The IRS is delaying various FATCA-related deadlines because it has received feedback that complying with the original deadlines and other requirements is proving to be impractical for some taxpayers (Announcement 2012-42). The announced changes modify the 388-page proposed regulations issued in February related to the Foreign Account Tax Compliance Act (FATCA) (REG-121647-10, see “Proposed FATCA Regs. Take Comprehensive Approach”). The announcement changes the due-diligence timelines, the withholding and documentation timelines, the date the first information reports are due, and the date gross proceeds will produce a withholdable payment. It also clarifies the scope of grandfathered obligations by expanding the items included as grandfathered.
The first change to the due-diligence timelines is to the date an obligation will be considered a “preexisting obligation” that is not subject to FATCA withholding. The announcement amends Prop. Regs. Sec. 1.1471-1(b)(48) to change the requirement that a preexisting obligation for a withholding agent means any account, instrument, or contract maintained or executed by the withholding agent as of Jan. 1, 2014 (instead of 2013). For participating FFIs (foreign financial institutions that enter into withholding agreements with the IRS) and deemed-compliant FFIs (foreign financial institutions that do not have to enter into IRS agreements), the date is also changed so that the rules will not apply before Jan. 1, 2014.
The announcement also amends the transition rules for completing due diligence on existing obligations. Under the new rule, Prop. Regs. Sec. 1.1471-2(a)(4)(ii) will provide that a withholding agent will not be required to withhold on payments made to a prima facie FFI (payees that have indications of being FFIs) for a preexisting obligation prior to July 1, 2014, unless the withholding agent has documentation establishing that the payee is a nonparticipating FFI. A similar rule delays the date participating FFIs must determine the status of a prima facie FFI.
Another delayed implementation date relates to Prop. Regs. Secs. 1.1471-2(a)(4)(ii) and 1.1472-1(b). The date by which a withholding agent will be required to document payees that are entities other than prima facie FFIs is delayed to Dec. 15, 2015. A participating FFI will be required to perform the requisite identification procedures and obtain the appropriate documentation to determine whether an entity, other than a prima facie FFI, is itself a participating FFI by the later of Dec. 31, 2015, or the date that is two years after the effective date of its FFI agreement.
The rule in Prop. Regs. Sec. 1.1471-5(g)(3)(i)(B) is modified to provide that a participating FFI must treat any preexisting account that is a high-value account as held by a recalcitrant account holder unless the participating FFI has performed the requisite identification procedures and obtained the appropriate documentation by the later of Dec. 31, 2014, or the date that is one year after the effective date of the FFI’s FFI agreement. The rule set forth in Prop. Regs. Sec. 1.1471-5(g)(3)(i)(A) is modified to provide that after Dec. 31, 2015, a participating FFI must treat any preexisting individual account, other than a high-value account, as held by a recalcitrant account holder unless the participating FFI has performed the requisite identification procedures and obtained the appropriate documentation.
Under the announcement, the due date for the first information report a participating FFI must file for 2013 and 2014 is not later than March 31, 2015, modifying the rule in Prop. Regs. Sec. 1.1471-4(d)(7)(v)(B). The date after which gross proceeds must be withheld from a sale or other disposition that would produce U.S.-source income is extended to Dec. 31, 2016 (Prop. Regs. Sec. 1.1473-1(a)(1)(ii)).
The final change to the proposed regulations expands the definition of grandfathered obligation to include (1) any obligation that could produce a foreign passthrough payment; (2) any instrument that would give rise to a withholdable payment solely because Sec. 871(m) gives rise to a dividend equivalent; and (3) any payment with respect to, or to repay collateral posted to secure, a notional principal contract (Prop. Regs. Sec. 1.1471-2(b)(2)).
The IRS says it will incorporate the changes announced on Wednesday into the final regulations when they are released, which is when the proposed changes will become effective.