USA: New Guidelines for Foreign Financial Institutions Entering into Agreements with the IRS
16 January 2014
Posted by: Author: Allen J. Littman
Author: Allen J. Littman (Baker & Hostetler LLP)
New guidelines for foreign financial institutions entering into agreements with the IRS under FATCA notice 2013-69
In October 2013, the Internal Revenue Service ("IRS”) issued Notice 2013-69 (the "Notice”), which applies to foreign financial institutions ("FFIs”) in compliance with the Foreign Account Tax Compliance Act ("FATCA”).  Notice 2013-69 provides additional guidance for FFIs entering into FFI agreements directly with the IRS and for FFIs under a Model 2 Intergovernmental Agreement ("IGA”). All participating FFIs, including those governed by a Model 2 IGA, must enter into the FFI agreement with the IRS as part of their FATCA registrations. Any FFI (or branch of an FFI) located in a jurisdiction that has entered into a Model 1 IGA is governed by that Model 1 IGA. An FFI that has no branch that can comply with the all terms of the FFI agreement under local law is not eligible to enter into the FFI agreement. However, if an FFI that is eligible to enter into an FFI agreement has a branch that cannot comply with all the terms of the FFI agreement, that branch is treated as a "limited branch,” which is subject to withholding as a nonparticipating FFI.
Most notably, the Notice includes a draft version of the standard FFI agreement (the "FFI agreement”) that complies with the requirements of the FATCA regulations under Treas. Reg. § 1.1471-4. Although the draft is subject to change, prospective participating FFIs should carefully consider the provisions of the FFI agreement prior to registering as a participating FFI.
Summary of the FFI Agreement
The draft FFI agreement includes and details the following key responsibilities for a participating FFI:
Due Diligence Requirements
The FFI agreement sets forth the due diligence procedures required by a participating FFI to determine which of the accounts it maintains are considered to be (i) U.S. accounts, (ii) accounts held by recalcitrant account holders, or (iii) accounts held by nonparticipating FFIs, in order to appropriately report and/or withhold on payments. If a participating FFI makes a withholdable payment to a payee other than an account holder, the participating FFI must also perform due diligence procedures to determine if withholding is required. In general, withholding is required to begin for a type of account after the due diligence procedures for that type of account are required to be completed. The FFI must identify those account holders and payees according to the requirements of Treas. Reg. § 1.1471-4(c) and must obtain proper documentation as required under Treas. Reg. § 1.1471-3(c). If proper documentation cannot be reliably associated with an account holder, then certain presumption rules must be applied. The FFI agreement provides detailed rules and requirements for documentation, reliably associating the documentation with an account holder, and applicable presumptions in the absence of adequate documentation.
The FFI agreement provides that a participating FFI is required to deduct and withhold 30 percent from withholdable payments made to an account held by a recalcitrant account holder or a nonparticipating FFI. A participating FFI is also required to deduct and withhold 30 percent of a withholdable payment made to a payee that is (or is presumed to be) a nonparticipating FFI with respect to an obligation that is not an account with the FFI. No withholding is required on any foreign passthru payment made before January 1, 2017. These general rules are subject to more specific rules and exceptions in the regulations, as well as coordination rules with other potentially applicable withholding provisions.
A participating FFI that withholds tax as required under FATCA is then required to deposit the withheld amounts collected at the close of any calendar month by the 15th day of the following month. If the participating FFI makes a withholdable payment to a recalcitrant account holder of a dormant account, the FFI may instead set aside the withheld amount in escrow until the account ceases to be dormant.
Information Reporting Obligations
The FFI agreement requires a participating FFI to provide annual magnetic media reports to the IRS containing certain specific payee information with respect to U.S. accounts, beginning on March 31, 2015. A participating FFI is also required to report certain aggregate account information with respect to recalcitrant account holders, and, in the case of a reporting Model 2 FFI, with respect to non-consenting U.S. account holders. In addition, a participating FFI is required to report on Form 1042-S payments made during the year to payees that are recalcitrant account holders, nonparticipating FFIs, and U.S. persons who hold a U.S. account that is reported by the participating FFI. A participating FFI also has a transitional reporting obligation for 2015 and 2016 with respect to certain payments made to accounts belonging to nonparticipating FFIs. All of this reporting is subject to more detailed rules regarding mode of filing, deadlines, and exceptions.
Tax Return Filing Obligations
If the FFI has withheld amounts under the previous sections, the FFI must also file an income tax return on Form 1042, beginning March 15, 2015, to report the amounts paid to account holders and payees that are required to be reported on Form 1042-S, as well as the amount of tax withheld and deposited with respect to those payments during the calendar year.
A participating FFI is required to adopt a compliance program under the authority of a responsible officer of the participating FFI (or, under a consolidated compliance program, the compliance FFI). The compliance program must be sufficient to satisfy the due diligence, reporting and withholding requirements of the FFI agreement. The participating FFI is also required to appoint a responsible officer to be in charge of establishing a compliance program that meets the requirements of FATCA and to issue certifications of compliance that are required under the FATCA regulations.
Participating FFI Withholding Certificate
Under the FFI agreement, each participating FFI is required to provide a valid withholding certificate to (i) each withholding agent from which the FFI receives a withholdable payment, and (ii) each participating FFI or deemed-compliant FFI with whom the FFI holds an account. A participating FFI must also provide a withholding statement to each withholding agent, allocating certain U.S. source "FDAP” income (such as U.S. source interest and dividends) received on behalf of account holders or other persons, including partners or beneficiaries.
As noted above, the draft FFI agreement provides that each of the key responsibilities of a participating FFI is subject to more specific and detailed provisions. There are also a number of other provisions in the FFI agreement, including:
- Requirements in the event of local law prohibitions on account reporting or withholding;
- Procedures for adjusting over- or under-withholding;
- Special rules relating to FFI groups;
- Rules relating to registration and changes of registration information; and
- Rules relating to expiration, modification, termination, default, and renewal of the FFI agreement.
The discussion in this article is summary in nature and cannot capture the numerous nuances of the draft FFI agreement. Although Notice 2013-69 and Notice 2013-43 (discussed in a previous article by the authors) provide useful guidance for those FFIs seeking to comply with FATCA, given the highly technical and detailed nature of these rules, a FFI that is considering FATCA compliance should seek the guidance of a U.S. tax adviser as soon as possible, and well before the June 30, 2014 deadline, when withholding agents FFIs will be required to begin withholding taxes under FATCA.
Although Notice 2013-69 includes the standard FFI agreement only in draft form, it also states that a finalized version would be issued by December 31, 2013. Most likely, however, the finalized version will make few, if any, significant changes to the draft agreement. Because all FFIs seeking to comply with FATCA must execute such an agreement with the IRS upon registration, it is in the best interest of FFIs to closely examine the draft FFI agreement and to consult with a U.S. tax advisor prior to the closing of the initial registration period on April 25, 2014.
This article first appeared on lexology.com.