On July 12th, the IRS issued Notice 2013-43, which postpones the effective dates of several key FATCA provisions. This Notice provides: (i) revised timelines for implementation of FATCA; and (ii) additional guidance concerning the treatment of financial institutions located in jurisdictions that have signed intergovernmental agreements (IGAs) for the implementation of FATCA but have not yet brought those IGAs into force.
Overview
FATCA, which will be phased in between 2013 and 2017, subjects many categories of payments made by U.S. persons to “Foreign Financial Institutions” (including most banks, funds, investment entities, depositories and insurance companies, collectively referred to as “FFIs”) and certain non-financial foreign entities (including multinationals, partnerships and trusts, collectively referred to as “NFFEs”) to a 30% U.S. withholding tax unless the foreign recipient, and each member of its affiliated group, have agreed in advance to provide information to the IRS on their (direct and indirect) U.S. owners, creditors and investors (“U.S. Account Holders”).
FATCA generally (i) requires FFIs to provide information to the IRS regarding their U.S. Account Holders; (ii) requires certain NFFEs to provide information on their “Substantial U.S. Owners” to withholding agents; (iii) requires certain certifications that the FFI or NFFE is compliant with FATCA rules; (iv) enhances certain withholding tax rules and imposes a withholding tax on certain payments (“Withholdable Payments”) to FFIs and NFFEs that fail to comply with their obligations; and (v) imposes increased disclosure obligations on certain NFFEs that present a high risk of U.S. tax avoidance.
The burden of complying with FATCA falls on both the foreign recipients of Withholdable Payments, which have to identify and disclose their U.S. Account Holders in order to be exempt from the FATCA withholding, and on the payors of such payments (as withholding agents), which are required to obtain certification of such exemption from the foreign payees in order not to withhold. A failure to obtain such certification can subject the payors to personal liability for any taxes not withheld.
Treasury Regulations under FATCA were issued on January 17, 2013. In addition, the United States has begun the process of signing IGAs with other countries to implement FATCA on a government to government basis. The IGAs currently fall into two categories, Model 1 and Model 2, which contain different terms and requirements.
Notice 2013-43
Notice 2013-43 provides a six-month extension (from January 1 to July 1, 2014) for when FATCA withholding will begin and for implementing new account opening procedures as well as related requirements to comply with FATCA. Importantly, the definition of “Grandfathered Obligation” (i.e., an obligation not subject to withholding) will be revised to include obligations outstanding on July 1, 2014 (whereas under the current rules, “grandfathered obligations” were obligations issued before January 1, 2014). Withholding on gross proceeds is still scheduled to begin on January 1, 2017.
The timeline for foreign financial institutions (FFIs) to register as participating foreign financial institutions (PFFIs) is also extended, with the registration portal expected to open on August 19, 2013. When the FATCA registration website opens, a financial institution will be able to begin the process of registering by creating an account and inputting the required information. Prior to January 1, 2014, however, any information entered into the system, even if submitted as “final,” will not be regarded as a final submission, but will merely be stored until the information is submitted as final on or after January 1, 2014. Thus, financial institutions can use the remainder of 2013 to get familiar with the registration process, to input preliminary information, and to refine that information. On or after January 1, 2014, each financial institution must finalize its registration information and submit the information as final. The IRS will electronically post the first IRS FFI List by June 2, 2014, and will update the list on a monthly basis thereafter. Thus, to ensure inclusion in the June 2014 IRS FFI List, FFIs would need to finalize their registration by April 25, 2014.
Finally, a jurisdiction will be treated as having in effect an IGA with the United States if the jurisdiction is listed on the Treasury website as a jurisdiction that is treated as having an IGA in effect. In general, Treasury and the IRS intend to include on this list jurisdictions that have signed but have not yet brought into force an IGA. The list of jurisdictions that are treated as having an IGA in effect is available at the following address: http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA-Archive.aspx.
Conclusions
Six months ago, when the IRS issued the final FATCA Regulations, it intended to provide some clarity and certainty for FFIs and other affected taxpayers intending to comply with FATCA this year. However, as of today, FFIs still face significant uncertainties pertaining to the implementation of FATCA in accordance with the timeline provided in the Regulations. In addition, the progress of the IGA program has been much slower than expected. At the beginning of the year, the Treasury and IRS indicated that active negotiations on IGAs were taking place with dozens of countries. Nevertheless, as of today, only 10 IGAs have been signed. FATCA compliance may differ depending on whether the FFI is in an IGA or non-IGA jurisdiction (and if the FFI is from an IGA jurisdiction, there will be a different term; depending on whether the IGA is a Model 1 or Model 2 IGA and whether the IGA is reciprocal or not). Thus, there is growing concern among FFIs from jurisdictions that have yet to sign an IGA with the IRS with respect to the course of action to comply with FATCA.
Furthermore, last year, the IRS issued a draft version of the IRS Form W-8BEN-E, which foreign persons would use to certify as to their FATCA status. The proposed W-8BEN-E form is an eight page long complex form containing a list of over 20 types of FATCA categories. It was expected that the IRS would finalize the W-8BEN-E, and, importantly, would issue guidance on how to prepare it early enough so that all affected taxpayers would be able to comply with it. Nevertheless, the IRS instead issued another draft in May 2013, and still expects comments from the tax community on the new draft. As a result, it is not expected that the final W-8BEN-E Form, with the instructions, will be issued before the fall of 2013.
The six-month extension provided in Notice 2013-43, will hopefully allow Treasury and the IRS, on the one hand, to provide more guidance with respect to implementation of FATCA; and affected taxpayers, on the other hand, to get more clarity as to how to comply with FATCA.
