New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney www.sullcrom.com October 1, 2015 FATCA: Recent Developments IRS and Treasury Department Issue Notice Postponing Certain FATCA Deadlines and Announce Competent Authority Arrangements with Australia and the United Kingdom SUMMARY On September 18, 2015, the IRS and Treasury Department issued Notice 2015-66 (the “Notice”). Most significantly, the Notice announces that the start of withholding on “foreign passthru payments” and “gross proceeds” will be postponed for at least two years. In addition, the Notice states the rules applying FATCA withholding to collateral will be modified in ways intended to simplify their application and clarify their scope. The Notice also extends a number of other FATCA-related deadlines. The table below summarizes the changes that the Notice makes to the FATCA implementation timetable: Milestone New Date Prior Date “Gross proceeds” withholding Dispositions occurring after December 31, 2018 Dispositions occurring after December 31, 2016 “Foreign passthru payment” withholding January 1, 2019 (or, if later, the date when final regulations defining “foreign passthru payments” are published) January 1, 2017 (or, if later, the date when final regulations defining “foreign passthru payments” are published) End of “limited branch” and “limited FFI” status December 31, 2016 (though reregistration is required after December 31, 2015) December 31, 2015 Deadline for sponsoring entities to register sponsored FFIs and sponsored direct reporting NFFEs, generally January 1, 2017 The later of January 1, 2016 or the date that the FFI identifies itself as qualifying as a registered deemed compliant FFI Deadline for sponsoring entities to register IGA-covered sponsored FFIs December 31, 2016 or, in the case of an entity covered by a Model 1 IGA, the date that is 90 days after a U.S. reportable account is first identified December 31, 2015 or, in the case of an entity covered by a Model 1 IGA, the date that is 90 days after a U.S. reportable account is first identified -2- FATCA: Recent Developments October 1, 2015 Milestone New Date Prior Date Timing for partner jurisdictions to exchange 2014 reportable information under a Model 1 IGA Obligation to exchange has not taken effect: Information that would have been reportable on September 30, 2015 must be reported by September 30, 2016, along with information that is reportable on September 30, 2016. Partner jurisdiction must demonstrate firm resolve to bring the IGA into force Obligation to exchange has taken effect: As soon as possible, as long as the partner jurisdiction notifies the U.S. competent authority of the delay by September 30, 2015 Obligation to exchange has not taken effect: In general, September 30, 2015 Obligation to exchange has taken effect: September 30, 2015 Additionally, on September 24, 2015, the IRS announced that it had signed “Competent Authority Arrangements” (the “CAAs”) with Australia and the United Kingdom. The CAAs supplement the intergovernmental agreements (“IGAs”) between these countries and the United States. Among other guidance, the CAAs provide examples of when a financial institution may be in “significant noncompliance” with an IGA and specify operational protocols for exchanging FATCA information. BACKGROUND FATCA, which was enacted by Congress in March 2010, is intended to prevent U.S. citizens and residents from evading their U.S. tax obligations by holding assets offshore. To accomplish this objective, FATCA establishes a set of withholding, information reporting and due diligence requirements for U.S. withholding agents and “foreign financial institutions” (“FFIs”). FFIs that sign an agreement (“FFI Agreement”) with the United States to comply with FATCA’s rules are referred to as “participating FFIs”. In general, if one FFI seeks “participating FFI” status (or certain types of “deemed compliant” status), each affiliate and branch within its “expanded affiliated group” must either be compliant with (or exempt from) FATCA.1 FFIs that do not comply with FATCA or qualify for an exemption are subject to a 30% withholding tax.2 Three types of payments can be subject to this withholding tax: (i) “U.S.-source FDAP income” (such as U.S.-source interest and dividends); (ii) “gross proceeds” from the sale or exchange of property that gives rise to U.S.-source dividends or interest; and (iii) “foreign passthru payments” (i.e., 1 An expanded affiliated group is generally defined as one or more chains of entities connected with a common parent through at least 50% ownership. A similar (although not identical) rule exists for FFIs covered by IGAs. 2 So-called “recalcitrant account holders” of participating FFIs are also subject to such withholding. Additional background on FATCA and the underlying regulations can be found in the Sullivan & Cromwell LLP publications entitled “FATCA: Final Regulations” (February 26, 2013) available here: https://www.sullcrom.com/FATCA_Final_Regulations, “FATCA: Updates and Coordinating Regulations” (March 21, 2014) available here: https://www.sullcrom.com/fatcaupdates-and-coordinating-regulations-treasury-releases-lastsubstantial-regulations-package-necessary-to-implement-fatca and “FATCA: Transitional Relief” (May 7, 2014) available here: https://www.sullcrom.com/fatca-transitional-relief-soft-opening-forfatca-2014-and-2015-deemed-a-transition-period-and-other-limited-transitional-relief-under-fatcaannounced. -3- FATCA: Recent Developments October 1, 2015 payments that do not arise from U.S. sources, but are “attributable to” a payment of U.S.