the home country tax administration automatically exchanging the information with the IRS. The United States and the United Kingdom have entered into one such intergovernmental agreement, and additional such agreements are expected soon. In addition, the US Treasury Department has announced exploration with Switzerland and Japan of other approaches of implementing FATCA.
In light of the potentially different sets of rules and timelines that may be applicable to FFIs, Announcement 2012-42 sets forth timelines for due diligence for both new accounts and existing obligations.
The Announcement provides that withholding agents, including participating FFIs and registered deemed-compliant FFIs, generally will be required to implement new account opening procedures by January 1, 2014.
Pre-existing Accounts and Obligations
The due diligence procedures that apply to pre-existing obligations differ from those that apply to new accounts and vary based on the type of withholding agent and the type of obligation or account.
- The Announcement relaxes the definition of "pre-existing obligation" so that any account, instrument, or contract maintained or executed by a withholding agent prior to January 1, 2014, is generally a pre-existing obligation. Further, for participating FFIs and registered deemed-compliant FFIs, the definition of pre-existing obligation is further extended to include accounts, instruments, or contracts maintained or executed before the FFI enters into an FFI agreement or registers as a deemed-compliant FFI, if the effective date of the FFI agreement or registration is after January 1, 2014.
- Withholding agents, other than participating FFIs, will be required to document payees that are prima facie FFIs by June 30, 2014. Participating FFIs generally will be required to perform the requisite identification procedures and obtain the appropriate documentation to determine whether a prima facie FFI payee is itself a participating FFI, deemed-compliant FFI, or nonparticipating FFI within six months after the effective date of its FFI agreement.
- For pre-existing accounts and obligations of other (non-prima facie FFI) entities, withholding agents, other than participating FFIs, will be required to document payees by December 31, 2015. A participating FFI generally will be required to perform the requisite identification procedures and obtain the appropriate documentation to determine whether an entity, other than a prima facie FFI, is itself a participating FFI by the later of December 31, 2015, or the date that is two years after the effective date of its FFI agreement.
- For high-value accounts, a participating FFI must perform the requisite identification procedures and obtain the appropriate documentation to identify pre-existing individual accounts that are high-value accounts by the later of December 31, 2014, or the date that is one year after the effective date of the FFI’s FFI agreement.
- For pre-existing accounts held by a participating FFI that are not high-value accounts, the participating FFI must perform the requisite identification procedures and obtain the appropriate documentation to identify pre-existing individual accounts prior to the later of December 31, 2015, or the date that is two years after the effective date of the FFI’s FFI agreement.
The Announcement also addresses the serious problem that the FATCA withholding rules apply to "foreign passthru payments" but that term is not defined in the proposed regulations. To deal with this uncertainty, the Announcement provides that the definition of "grandfathered obligation" will be modified so that it includes "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 final regulations defining the term ’foreign passthru payment’ are filed with the Federal Register." For similar reasons, the term "grandfathered obligation" will be modified to address the uncertainty caused by the enactment of the dividend equivalent payment rules of section 871(m) of the Internal Revenue Code, so that an instrument that gives rise to a dividend equivalent pursuant to section 871(m) and the regulations thereunder will be a grandfathered obligation, "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." The Announcement further provides that the term "grandfathered obligation" will 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.
The Announcement also states that a participating FFI will be required to file information reports with respect to the 2013 and 2014 calendar years not later than March 31, 2015, and that the term "withholdable payment" includes 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.
The IRS Table Released on October 24 is Reproduced Below
Summary of Timing for Performing Due Diligence Procedures to Identify and Document Accounts
The following table summarizes the dates by which withholding agents and financial institutions must fully implement new account opening procedures to identify account holders and the dates by which withholding agents and financial institutions must complete the review and documentation of all preexisting accounts for purposes of applying the relevant Treasury regulations. The table is intended only as an illustrative tool and therefore should be interpreted consistently with the accompanying Announcement. It is important to emphasize that although the final regulations will provide a reasonable period of time to allow withholding agents to review and document all preexisting accounts, the final regulations will make clear that once a particular account has been documented, for example as a U.S. Account or as a nonparticipating FFI, withholding or reporting, as appropriate, must begin with respect to that account even though the time period for completing the identification and documentation of preexisting accounts may not have expired.
Click here to see Table.