On 20 February 2014 the US Department of the Treasury and the Internal Revenue Service (IRS) issued what they describe as “the last substantial package of regulations necessary to implement the Foreign Account Tax Compliance Act (FATCA)”. The changes revise and further clarify the FATCA regulations issued on 28 January 2013.

Amendments released on 20 February 2014 (Regulations) contain a set of revisions to the final FATCA regulations issued on 28 January 2013, made in response to stakeholder feedback.

In a press conference as part of the recent G20 summit in Sydney, Jack Lew, United States Secretary of the Treasury and Joe Hockey, Treasurer of Australia announced that the United States and Australia have “completed a FATCA agreement in substance”.

The Regulations will continue to be relevant to Australian financial institutions even if Australia and the US sign a FATCA intergovernmental agreement (IGA).

Importantly, Australian financial institutions will be required to comply with FATCA obligations contained in an Australia IGA; an IGA will remove the choice of compliance.

Key changes for Australian “foreign financial institutions” (FFIs) include:

  1. Changes to “expanded affiliated group” definition

The Regulations no longer require that all FFIs in the expanded affiliated group be either participating FFIs or deemed-compliant FFIs, but recognize that an expanded affiliated group may also have exempt beneficial owners as group members.

  1. Due diligence procedures

The Regulations contain a number of changes that amend the due diligence procedures for “participating” FFIs. Australian FFIs that intend to elect to adopt the due diligence procedures set out in the Regulations rather than in Annex I of the IGA should carefully consider these amendments and update their proposed processes accordingly.

  1. Definitions of “financial institution” (including exclusions), “financial accounts” and expansion of certain deemed-compliant FFI categories

It is unclear whether the changes made to the definitions of Financial Institution and Financial Accounts will be specifically replicated in the IGAs going forward. For example, the amendment to the definition of “custodial institution” and the change to the definition of “financial account” in relation to the value of certain equity and debt interests in financial institutions that are determined primarily by reference to assets that give rise (or could give rise) to withholdable payments.

The Regulations amend the definition of “excepted non-financial group entities”, including the definition of “holding company” and “treasury center”. For example, an entity which manages the working capital of its expanded affiliated group but does not otherwise invest or trade in financial assets may now qualify as a treasury center.

The Regulations expand the deemed-compliant FFI category applicable to qualified credit card issuers to include qualified credit card servicers.

The Regulations also clarify that a sponsoring entity will not be jointly and severally liable for the sponsored FFI’s obligations (except where the sponsoring entity is also a withholding agent that is separately liable for such obligations).

  1. Broadening of transitional exemption for existing limited life debt investment entities

Most Australian securitisation vehicles (ASV) were unable to meet the existing transitional relief afforded to limited life debt investment entities (LLDIE). The Regulations have significantly broadened the scope of this relief. To rely on it, an ASV must meet the following conditions:

  • It must be an “investment entity” for FATCA purposes that issued one or more classes of debt or equity interests to investors pursuant to a trust indenture or similar agreement and all of such interests were issued on or before 17 January 2013.
  • It must have entered into a trust indenture or similar agreement that requires it to pay to investors holding substantially all of the interests in the ASV, no later than a set date or period following the maturity of the last asset held by the ASV, all amounts that such investors are entitled to receive from the ASV.
  • It must have been formed and operated for the purpose of purchasing or acquiring specific types of debt instruments or interests therein and holding those assets subject to reinvestment only under prescribed circumstances to maturity.
  • Substantially all of the ASV’s assets must consist of debt instruments or interests in debt instruments.
  • All payments made to the ASV investors (other than holders of a de minimis interest) must either be cleared through a clearing organization or custodial institution that is a participating FFI, reporting Model 1 FFI, or U.S. financial institution or made through a transfer agent that is a participating FFI, reporting Model 1 FFI, or U.S. financial institution.
  • The trustee of the ASV must not be authorized through a fiduciary duty or otherwise to fulfil the obligations of a “participating” FFI under the Regulations and no other person must have the authority to fulfil the obligations of a participating FFI on behalf of the ASV.

An ASV that meets these requirements will be treated as a certified deemed-compliant FFI and will not be required to conduct FATCA due diligence or reporting obligations in respect of its account holders. The original transitional relief only applied until 1 January 2017. The new relief, while still referred to in the Regulations as “transitional”, has removed this date limitation, and the supplementary information accompanying the Regulations indicates that an LLDIE relying on this relief will be treated as a certified deemed-compliant FFI until the LLDIE liquidates or terminates.

  1. Clarification of grandfathering for certain life insurance contracts

The Regulations provide grandfathering relief to certain life insurance contracts that permit substitution of an insured, until such time as the substitution provision is invoked.

  1. General

A number of changes align the definitions in the Regulations with the Model 1 and Model 2 IGAs.

The Regulations are awaiting final publication by the US Office of the Federal Register and as such are subject to change before final publication.

What do you need to do by 1 July 2014?

FFIs that are advanced in establishing their systems and processes for compliance with FATCA should consider whether any changes need to be made to the work undertaken to date.

Those FFIs that have not yet established measures to ensure compliance with FATCA should do so with an increasing sense of urgency, given the dates for withholding and the due diligence obligations start on 1 July 2014.