The final FATCA Regulations: highlights

Updated August 27, 2013

International Tax Compliance Alert (US)

The US Treasury Department has issued the final FATCA regulations.

Although simplified and clarified, the Regulations are lengthy (544 pages) and more than 150 pages longer than the Proposed Regulations.[1]

In drafting the Regulations, the US Treasury Department adopted a targeted, risk-based approach to implement FATCA by balancing policy considerations and administrative burdens and more fully incorporating local AML/KYC documentation practices. The Regulations detail the operational aspects of implementing FATCA – to reduce administrative burdens and clarify the interaction of the unilateral regulatory regime with the bilateral intergovernmental (IGA) regime.

Of particular importance is that the Regulations fill in many of the gaps that foreign financial institutions (FFIs) had as to how to implement FATCA. Nevertheless, FFIs, particularly global financial institutions, will have continuing challenges implementing the rules under the Regulations and IGAs within the current timelines among geographies, lines of business, clients and products. With the six-month extension announced in Notice 2013-43, FFIs will have much needed additional time to implement FATCA.

HEADLINE CHANGES

  • Withholding: grandfathered date extended for obligations outstanding on July 1, 2014 and for gross proceeds and foreign passthru payments occurring before January 1, 2017.
  • Covered FFIs: clarified and scope limited; non-professionally managed passive entities now are non-financial foreign entities (NFFEs), not FFIs; clarification of scope of depository institutions, insurance companies and investment funds.
  • Financial account: clarified and scope limited.
  • Deemed compliant: current category requirements relaxed and several new categories added.
  • Retirement funds: exempted categories expanded and relaxed.
  • Due diligence/documentation rules: calibrated, based on value, risk profile; greater reliance on currently existing information, AML/KYC and local statements and self-certifications.
  • Timing: delay timeframes to review existing accounts and implement FATCA’s obligations in stages.
  • Compliance and verification: FFI obligations detailed with respect to establishing, reviewing and remediating compliance program.
  • Local law conflicts with FFI Agreement: FFI’s withholding and reporting obligations under an FFI Agreement and local law conflicts clarified.
  • Regulation and IGA/definitional conformance: numerous definition variances and other items under Proposed Regulations and IGAs conformed.
  • IGAs: details provided as to interaction of Regulations and IGAs.
  • IRS FATCA Registration Website: the Website is now open; the IRS has now provided much detail in the form of a User Guide, other online guidance and videos on accessing and using the Website.

OVERVIEW

The Regulations contain myriad, detailed rules. This Alert focuses on a number of the important changes between the Regulations and the Proposed Regulations. Future alerts will analyze more technical aspects of the Regulations.

WITHHOLDING

  • Grandfathering. Obligations outstanding on July 1, 2014, and associated collateral, are exempt from FATCA withholding.
  • Foreign passthru payments. Exempted from FATCA withholding until the later of January 1, 2017, or six months after the date of publication of final regulations defining the term “foreign passthru payments.”
  • Dividend equivalent payments. Exempted from FATCA withholding with respect to obligations outstanding any time prior to six months after the final regulations published.
  • US source FDAP. July 1, 2014 for certain payees; then in subsequent years phased in for other payees.
  • Gross proceeds from US obligations. Exempted from FATCA withholding until January 1, 2017.

COVERED FFIS

  • Depository institution: precondition is accepting deposits in the ordinary course of its business with customers; in addition, the entity must regularly engage in one or more of the banking or financing activities enumerated in the Regulations; thus, finance companies that do not fund operations through deposits are excluded. The Regulations also clarify that an IGA controls as to whether a resident entity described in an applicable IGA is an FFI.
  • Investment entity: definition is clarified. An investment entity encompasses a wide array of investment oriented entities and means (i) an entity that primarily conducts as business on behalf of customers (a) trading in an enumerated list of financial instruments, (b) individual or collective portfolio management, or (c)  otherwise investing, administering, or managing funds, money, or financial assets on behalf of other persons; (ii) an entity whose income is primarily attributable to investing, reinvesting or trading in financial assets and is professionally managed by an FFI; or (iii) an entity that functions or holds itself out as a collective investment vehicle, mutual fund, hedge fund or similar investment vehicle established with an investment strategy of investing, reinvesting or trading in financial assets.  Thus, investment entities include entities that provide financial services to customers, such as investment management or administration, whether or not the entity holds financial assets, but exclude non-professionally managed investment entities, which will be treated as passive NFFEs. 
  • Certain holding companies and treasury centers: limit the circumstances under which a holding company or treasury center is treated as an FFI.

