The IRS announced on Friday, July 12, in Notice 2013-43 (the "Notice") that the earliest deadlines under the Foreign Account Tax Compliance Act ("FATCA") have been extended by six months. FATCA withholding will now not begin until July 1, 2014. Thus, foreign financial institutions ("FFIs") can delay entering into their agreements with the IRS based on this new deadline and, in particular, may want to wait to do so pending negotiation of an intergovernmental agreement ("IGA") between the U.S. and their governing jurisdiction. (Such IGAs will probably be easier for FFIs to comply with than the U.S. statutory withholding and other rules that apply if there is no IGA.) "Grandfather" treatment is extended to obligations outstanding on July 1, 2014. Several other FATCA deadlines are extended accordingly, including those for an FFI's "due diligence" to search its accounts and investors for U.S. individuals and entities. The IRS also will post on its web site an official list of countries that have signed an IGA, which can be relied on by withholding agents even if the IGA is not ratified (or otherwise finalized).
To recap FATCA itself, the FATCA rules (Sections 1471 through 1474 of the Internal Revenue Code) require a U.S. withholding agent (e.g., a U.S. person who is an obligor on a debt instrument, an issuer of stock, or a counterparty on an ISDA derivative) to withhold 30 percent of any U.S. source payment (e.g., interest on the debt instrument or the collateral posted on the derivative or dividends paid on the stock) made to an FFI unless the FFI enters into an agreement with the IRS (by registering on the IRS web site) and satisfies significant IRS reporting requirements (or qualifies for one of the exemptions from the rules).
All non-U.S. banks are FFIs for this purpose, as are many non-U.S. investment funds (including hedge funds, CDOs, CLOs, private equity funds, and in some cases real estate funds). As a result, beginning on the FATCA effective date, any U.S. source payment made to a non-exempt FFI will be subject to 30-percent withholding unless the FFI (i) registers with and enters into an agreement with the IRS requiring it to obtain and report information regarding its U.S. account holders and investors and meets other requirements and (ii) provides the withholding agent (as described above) with a new type of form (W-8BEN-E) attesting to its IRS registration and providing its FATCA identification number (called a GIIN). Under final U.S. Treasury Regulations released this January, withholding was to begin on January 1, 2014, so that non-exempt FFIs were generally required to register and obtain their GIINs from the IRS by that date to avoid withholding.
New FATCA Withholding and IRS Registration Deadlines
Under the Notice, the earliest date for FATCA withholding will now be July 1, 2014. The Notice states that the IRS's registration web site will be accessible as of August 19, 2013, and thus an FFI can begin to input its information at that time. An FFI will not be able to finalize its registration, however, until January 1, 2014, and no GIINs will be issued until that date. The IRS will electronically post the first monthly list of GIINs for use by withholding agents on June 2, 2014, and the Notice states that FFIs will need to finalize their registrations by April 25, 2014 to be on that list. It is, however, not necessary for an FFI to be on that first list to avoid withholding for payments on the first withholding date—i.e., July l, 2014—but it must be on a list soon thereafter. Although FFIs that are covered by an IGA will also need to obtain a GIIN, payments to them will generally be exempt from withholding as long as the GIIN is issued and listed by the IRS prior to January 1, 2015.
Extended "Grandfather" Treatment
The grandfather rules, which eliminate FATCA withholding entirely for certain obligations, are now extended to obligations outstanding on July 1, 2014. For this purpose, all of the favorable rules added by the final regulations continue to apply. For example, where an obligation is grandfathered, collateral posted to secure the obligation is also generally grandfathered (even if such collateral was not outstanding on July 1, 2014). As before, however, a "material modification" after July 1, 2014 will cause the obligation to lose its grandfather protection.
So Why Did the IRS Do This?
Deferral of the FATCA deadlines was not expected in the market, and thus the Notice came as a pleasant surprise to most practitioners. Although we are reluctant to look this "gift horse" in the mouth, the IRS obviously came to appreciate some of the problems faced by both FFIs and withholding agents in meeting the previous January 1, 2014 deadline, especially for their information systems. In particular, although the U.S. Treasury is focusing on entering into new IGAs to facilitate compliance, to date it has completed only nine out of more than 50 negotiations announced. This summer and fall, many FFIs would have been forced to gear up for compliance with the U.S. statutory rules even though an IGA with their jurisdiction may still be likely (which would change the compliance process very significantly).
Other Deferred Dates
The requirement that a registering FFI implement FATCA procedures for opening new accounts is deferred until July 1, 2014. The Notice also defers by six months the dates by which an FFI must perform "due diligence" with respect to "preexisting" obligations to determine the holders of accounts or interests who are U.S. persons or noncompliant FFIs; for institutional holders, due diligence must be completed by six months after June 30, 2014 (for FFIs registering on or before this date) and for other holders by two years after this date. A "preexisting" obligation for these purposes will now be an obligation outstanding on June 30, 2014 (for FFIs registering on or before this date).
The Notice makes clear that no change is being made to the dates for withholding on "foreign passthru payments"—i.e., payments by an FFI to another foreign entity—and payments of gross proceeds of dispositions of U.S. source assets. These both will still be subject to FATCA withholding no earlier than January 1, 2017. FFIs will still be required to file their first FATCA information returns by March 31, 2015, but will now have to supply information for the 2014 year only (instead of 2013 and 2014) and only with respect to the smaller number of U.S. accounts required to be identified in 2014 (under the revised due diligence rules above).
Another positive development is that the IRS will provide an official list on its web site of IGAs that have been signed, even if they have not been ratified under a required foreign procedure or foreign implementing legislation has not yet been passed. The Notice says that U.S. withholding agents are allowed to treat the countries on this list as having an IGA (with the effect that their FFIs will almost never be subject to withholding) until they are removed from the list. This should further ease anxiety for FFIs in countries where an IGA seems likely (e.g., major U.S. trading partners) but where the negotiation and ratification process may linger on.
We do not expect any further deferral of the FATCA deadlines at this point, and it would not be prudent to assume that the IRS will show such generosity again. But we will continue to update you on any major developments regarding FATCA, both before and after the new July 1, 2014 effective date.