-source FDAP income or “gross proceeds”). Since 2012, the Treasury Department has entered into intergovernmental agreements (“IGAs”) to facilitate the implementation of FATCA. IGAs are intended to remove domestic legal impediments to FATCA compliance and reduce burdens on FFIs located in jurisdictions (“partner jurisdictions”) that enter into IGAs. There are two principal models of IGAs: (i) “Model 1 IGAs”, under which covered FFIs report FATCA information to the partner jurisdiction, which then transmits the information to the IRS, and (ii) “Model 2 IGAs”, under which a partner jurisdiction agrees to facilitate FATCA compliance by its resident FFIs, but local FFIs generally must still report information about U.S. accounts directly to the IRS. At present, 112 IGAs have been either signed or “agreed in substance”. Many elements of FATCA took effect in July 2014 when, among other things, FATCA withholding (on U.S.-source “FDAP income”) was first required. However, certain aspects of FATCA either are not yet implemented, or are subject to transitional rules, including the following: So-called “grandfathered obligations” (including arrangements to secure other “grandfathered obligations”) are not subject to FATCA withholding; Payments made prior to January 1, 2017 by a secured party (or to a secured party, other than a “nonparticipating FFI”) with respect to collateral are generally not subject to FATCA withholding;3 FATCA withholding has not yet started on “gross proceeds” and “foreign passthru payments” (and was previously scheduled to begin on such amounts no earlier than January 1, 2017); and The first information exchange under FATCA was not scheduled to take place until September 30, 2015. DISCUSSION A. POSTPONEMENT OF WITHHOLDING ON GROSS PROCEEDS AND FOREIGN PASSTHRU PAYMENTS According to the Notice, “gross proceeds” withholding will not apply to sales or dispositions that occur prior to January 1, 2019, and “foreign passthru payment” withholding similarly will not apply to payments made before January 1, 2019. Both “gross proceeds” withholding and “foreign passthru payment” withholding were previously scheduled to begin on January 1, 2017. The FATCA regulations separately provide that “obligations”4 that are outstanding prior to the date that is six months after the date when “foreign passthru payments” are first defined in final regulations are generally “grandfathered” from “foreign passthru payment” withholding. The Notice does not change this rule. However, the Notice contains no indication as to when the IRS and Treasury Department intend to issue such regulations (either in proposed or final form). 3 See Treas. Reg. § 1.1473-1T(a)(4)(vii). 4 “Obligation” is a defined term that includes most debt instruments and other binding legal agreements, other than instruments that either are treated as equity for U.S. federal income tax purposes or that lack a pre-defined expiration date. See Treas. Reg. § 1.1471-2(b)(2)(ii). -4- FATCA: Recent Developments October 1, 2015 B. TRANSITION RULES FOR COLLATERAL ARRANGEMENTS According to the Notice, two changes will be made—in response to industry comments—to the treatment of collateral arrangements under FATCA. The first of these changes modifies the treatment of pooled collateral. In particular, as noted above, a collateral arrangement that secures a “grandfathered obligation” (including, for example, an individual swap contract entered into before the relevant “grandfathering deadline”) is itself a “grandfathered obligation”. However, a collateral arrangement that secures a “non-grandfathered” obligation is not a “grandfathered obligation”. The current FATCA regulations provide that if collateral (or a pool of collateral) secures both “grandfathered obligations” and other agreements, the collateral posted to secure the “grandfathered obligations” must be determined by allocating (pro rata by value) the collateral to all obligations secured by that collateral.5 According to the Notice, commentators have stated that applying a pro rata approach to pools of collateral that secures both “grandfathered” and “non-grandfathered” obligations could be administratively burdensome. In response to this feedback, the Notice announces that the IRS and Treasury Department intend to amend the FATCA regulations to allow such secured parties to either (i) withhold on all collateral or (ii) apply a pro rata approach. The second collateral-related change announced in the Notice clarifies the treatment of substitute payments. In particular, the Notice observes that commentators have expressed concerns that the definition of a “grandfathered obligation” may not include an obligation (such as a commitment to make substitute interest payments) that arises from the posting of “grandfathered obligations” (such as debt instruments issued before July 1, 2014) as collateral. To address these concerns, the Notice announces that the IRS and Treasury Department will amend the definition of a “grandfathered obligation” to include an obligation to make substitute payments in respect of collateral that is otherwise treated as “grandfathered”. C. EXTENSION OF LIMITED FFI AND LIMITED BRANCH STATUS As noted above, the FATCA regulations generally require each FFI and branch within an “expanded affiliated group” that includes a “participating FFI” or a “registered deemed compliant” FFI to be FATCA-compliant. To accommodate FFIs with affiliates and branches that are subject to local laws that prohibit full compliance with FATCA, a transition rule allows such groups to include “limited FFIs” and “limited branches”. Such “limited FFIs” and “limited branches” are subject to less stringent requirements and are not required to report information to the IRS if doing so would conflict with local law, but are subject to full FATCA withholding, as if they were “nonparticipating FFIs”. The current FATCA regulations provide that the availability of “limited branch” and “limited FFI” status is due to expire on December 31, 2015.6 5 See Treas. Reg. § 1.1471-2(b)(2)(i)(A). 6 FFIs and branches covered by an IGA are not subject to these rules. Instead, “related entities” to IGA-covered FFIs are subject to a different set of requirements which—while similar to the “limited FFI” and “limited branch” rules—do not expire. See, e.g., U.S. Dep’t of the Treasury, Model 1A IGA (Nov. 4, 2013), at Art. 4 ¶ 5. -5- FATCA: Recent Developments October 1, 2015 The Notice announces an extension of the sunset date for “limited FFI” and “limited branch” status to December 31, 2016. However, the Notice also states that all “limited FFIs” and “limited branches” that intend to take advantage of the extended deadline will be required to update their status on the FATCA registration website after December 31, 2015. D. REGISTRATION OF SPONSORED ENTITIES Under FATCA, certain types of FFIs (i.e., investment entities and controlled foreign corporations) can become “registered deemed compliant” FFIs if their FATCA responsibilities are assumed by a “sponsoring entity”.7 A “direct reporting” NFFE (i.e., an NFFE that agrees to satisfy reporting requirements that are similar to those imposed on FFIs) similarly can elect to have its FATCA responsibilities assumed by a “sponsoring entity”.8 Although “sponsors” must currently be registered with the IRS, “sponsored entities” themselves are not yet required to be registered. Rather, under the current FATCA regulations, “sponsored registered deemed compliant” FFIs generally have until January 1, 20169 to complete this process, while “sponsored” entities covered by an IGA are generally required to register by December 31, 2015.10 Consistent with this, the current FATCA regulations permit “withholding certificates” (such as IRS Forms W-8BEN-E and W-8IMY) given by “sponsored” entities to provide the GIIN assigned to the “sponsoring” entity (rather than the GIIN assigned to the provider of the form) until January 1, 2016.11 According to the Notice, these deadlines will be extended by one year. Therefore, “sponsored registered deemed compliant FFIs” and “sponsored direct reporting NFFEs” covered under the FATCA regulations will have until January 1, 2017 to register with the IRS. Similarly, the deadline for “sponsored investment entities” and “sponsored controlled foreign corporations” covered by a Model 1 or 2 IGA to register with the IRS will be extended to December 31, 2016 or, in the case of entities covered by a Model 1 IGA, 90 days after the entity first identifies a “U.S. reportable account” (if later). Withholding agents will also be able to continue making payments to a sponsored “registered deemed compliant FFI” or “direct reporting NFFE” that has been documented using its sponsor’s GIIN until January 1, 2017. 7 See Treas. Reg. § 1.1471-5(f)(1)(i)(F). Certain “closely held investment vehicles” may, alternatively, qualify as “certified” deemed compliant FFIs. See Treas. Reg. § 1.1471-5T(f)(2)(iii). Such “certified” deemed compliant FFIs are not required to register with the IRS (although their “sponsoring” entities must do so). 8 See Treas. Reg. § 1.1472-1T(c)(5). 9 See Treas. Reg. § 1.1471-5(f)(1)(i)(F)(3)(iii). 10 See U.S. Dep’t of the Treasury, Model 1 IGA, Annex II (Nov. 4, 2013), at § IV.B.3.c; U.S. Dep’t of the Treasury, Model 2 IGA, Annex II (Nov. 4, 2013), at § IV.B.3.c. Entities covered by a Model 1 (but not Model 2) IGA are, however, exempt from this registration requirement until 90 days after they identify a “U.S. reportable account”. 11 See Treas. Reg. § 1.1471-3(d)(4)(i) (sponsored FFIs); Treas. Reg. § 1.1471-3(d)(11)(xi) (sponsored direct reporting NFFEs). -6- FATCA: Recent Developments October 1, 2015 E. MODEL 1 IGA INFORMATION EXCHANGE There are currently 112 IGAs that have been either signed or “agreed in substance”. However, not all of these IGAs have entered into force, and in some jurisdictions where a Model 1 IGA has entered into force, enabling legislation (which is necessary to allow local tax authorities to exchange information with the United States) has not yet been enacted. In general, however, Model 1 IGAs require jurisdictions to provide FATCA information within nine months of the end of the calendar year to which the information relates (i.e., by September 30, 2015).12 According to the Notice, the IRS and Treasury Department are aware of these difficulties and intend to provide transitional relief to FFIs located in “Model 1” IGA jurisdictions. Therefore, to the extent a jurisdiction