FINANCIAL ACCOUNT

  • The Regulations limit the scope of the term “depository account” in a number of ways and, in that regard, provide clarifying guidance with respect to equity or debt interests in different types of financial institutions.
  • The Regulations simplify insurance definitions and contracts and clarify when an insurance company is an FFI or an NFFE.
  • The Regulations expand the exception from financial account status for certain savings accounts to accommodate savings vehicles used in a number of countries.

DEEMED COMPLIANT

  • The Regulations generally retain the same deemed compliant categories included in the Proposed Regulations, subject to modification and clarification, and add new categories for certain credit card issuers, sponsored FFIs (i.e., where a trustee or fund manager manages trusts or funds on a consolidated basis) and limited-life debt investment entities.
  • Insurance companies can now qualify as local FFIs and FFIs with only low-value accounts.
  • The Regulations have relaxed various requirements for registered deemed compliant FFIs, including local FFIs, qualified collective investment vehicles and restricted funds.
  • The Regulations have added a six-month “cure” period to correct non-compliance with the deemed compliant requirements.
  • Retirement fund deemed compliant categories have been moved to the “exempt beneficial owner” category.
  • Nonprofit entities have been moved from the deemed compliant category to the excepted NFFE category.
  • IGA deemed compliant entities will be treated as deemed compliant entities under the Regulations.

RETIREMENT FUNDS

The Regulations expand the circumstances under which certain classes of entities qualify for exemption from FATCA, including certain retirement funds and exempt beneficial owners identified in an IGA.

DUE DILIGENCE/DOCUMENTATION RULES

  • The Regulations significantly modify and relax general requirements for identifying, documenting and retaining documentation of account holders and the interaction with AML/KYC rules. The Regulations in certain circumstances permit reliance on withholding certificates, written statements, elimination of the penalty of perjury requirements, substitute and non-IRS forms (including forms in a foreign language), reliance on pre-FATCA W-8 Forms; the treatment of a new account of a pre-existing customer as a pre-existing account; curing inconsequential errors; the validity of documentation; how and when the changed circumstances rule applies and its impact on documentation; rules with respect to reliance on documentation from other parties and in a “bulk" acquisition; and reliance on electronic transmission of documentation.
TIMING
As modified by Notice 2013-432,  there will be delayed time frames both under the Regulations and IGAs for various actions, to include:
  • An FFI Agreement for a PFFI that registers and receives a GIIN (Global Intermediary Identification Number) from the IRS on or before June 30, 2014, will have an effective date of June 30, 2014.
  • New account due diligence procedures commence July 1, 2014, or the effective date of the FFI Agreement.
  • Preexisting Obligations are accounts maintained and outstanding on June 30, 2014; account holder documentation is delayed until June 30, 2016 for other than prima facie FFIs and High Value Individual Account holders, which now have a due date six months after their original due date.
  • Reporting account information to the IRS, on Form 8966, with respect to 2014 calendar year, is delayed until March 31, 2015.

FFI AGREEMENT AND LOCAL LAW CONFLICTS

  • The Regulations provide that an FFI may enter into an FFI Agreement if it can meet the following requirements: (i) if foreign law prohibits a Participating FFI from fulfilling its withholding obligations with respect to an account, the Participating FFI must close the account within a reasonable time or, if local law prohibits closing the account, the Participating FFI must block of transfer the account; and (ii) if a Participating FFI is prohibited by foreign law, absent a waiver, from reporting information on an account that it must treat as a US account, the Participating FFI must request a waiver of foreign law from the account holder and if such waiver is not obtained within a reasonable period of time, the Participating FFI must close or transfer such account. If an FFI cannot meet the foregoing requirements, it is not eligible to enter in an FFI Agreement but may obtain status as a “limited FFI” or “limited branch” if conditions are satisfied. That status causes the limited FFI or limited branch to be subject to FATCA withholding but does not disqualify the expanded affiliated group from becoming non-compliant FFI through 2015.
  • Caveat. After December 31, 2015, under the Regulations, all FFIs within an expanded affiliated group must be compliant. Thus, non-IGA FFIs/branches will not be treated as compliant and will become subject to the FATCA withholding tax unless the local country changes its laws to allow compliance with FATCA or the country enters into an IGA (IGA country FFIs/branches can remain compliant if certain conditions are met under the IGA).

