More than four years after Congress enacted the Hiring Incentives to Restore Employment Act of 2010, Pub. L. 111-147, which added the Foreign Account Tax Compliance Act (FATCA) provisions to the Internal Revenue Code, FATCA will become effective on July 1, 2014. While the importance of this date has been mitigated somewhat by the transition period rules of Notice 2013-33 (discussed below), the last few days nevertheless have brought a mountain of last minute publications from the IRS and the Treasury.
The publications released within the past two weeks include:
- Instructions for Form W-8BEN-E. A foreign entity (other than a foreign intermediary or passthrough entity) will use this form both to reflect its status as a payee for FATCA purposes and to reflect its status as a beneficial owner for purposes of the traditional section 1441 and 1442 withholding rules.
- Instructions for Form W-8IMY. A foreign intermediary or passthrough entity will use this form to reflect its status as a payee for FATCA and section 1442 purposes, as well as to report the status of its owners and payees.
- Instructions for Form 1042-S. The Form 1042-S is the information return U.S. withholding agents use to report U.S. source payments under sections 1441 and 1442 or the amounts subject to withholding under FATCA.
- Instructions for Form 8966. Participating “Foreign Financial Institutions” (FFIs), U.S. withholding agents, and other persons will file this form with the IRS to report the FATCA status of owners of certain U.S. accounts of FFIs and the substantial U.S. owners of “Passive Non-financial Foreign Entities” (NFFEs).
- Revenue Procedure 2014-39. This revenue procedure updates the withholding agreement for Qualified Intermediaries (QIs) and provides guidance for the application procedures for becoming a QI and renewing a QI agreement.
- Revenue Procedure 2014-38. This revenue procedure updates the agreement for participating FFIs and provides general guidance to FFIs that are “reporting” FFIs under a Model 2 Intergovernmental Agreement (an “IGA”), i.e., an IGA in which the FFIs report all relevant FATCA information directly to the IRS.
- A recently updated list of all FFIs that have received Global Intermediary Identification Numbers (GIINs), and several “FAQs,” with frequently asked questions and answers about the FFI List or registration. This list will determine whether an FFI has registered with the IRS, so a payor will know it does not need to withhold on any payments to the FFI. Currently, there are more than 17,000 FFIs on the IRS GIIN list. The IRS has stated that it will update this list monthly. FFIs in jurisdictions that have a Model I IGA have until December 22, 2014 to register for a GIIN to ensure inclusion on the January 1, 2015 list. The FAQs have provided answers to questions regarding, among other things, the different file formats available to parties that need to download the full FFI list.
In addition, the US has now entered into IGAs with more than 40 countries and continues to negotiate these agreements. Importantly, the US and China have recently reached an agreement in substance on the terms of a Model 1 IGA. Other than China, Russia remains the largest remaining country not to enter into an IGA with the US (the situation in the Ukraine having slowed down the negotiation process).
Despite this flurry of activity, the IRS and Treasury still have significant FATCA projects to complete. The IRS still needs to update its withholding agreements for Withholding Foreign Partnerships (WPs) and Withholding Foreign Trusts (WTs) to reflect FATCA, which it has promised for July. Furthermore, there are several areas where the IRS and Treasury have yet to make promised corrections to the FATCA regulations, e.g., with respect to the “offshore obligation” exception.
The Form W-8 Instructions
As has been expected, the instructions to the Forms W-8 are lengthy and extraordinarily complex. The instructions to the Form W-8BEN-E are 16 pages long, with fully five pages simply devoted to definitions, and contain rules detailing more than 20 different FATCA statuses for foreign payees. Knowledgeable tax practitioners will no doubt find these definitions and extensive instructions helpful. But it would be an understatement to say that foreign non-tax professionals will find these instructions difficult to apply, in particular because they are replete with cross-references to the Internal Revenue Code, to the FATCA regulations, to the instructions for other IRS forms (the Form W-8IMY in particular), and even to pages on the IRS website.
Notice 2014-33 and the Transition Period
Fortunately, as noted above, the pressure of the impending July 1, 2014 effective date is diminished somewhat by the issuance of Notice 2014-33. In that Notice, the IRS announced that calendar years 2014 and 2015 will be a transition period for purposes of IRS enforcement of the reporting and withholding provisions of FATCA. To that extent, the IRS will take into account the extent to which entities have made reasonable efforts during the transition period to modify their account opening practices, to document the FATCA status of their customers, and other parties that are required to collect FATCA documentation, and to apply the FATCA “presumption rules” reasonably.
Sutherland Observation: Despite the transition period rules, FFIs and U.S. withholding agents still need to make a good faith effort to implement the FATCA rules as of July 1, 2014. Such efforts could include instructional sessions with employees, training manuals, and changes to policy manuals that make employees aware of the need to document customers’ FATCA status when they open accounts. Further, FFIs and U.S. withholding agents would be well served to maintain records of these efforts in a file for easy access in the event IRS agents ask for proof of a party’s good faith efforts to comply with FATCA. Finally, if a withholding agent chooses not to be lenient with respect to FATCA documentation, parties should generally expect to be required to provide the documentation to the agent.
Notice 2014-33 also expanded the definition of preexisting obligations to include accounts that are opened by entities between July 1, 2014 and December 31, 2014. Effectively, this notice gives FFIs and U.S. Withholding Agents until June 30, 2015 to determine the FATCA status of these accounts. This change also applies to FFIs that claim the benefits of an IGA. Presumably, the IRS took this step in light of the late date at which it published the Form W-8-BEN-E Instructions, as well as the extreme complexity of these rules.
But this reprieve has a significant caveat. The expanded definition of preexisting obligation does not apply to obligations opened by individuals during the second half of 2014. As of July 1, 2014, FATCA will become fully effective with respect to accounts that are opened by individuals.
Sutherland Observation: A preexisting obligation should be distinguished from a “grandfathered obligation” as defined in Treas. Reg. § 1.1471-2(b). While a preexisting obligation receives what is, in essence, a six-month reprieve from the FATCA rules, a payment made under a grandfathered obligation is not a withholdable payment as long as the grandfathered contract does not undergo a material modification.