Foreign Income & Taxpayers
The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147. It requires foreign financial institutions (FFIs) to enter into an agreement with the IRS to (1) perform due diligence regarding their investors to determine whether or not they have direct or indirect U.S. investors, (2) report infor mation about their direct and indirect U.S. investors, and (3) withhold amounts payable to investors who refuse to provide infor mation to the FFI (recalcitrant account holders) and o ther FFIs that do not comply with their obligations under FATCA (noncompliant FFIs), or FFIs that elect to have funds withheld.
If an FFI does not enter into an agreement with the IRS (or qualify for the benefits of an intergovernmental agreement (IGA)), it will be subject to a 30% withholding tax on its U.S.-source interest and dividends (FDAP) and gross proceeds from the disposition of property that gives rise to U.S.-source interest and dividends. It is generally believed that compliance under an IGA will be simpler than compliance through an FFI agreement.
Treasury has published two model IGAs. Under the Model 1 IGA, FFIs would report information about U.S. account holders to their government without having to enter into an FFI agreement. The local government then would report the information to the IRS. Under the Model 2 IGA, the FFIs are required to enter into an FFI agreement and must comply with the requirements as modified by the terms of the IGA. Under both models, the FFIs are required to register with the IRS.
In response to concerns of FFIs and practitioners, the IRS on July 12 announced in Notice 2013-43 that it will amend the final regulations to revise timelines for the implementation of certain key dates (generally by six months) as well as provide additional guidance concerning the treatment of FFIs located in jurisdictions that have signed IGAs, but have not yet brought those IGAs into force. Key changes included:
- The online FATCA registration portal opened on Aug. 19, 2013, instead of July 15, 2013, as was originally scheduled;
- Withholding on interest and dividends from U.S. securities will begin on July 1, 2014, instead of Jan. 1, 2014, for payments made on and after that date to payees that are FFIs or nonfinancial foreign entities, for obligations that are not grandfathered obligations, unless the payments can be reliably associated with documentation on which the withholding agent can rely to treat the payments as exempt from withholding. The notice did not change the timeline for withholding on gross proceeds, passthrough payments, and payments of U.S.-source FDAP for offshore obligations by persons not acting in an intermediary capacity.
- For purposes of FATCA, the due-diligence rules applicable to new investors will be effective for those investing on or after July 1, 2014, instead of Jan. 1, 2014, along with the modified definition of the term “preexisting obligation”;
- The first information report of participating FFIs, for U.S. accounts identified by Dec. 31, 2014, will be due by March 31, 2015. Reports relating to 2013 will not be required for a jurisdiction that has in force a Model 1 IGA containing paragraph 6 of Article 4; and
- All qualified intermediary, withholding foreign partnerships, or withholding foreign trust agreements that would otherwise expire on Dec. 31, 2013, will be automatically extended until June 30, 2014.
In addition, the IRS addressed certain technical issues:
- FATCA registrations will not be finalized in 2013. Global intermediary identification numbers (GIINs) will not be issued in 2013 but in 2014 after the FFI finalizes the information input in the FATCA portal. The IRS will issue the first GIIN list on June 2, 2014. To ensure that they are included on the first GIIN list, FFIs must finalize their registration by April 25, 2014.
- An FFI resident in a jurisdiction that is treated as having an IGA in effect will be permitted to register on the portal as a registered deemed-compliant FFI. A jurisdiction will be deemed to have an IGA in effect as soon as it has signed an IGA. However, if the country fails to conform to the IGA in a reasonable time, that country will be removed from the formal Treasury listing of approved IGAs.
FATCA is postponed, but it is not gone. FFIs need to continue to prepare for its implementation. The following are some of the steps that will need to be taken:
- Appoint an officer responsible for ensuring compliance with all FATCA certification and requirements;
- Perform due diligence on existing investors to determine their status and require additional information if necessary;
- Update legal documents, fund documents, subscription agreements, and partnership agreements if necessary to comply with FATCA requirements;
- Determine if some of the responsibilities will be allocated to outside service providers.
IGA Status Update
There are two types of Model 1 IGAs—reciprocal and nonreciprocal. The United States will enter into reciprocal agreements only if the IRS determines that the other country has sufficient protections to ensure the information is kept confidential and used only for tax purposes. Model IGAs as well as the current list of jurisdictions that are treated as having an IGA in effect are available online. The current status (as of July 2013) of IGA signups are as follows:
IGA Model 1—Signed (all agreements are reciprocal): Denmark, Germany, Ireland, Mexico (in force), Norway, Spain, and the United Kingdom (the U.K. issued guidance on its IGA).
IGA Model 2—Signed: Japan (in force) (Japanese financial institutions will report directly to the IRS) and Switzerland, which signed a memorandum of understanding clarifying the IGA.
IGAs in negotiations: Canada, Finland, France, Guernsey, Isle of Man, Italy, Jamaica, Jersey, Malta, the Netherlands, and Thailand. (France and Italy are expected to enter into a Model 1 IGA. Thailand is making progress on becoming compliant with negotiations expected to start in August 2013.)
IGAs in active dialogue: Argentina, Australia, Belgium, Cayman Islands, Cyprus, Estonia, Hungary, Israel, Korea, Liechtenstein, Luxembourg, Malaysia, New Zealand, Singapore, the Slovak Republic, South Africa, and Sweden.
Exploring IGA options: Bermuda, Brazil, British Virgin Islands, Chile, the Czech Republic, Gibraltar, India, Lebanon, Romania, Russia, Seychelles, St. Maarten, Slovenia, and Taiwan.
The U.S. initiative in combating tax evasion and improving global compliance has become a worldwide initiative, since it is viewed as a win-win for most countries. In November 2012, Treasury announced that it is engaging with more than 50 countries to combat tax evasion and improve global tax compliance; by July 2013 the count had risen to 80 countries. The Organisation for Economic Co-operation and Development has said that FATCA will be a model for global information exchange in the future.
Alan Wong is a senior manager–tax with Baker Tilly Virchow Krause LLP, in New York City.
For additional information about these items, contact Mr. Wong at 212-792-4986, ext. 986, or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with Baker Tilly Virchow Krause LLP.