Keeping up to speed on FATCA

By Jay A. Ballesteros

First Published in Business World (1/6/2014)

In January 2013, the US Treasury and the US Internal Revenue Service (IRS) issued the much-awaited final regulations on the Foreign Account Tax Compliance Act (FATCA).

These final regulations addressed many of the major issues that were pointed out in comments on the proposed regulations, issued in February 2012. They also incorporated what the US government views as a targeted, risk-based approach aimed at limiting the scope of impacted entities, obligations and accounts and reducing due diligence and compliance burdens, while maintaining the policy objective of improved information reporting with respect to US taxpayers with assets in non-US jurisdictions.

On July 12, 2013, the US Treasury and the IRS released Notice 2013-43, which announced a delay of key timelines for implementation of many of the FATCA provisions affecting withholding agents, foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs). In addition, the Notice provided updates on the FATCA Portal, which is to be used by FFIs to enter into FFI Agreements (FFIAs) and/or register for FATCA purposes, and by all withholding agents to verify Global Intermediary Identification Numbers (GIINs) provided to them by FFIs. The FATCA Portal opened last August 19, 2013.

The Notice provided the following new timelines for withholding agents, registered deemed-compliant FFIs and FFIs whose agreements with the IRS will become effective on June 30, 2014:

• FATCA withholding on new accounts will become effective July 1, 2014.
• Changes to customer onboarding processes as required by FATCA must be in place by July 1, 2014.
• Accounts opened before July 1, 2014 will be considered to be “pre-existing accounts.”
• Obligations issued before July 1, 2014 (and associated collateral) will be “grandfathered obligations” for FATCA purposes.
• The period for performing due diligence on pre-existing accounts generally is extended by six months. For example, US withholding agents must review pre-existing accounts of prima facie FFIs by December 31, 2014. Likewise, a participating FFI must perform an enhanced review of pre-existing high-value individual accounts by July 1, 2015. Accordingly, the corresponding withholding obligations with respect to US-source fixed or determinable annual or periodical (FDAP) income for pre-existing accounts is delayed by six months.

• Although the FATCA Portal was opened on August 19, 2013, information entered into the Portal before January 1, 2014 will not be treated as a final submission. FFIs may finalize their registration information beginning on or after January 1, 2014. The first IRS FFI List is estimated to be posted by June 2, 2014 and will be updated monthly thereafter. To ensure inclusion in the initial list, FFIs must finalize their registration by April 25, 2014. No GIINs will be issued in 2013.

• Withholding certificates (Forms W-8) and documentary evidence otherwise expiring on December 31, 2013 will now expire on June 30, 2014, unless a change of circumstances occurs that would otherwise render the documents unreliable.

The effective date for withholding on gross proceeds, payments of US source FDAP income paid with respect to offshore obligations by non-intermediaries and, potentially, pass-thru payments has not been changed and remains as January 1, 2017.

Additional changes applicable to FFIs include:
1) A one-year deferral (to December 31, 2015) of the requirement to monitor the account balance of pre-existing accounts to determine whether enhanced review is required, and
2) Removal of the requirement to report on US accounts by March 31, 2015 with respect to calendar year 2013.

The Notice also addressed the treatment of FFIs located in jurisdictions that have signed intergovernmental agreements (IGAs) with the United States during the period when those agreements are not yet in force. These countries include Cayman, Costa Rica, Denmark, France, Germany, Ireland Malta, Mexico, Norway, Spain, Switzerland and United Kingdom. So far, the only country in Asia Pacific that has signed an IGA is Japan but it is expected that several others will follow.

On October 29, 2013, the IRS also issued Notice 2013-69, which generally provided guidance to FFIs entering into FFIAs with the IRS to be treated as participating FFIs, including FFIs in Model 2 IGA countries. The Notice also contained a draft FFIA.

FFIs in Model 1 IGA countries are not required to enter into FFIAs. The “Model 1 IGA” allows FFIs in a partner jurisdiction to satisfy their FATCA requirements by reporting specified information about US accounts to their government, which will furnish that information to the IRS.

The “Model 2 IGA,” on the other hand, allows FFIs in a partner jurisdiction to report directly to the IRS according to the final regulations (as modified by the applicable Model 2 IGA).

The draft FFIA clarified how FFIs with branches in various types of jurisdictions (i.e., Model 1 countries, Model 2 countries, jurisdictions in which FFIs will be able to enter into FFIAs, jurisdictions in which FFIs will not be able to enter into FFIAs due to local law limitations and in the United States as US branches, among others) must operate.

Last December 26, 2013, the IRS unveiled the much awaited final agreement for FFIs that will have to sign up for direct reporting of their US-owned accounts in Revenue Procedure 2014-13.

With less than a few months before FATCA takes effect, local financial institutions are encouraged to develop, if they have not yet done so, a roadmap on how to assess and/or implement the organizational and operational implications required by FATCA. The extension in the timelines provides FIs with some breathing space to effect the necessary changes, but decisions will have to be strategically made as soon as possible considering that FATCA impacts every financial institution, either directly in their core business or indirectly through relationships with other financial institutions and the financial market infrastructure. It is public knowledge that industry associations in the United States have requested a further extension of time. So far, US government officials have been adamant that there will be no further extensions of time.

Jay A. Ballesteros is a Tax Senior Director at SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.