Regulations
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 News Notes, “FATCA Prop. Regs.,” 43 The Tax Adviser 209 (April 2012)). 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 preexisting obligations. Under the new rule, Prop. Regs. Sec. 1.1471-2(a)(4)(ii) will provide that with respect to preexisting obligations, a withholding agent that is not a participating FFI 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. With respect to a preexisting obligation, the final regulations will provide that a participating FFI will be required to perform the requisite identification procedures and obtain the appropriate documentation to determine whether a prima facie FFI payee is itself a participating FFI, deemed-compliant FFI, or nonparticipating FFI within six months after the effective date of its FFI agreement (June 30, 2014, for any FFI that enters into an FFI agreement on or before Dec. 31, 2013).
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 that is not a participating FFI will be required to document payees that are entities other than prima facie FFIs is delayed to Dec. 31, 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, or the date that is two years after the effective date of the FFI’s FFI agreement, 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 of any property of a type that can produce interest or dividends that are U.S.-source fixed or determinable annual or periodic 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 and that cannot produce a withholdable payment; (2) any instrument that would give rise to a withholdable payment solely because the instrument is treated as giving rise to a dividend equivalent pursuant to Sec. 871(m) and the regulations; and (3) any payment with respect to, or to repay collateral posted to secure, obligations under a notional principal contract that is a grandfathered obligation (Prop. Regs. Sec. 1.1471-2(b)(2)).
The IRS said it will incorporate the announced changes into the final regulations when they are released, which is when the proposed changes will become effective.