has signed a Model 1 IGA (or agreed to one “in substance”) but that IGA has not yet entered into force on September 30, 2015, the Notice states that the IRS and Treasury Department intend to continue treating FFIs covered by that IGA as FATCA-compliant, so long as the relevant “partner jurisdiction” continues to demonstrate “firm resolve” to bring the IGA into force (and any information that would have been reportable on September 30, 2015 is exchanged by September 30, 2016).13 Likewise, to the extent an IGA has entered into force (but the relevant “partner jurisdiction” is unable to meet the September 30, 2015 deadline for exchanging information), the Notice provides that the IRS and Treasury Department intend to treat covered FFIs as FATCA-compliant if the partner jurisdiction: (i) notifies the U.S. competent authority of the delay before September 30, 2015; and (ii) provides assurance that it is making “good faith efforts” to provide the required information as quickly as possible. In both cases, these concessions apply only to partner jurisdictions, and do not directly affect the deadlines imposed on FFIs. F. COMPETENT AUTHORITY ARRANGEMENTS The CAAs supplement the IGAs between the United States and each of Australia and the United Kingdom. The press release announcing the CAAs states that the IRS expects that “numerous” similar agreements will be signed in the near future.14 Perhaps most significantly, the CAAs provide additional detail on when a financial institution may be found to be in “significant non-compliance” with each IGA, a status that can lead to both penalties imposed under domestic law and, in the case of an FFI that is in “significant non-compliance” for 18 months, being treated as a “nonparticipating” FFI under FATCA. According to the CAAs, “significant non-compliance” can include: (i) reporting failures by an FFI (both with respect to U.S. reportable accounts and payments to “nonparticipating” FFIs); (ii) in cases where “administrative or other minor 12 See, e.g., U.S. Dep’t of the Treasury, Model 1A IGA (Nov. 4, 2013), at Art. 3 ¶ 5. 13 The Notice observes that this is consistent with agreements that the IRS and Treasury Department have reached with some IGA jurisdictions. 14 See Internal Revenue Service, “U.S. Signs Competent Authority Arrangements with Australia and the United Kingdom in Accordance with the Intergovernmental Agreements” (September 24, 2015). -7- FATCA: Recent Developments October 1, 2015 errors” occur (such as incorrect or incomplete reporting), not making timely corrections; and (iii) other infringements of the IGA, including non-compliance with the limitations that each IGA places on “nonparticipating” entities and branches that are related to an Australian or UK financial institution. Additionally, the CAAs specify a number of technical and operational details that relate to information exchange. Consistent with other recent guidance, each CAA also observes that both the IRS and the local competent authority view 2014 and 2015 as a “transition period”, and accordingly intend to take into account the good faith efforts of affected parties when pursuing enforcement. G. ADDITIONAL DEVELOPMENTS Finally, the Australian Taxation Office has announced that it will be providing information on over 30,000 accounts to the IRS, with a balance in excess of $5 billion.15 Many observers were surprised at the magnitudes involved, and this announcement highlights the extent of the burdens imposed on FFIs and others in complying with FATCA, together with the massive task the IRS will have in analyzing the information supplied. * * * 15 See Australian Taxation Office, “A Major Step in Global Transparency” (September 23, 2015). Copyright © Sullivan & Cromwell LLP 2015 -8- FATCA: Recent Developments October 1, 2015 LONDON:518069.2A ABOUT SULLIVAN & CROMWELL LLP Sullivan & Cromwell LLP is a global law firm that advises on major domestic and cross-border M&A, finance, corporate and real estate transactions, significant litigation and corporate investigations, and complex restructuring, regulatory, tax and estate planning matters. Founded in 1879, Sullivan & Cromwell LLP has more than 800 lawyers on four continents, with four offices in the United States, including its headquarters in New York, three offices in Europe, two in Australia and three in Asia. CONTACTING SULLIVAN & CROMWELL LLP This publication is provided by Sullivan & Cromwell LLP as a service to clients and colleagues. The information contained in this publication should not be construed as legal advice. Questions regarding the matters discussed in this publication may be directed to any of our lawyers listed below, or to any other Sullivan & Cromwell LLP lawyer with whom you have consulted in the past on similar matters. If you have not received this publication directly from us, you may obtain a copy of any past or future related publications from Stefanie S. Trilling (+1-212-558-4752; email@example.com) in our New York office. CONTACTS New York Andrew P. Solomon +1-212-558-3783 firstname.lastname@example.org S. Eric Wang +1-212-558-3328 email@example.com Dana E. Brodsky +1-212-558-3949 firstname.lastname@example.org London S. Eric Wang +44-20-7959-8411 email@example.com Michael Orchowski +44-20-7959-8504 firstname.lastname@example.org
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