COMPLIANCE AND VERIFICATION

  • The Regulations provide detailed rules with respect to Participating FFI compliance, to include appointment of a responsible officer, establishment of a compliance program that includes policies, procedures and processes sufficient for the Participating FFI to satisfy the FFI Agreement requirements, responsible officer periodic review of the compliance program, material failures, events of default, certification and remediation, and IRS review.
  • A responsible officer may be any officer of the Participating FFI or reporting Model 1 FFI in the Participating FFI’s expanded affiliated group with sufficient authority to fulfill the duties of a responsible officer as described in the Regulations.

REGULATION/IGA CONFORMANCE

  • The Regulations conform the definition of many FATCA terms to those contained in IGAs to avoid disparities that were contained in the Proposed Regulations. The Regulations also conform various items related to due diligence, such as timing and when changed circumstances must be reported.

IGAS

  • FFIs covered by, and compliant with, Model 1 IGAs do not need to comply with the Regulations for purposes of avoiding FATCA withholding, but must register, as discussed below.
  • In certain cases, the laws of a FATCA Partner jurisdiction may allow an FFI to elect to apply the provisions of the Regulations instead of IGA.
  • FFIs covered by Model 2 IGA will be required to implement FATCA in manner prescribed by Regulations except to the extent expressly modified by the Model 2 IGA but must register, as described below.

FATCA REGISTRATION WEBSITE

  • The FATCA Registration Website will be the primary means for FFIs to interact with the IRS to create, complete and maintain their FATCA registrations, agreements and certifications.[2]
  • The Website is a paperless, secure online web portal.
  • The Website will be used for registration, electronic communication between the IRS and FFIs and other FATCA communications.
  • The Website opened August 19, 2013.
  • Although an FFI can utilize paper Form 8937 to register, rather than the Website, the IRS strongly encourages registration through the Website.
  • Registration is done by entities on behalf of themselves and their branches.
  • All FFIs other than certified deemed compliant FFIs and exempt beneficial owners will be required to register.
  • A Financial Institution may register as a Single FI, a Lead FI, a Member FI or a Sponsoring Entity.
  • Once an FFI receives approval, the IRS will issue a GIIN (Global Intermediary Identification Number) to each Participating FFI and registered deemed compliant FFI. A GIIN will be used as the ID number for identifying the FFIs status to a withholding agent and for its reporting obligations.
  • Although an FFI can create an account in 2013, registrations can only be finalized in 2014.
  • The IRS will electronically post the first IRS list of Participating FFIs and registered deemed compliant FFIs on June 2, 2014, and will update the list on a monthly basis.
  • The last date by which an FFI can register with the IRS to ensure inclusion on the June 2014 IRS FFI list is April 25, 2014.

FORTHCOMING IRS GUIDANCE

  • The IRS will publish Regulations that correct and clarify certain points and will issue Proposed Regulations on issues reserved in the Regulations.

  • The IRS has issued and will continue to issue new forms (and instructions) related to FATCA compliance.
  • In addition, it is anticipated that the IRS will issue other administrative guidance with respect to FATCA.
For more information about the FATCA Regulations, please contact Witold Jurewicz.


 

[1] This alert was updated on August 27, 2013 to incorporate the extensions announced by IRS Notice 2013-43 (the Notice) and to reflect the opening of the IRS FATCA Registration Website.  The US Treasury Department and the IRS intend to amend the Regulations to adopt the extension contained in the Notice.  For additional information about the Notice,  please see our July 12, 2013 alert, IRS announces six-month delay in FATCA implementation.

[2] Please see our August 20, 2013 alert, IRS opens online FATCA registration system: financial institutions may now sign in .