New Regulations Modify, Expand and Update Proposed Regulations Issued in February 2012 and Prior Administrative Guidance.
On January 17, 2013, the US Treasury Department (IRS) released final regulations to implement the US reporting and withholding rules originally enacted in 2010 and frequently referred to as the Foreign Account Tax Compliance Act, or FATCA. Beginning on January 1, 2012, the FATCA rules generally impose a 30 percent withholding tax on many types of payments of US-source income to a foreign entity ("withholdable payments") unless the foreign entity reports certain information about any US account holders or owners it possesses. The FATCA rules apply directly to withholding agents, foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs), but their indirect impact is far broader and often affects unsuspecting parties.
For background on FATCA and the proposed regulations issued in February 2012, please see US Department of the Treasury Releases Proposed Regulations Implementing FATCA.
Overview of Final FATCA Regulations
Previous FATCA guidance has been noteworthy for its level of complexity and detail, and the final regulations are even more daunting in that regard. For example, the section of the final regulations describing definitions has doubled in size from the proposed regulations. The final regulations are hundreds of pages in length and are replete with very specific rules as to which actions are required for which type of entity. Much of this complexity and detail, however, is the result of the US Treasury Department's attempt to respond to requests for clarification and specific guidance on various parts of the proposed regulations.
In general, the final regulations make wide-ranging changes to the rules in the proposed regulations, in response to comments received from US and foreign entities. The final regulations
- Delay withholding or reporting effective dates in several cases to provide temporary or transitional relief;
- Coordinate the new rules set forth in the final regulations with the rules in FATCA-related agreements being negotiated with other jurisdictions ("intergovernmental agreements," or IGAs);
- Adopt changes in phrasing and structure intended to clarify the rules in the final regulations; and
- Provide certainty and clarity by superseding all of the previous FATCA guidance issued by the US Treasury Department.
What the Final Regulations Mean for US and Foreign Entities
As a result of all of the modifications made by the US Treasury Department, the final regulations must be carefully reviewed by affected US and foreign persons. For those who have not yet begun to implement their compliance with FATCA, the final regulations (and any applicable IGA) must be analyzed to determine the most cost-effective and commercially feasible means to meet any FATCA obligations the person may incur. For those who have begun to implement a compliance program based on the proposed regulations, the changes made by the final regulations, both intended and unintended, must be evaluated and incorporated into their FATCA compliance program.
- US persons issuing stock or debt or making fixed or determinable annual or periodical (FDAP) payments to foreign persons. Imposition of FATCA withholding tax is phased in, applying to the first category of payments beginning on January 1, 2014. FATCA withholding tax does not apply to payments on obligations that meet a "grandfather" rule, however, no matter when the payments are made. The final regulations extend the deadline for issuing "grandfathered" obligations for one year, until December 31, 2013, and make certain other changes to the definition of "grandfathered" obligations. The final regulations also reflect the previously announced relief for "dividend equivalents" and "passthru payments." Existing agreements and planned issuances need to take into account the new or modified rules in the final regulations.
Withholding agents. Withholding agents must determine whether (and how much) to withhold under FATCA and obtain the information needed to meet FATCA requirements. The final regulations include expanded and detailed guidance to withholding agents, including:
- How to determine if an obligation is grandfathered or if a payment meets the definition of a withholdable payment;
- Documentary evidence on which a withholding agent may rely;
- The use of substitute (and foreign language) forms; and
- The role agents and third parties may play in determinations made by withholding agents.
FFIs. Information reporting by FFIs on US account holders is the primary goal of FATCA. The changes made by the final regulations are extensive and include:
- A delay in effective date of FFI agreements (to align with the timelines provided under IGAs);
- Changes to what constitutes a "US account" and is therefore subject to reporting, including relief for cash value insurance contracts, escrow accounts, accounts for holding of property and credit balances in credit card accounts;
- Significant changes with respect to life insurance and life insurance companies, investment entities (especially those that are not "professionally managed"), retirement plans, and holding companies, treasury centers and captive finance companies that are part of a nonfinancial group;
- Detailed guidance on the treatment of US branches of participating FFIs;
- Due diligence required for pre-existing and new accounts (generally incorporating previously announced guidance); and
- Expansion of the category of "deemed-compliant" FFIs. The proposed regulations treated certain entities as "deemed-compliant" FFIs. The final regulations modify the definitions of several of these entities, delete the retirement fund rules (combining them with a similar rule in another part of the final regulations) and add certain new entities.
- The final regulations modify the definition of entities treated as "registered deemed-compliant" entities, particularly the rules for "local FFIs," "qualified collective investment vehicles" and "restricted funds." They also add two new entities: "qualified credit card issuers" and "sponsored FFIs."
- The final regulations add "sponsored, closely held investment vehicles" and (until 2017) "limited life debt investment entities" to the category of "certified deemed-compliant" FFIs. Further, the final regulations slightly liberalize the rules for "owner-documented FFIs."
- NFFEs. Consistent with prior guidance, the final regulations state that withholding on withholdable payments to NFFEs does not apply until January 1, 2014, with withholding further delayed until January 1, 2015, if certain requirements are met. The definition of "passive" NFFEs has been changed to reflect an enumerated list.
Staggered Effective Dates
The final regulations generally maintain, and in some cases increase, the "transitional" rules in FATCA that lead to different effective dates for different aspects of FATCA. Careful attention is necessary regarding when specific withholding, reporting, documentation and other rules begin to apply to an affected person.
Next Steps by the IRS and US Treasury Department
- Creation of Registration Portal. The preamble to the final regulations states that a FATCA Registration Portal will be created, and that it will be the primary means for financial institutions to interact with the IRS to complete and maintain their FATCA-related registrations, agreements and certifications. It should be accessible by July 15, 2013.
- Issuance of GIINs. The IRS will begin issuing a Global Intermediary Identification Number (GIIN) to participating FFIs and deemed-compliant FFIs by October 15, 2013. FFIs will use their GIINs to satisfy reporting requirements and to identify their status to withholding agents. The IRS expects to post its initial list of participating FFIs and registered deemed-compliant FFIs on December 2, 2013, and to update the list on a monthly basis.
- New forms. To implement FATCA reporting, the IRS will revise existing forms and issue new forms, including new Form 8966 "FATCA Report." Final versions of the revised and new forms are expected by late 2013 or early 2014.
- Terms of FFI agreements. Before the Registration Portal becomes accessible, the IRS will issue a revenue procedure setting out the terms of FFI agreements. The revenue procedure will specify the terms and conditions applicable to participating FFIs.
- Coordination of FATCA and "regular" US withholding tax rules. In light of the new and detailed FATCA guidance, the US Treasury Department will undertake greater coordination of FATCA and "regular" (Chapter 3) US withholding tax rules to reduce duplication and to update the Chapter 3 withholding rules to reflect FATCA documentation and substantiation rules.
- More IGAs. The preamble to the final regulations makes clear that the final regulations are only one element of the information reporting rules contemplated by FATCA. IGAs are expected to deal with both jurisdiction-specific entities and arrangements and with some of the more problematic aspects of FATCA, such as the definition of foreign passthru payments (withholding on which is delayed until the later of January 1, 2017, and six months after publication of final regulations defining that term) and withholding on gross proceeds (which is delayed until January 1, 2017). The treatment of FFIs under an IGA is generally better than under the final regulations, and almost never worse.
- Filling in the blanks. The US Treasury Department must issue future regulations to address areas on which the final regulations reserve such as foreign passthru payments and certain payments of gross proceeds.