Foreign Income & Taxpayers
The Foreign Account Tax Compliance Act (FATCA) was enacted as part of the Hiring Incentives to Restore Employment Act, P.L. 111-147, in March 2010. Most of the law was slated to take effect on Jan. 1, 2014, following the initial delay provided in regulations released in January 2013. In Notice 2013-43, released in July 2013, the IRS further delayed the act's effective date by six months to July 1, 2014. On May 2, 2014, the IRS released Notice 2014-33, which provides transition relief from IRS enforcement for calendar years 2014 and 2015, which is welcome news. This relief is available to withholding agents, foreign financial institutions (FFIs), and other entities that have responsibilities under the new legislation.
Transition rules also will apply in connection with due-diligence and withholding requirements governing the long-standing withholding tax regime under chapter 3 of the Code and the related information-reporting requirements under chapter 61 of the Code. Although the notice is not specific regarding the extent of the relief, it may well extend to inadvertent failures to withhold.
Background on FATCA
FATCA was enacted to combat tax evasion by U.S. persons who hold investments in offshore accounts. It imposes expanded information-reporting and documentation requirements on FFIs with U.S. accounts. It also expands withholding and reporting requirements with respect to certain payments made to certain foreign entities (Secs. 1471—1474). For foreign or domestic financial or nonfinancial entities, the IRS and Treasury have issued extensive regulations, notices, and announcements implementing guidance for what is widely regarded as a highly complex area of tax law.
FATCA has gained worldwide interest, not only for the substantial level of compliance it thrusts upon foreign entities, but also as a potential model for other foreign governments in combating tax evasion. Additionally, the United States has entered into intergovernmental agreements (IGAs) with various countries, providing the framework for implementing FATCA for FFIs in those countries. At the time of this writing, over 30 IGAs had been finalized, with more than 60 more near completion. Still more are under negotiation. Thus, while FATCA initially was greeted with alarm by some of the United States' trading partners, Treasury's success in negotiating IGAs validates the concept on a global scale.
Enforcement Transition Period
While many had hoped for an extension beyond the July 1, 2014, effective date for FATCA, it did not come. However, in Notice 2014-33, the IRS announced that in any enforcement actions under FATCA, it will take into consideration the good-faith efforts of FFIs and withholding agents to comply with the act for calendar years 2014 and 2015. The notice does not define a good-faith effort in this context.
Provisions Governing Preexisting Obligations
Treasury announced in Notice 2014-33 that it will amend previously issued regulations to provide that withholding agents and FFIs may treat obligations and accounts held by an entity that are opened, issued, or executed on or after July 1, 2014, and before Jan. 1, 2015, as preexisting obligations under Secs. 1471 and 1472. Regs. Sec. 1.1471-1(b)(104) defines preexisting obligations under FATCA as including accounts, instruments, contracts, debts, or equity interests maintained, executed, or issued by the withholding agent that are outstanding on Dec. 31, 2013 (now Dec. 31, 2014, as extended by Notice 2014-33). As such, applying the higher documentation and review standards otherwise required with respect to new accounts and obligations can be deferred until Jan. 1, 2015, although this relief is limited to payees that are entities and is not extended to individuals. The additional time provided by Notice 2014-33 was due in part to comments received regarding the delayed finalization of IRS Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities), and related instructions, which is used to document foreign status of entities for purposes of chapter 3 income tax withholding and chapter 4 withholding under FATCA. (The IRS issued the final Form W-8BEN-E instructions on June 25.)
Amendments to the Reason-to-Know Standards and Reasonable Explanation Definition
To harmonize the provisions of the existing chapter 3 and new chapter 4 withholding regimes, Treasury previously issued regulations designed to eliminate inconsistencies between the two regimes and thus provide a streamlined platform. Accordingly, Notice 2014-33 also provides that the temporary coordination regulations that concern the reason-to-know standards will be amended to provide that direct account holders that have been documented as foreign by July 1, 2014, and that have a U.S. phone number or place of birth will not be subject to the new reason-to-know standards without regard to whether the withholding agent has a U.S. telephone number or U.S. place of birth for the account holder. However, under the coordination regulations, a withholding agent otherwise is deemed to have a reason to know a payee may be a U.S. person, and subject to the 30% withholding levied under FATCA, if the withholding agent is notified of a change in circumstances with respect to the account holder's foreign status or the withholding agent reviews documentation for the account holder that contains a U.S. place of birth.
The notice also outlines the IRS and Treasury's intention to amend the final FATCA regulations to adopt the definition of the reasonable explanation of foreign status as provided under Temp. Regs. Sec. 1.1441-7T(b)(12). As such, withholding agents will be able to rely on statements or checklists for FATCA that certify certain individuals with U.S. indicia are foreign, in cases of a temporary U.S. base for: (1) students; (2) teachers, trainees, or interns; (3) individuals serving in diplomatic and international organization postings; and (4) spouses or unmarried children of the foregoing.
Agents will also be able to rely on a statement or checklist from an individual that provides information that demonstrates he or she has not met the substantial presence test; certifies that he or she meets the closer-connection exception of Regs. Sec. 301.7701(b)-2; or, with respect to a payment entitled to a reduced rate of tax under a U.S. income tax treaty, certifies that he or she is treated as a resident of a country other than the United States and is not treated as a U.S. resident or U.S. citizen for purposes of that income tax treaty.
Release of FFI Search Tool
On June 2, 2014, the IRS announced that an FFI search tool was available for global use on the FATCA homepage ( www.irs.gov ). Under FATCA, certain FFIs are required to register with the IRS to be compliant and in doing so are issued a global intermediary identification number (GIIN). FFIs are required under FATCA to provide the GIIN issued for the respective entity for which a withholding certificate is provided to a payor, on Form W-8BEN-E (or Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting , for intermediaries or Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting , for exempt entities). Thus, to verify a GIIN, withholding agents should access this section of the IRS website to confirm that the GIIN provided matches the entity name of the U.S.-source payment to be made and therefore avoid withholding under FATCA.
Relief provided by Notice 2014-33 is conditioned on good-faith efforts of withholding agents to comply with the new law. Therefore, withholding agents will need to continue their implementation efforts through 2014 and 2015 to avail themselves of this temporary, yet still undefined, relief. Moreover, as part of their new withholding procedures in effect now that FATCA is in force, withholding agents should be using the search and download tools on the IRS website to confirm the validity of GIINs provided by FFIs.
Howard Wagner is a director with Crowe Horwath LLP in Louisville, Ky.
For additional information about these items, contact Mr. Wagner at 502-420-4567 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with Crowe Horwath LLP.