Under the tax reporting and withholding regime of the Foreign Account Tax Compliance Act (FATCA), a foreign financial institution (FFI) is generally subject to a 30% United States federal withholding tax on certain payments unless the FFI agrees to report certain information to the Internal Revenue Service (IRS) regarding the FFI’s owners or account holders, or the FFI qualifies for the reporting procedures of its residence jurisdiction under an intergovernmental agreement (IGA) between such jurisdiction and the United States. A resident FFI qualifying under an effective IGA is generally entitled to deemed compliant status under the FATCA rules, enabling it to be exempt from the 30% withholding tax.
The first phase of the FATCA withholding regime became effective July 1, 2014; however, several jurisdictions had begun negotiations but had not yet entered into an IGA with the United States at that time. In Announcement 2014-17, the IRS and Treasury provided that certain jurisdictions would be deemed to have an effective IGA as of June 30, 2014, so that resident FFIs could rely upon the model IGA expected to be signed by such jurisdiction, even though the IGA was not yet signed by the two countries. The Treasury Department maintains a list of such “agreed in substance” IGAs on its website. The deemed effective status would expire after December 31, 2014, if the jurisdiction in question failed to sign the IGA by such date. Fourteen jurisdictions that were listed in June 2014 as having IGAs agreed in substance have since signed their IGA. FFIs in the remaining jurisdictions could have become subject to FATCA withholding as of December 31, 2014 absent entering into an FFI agreement with the IRS directly or complying in another manner with the complex rules.
On December 1, 2014, in Announcement 2014-38, the IRS extended the deemed effective status of such listed IGAs beyond December 31, 2014, indicating that resident FFIs may continue to rely upon such IGAs to claim compliance with FATCA, as long as the jurisdiction “continues to demonstrate firm resolve to sign the IGA." In addition, the IRS added 11 new jurisdictions to the list of jurisdictions treated as having an IGA agreed in substance as of November 30, 2014. Currently, there are a total of 64 jurisdictions that have IGAs agreed in substance.
Although the Treasury will review progress on a monthly basis, if it is determined that a jurisdiction should be removed from the deemed effective list, an FFI would no longer be entitled to rely upon the corresponding model IGA, beginning with the first day of the month following the jurisdiction’s removal. Despite the potential lack of notice upon which the status of a deemed IGA may change, the ability to continue to rely upon a model IGA should be beneficial to resident FFIs in those countries that seek to comply with FATCA.