The Treasury Department and IRS Release Final Regulations on Foreign Account Tax Compliance Act (FATCA)

On January 17, 2013, the Treasury Department and the IRS released final regulations (T.D. 9610) on the Foreign Account Tax Compliance Act (FATCA). The Treasury Department and the IRS have indicated they are exercising the authority granted to them and are attempting to provide a balanced and integrated method for implementing this law.

After taking into consideration all of the comments they have received, they believe they are providing a risked-based approach that effectively addresses policy, eliminates burdens, and builds on existing practices and procedures. To that end, the final regulations attempt to meet this goal by limiting the application of FATCA to institutions, obligations, and accounts that present the concerns FATCA seeks to address.

The guidance also addresses the coordination of the Intergovernmental Agreements (IGAs) and the regulations by making it clear that foreign financial institutions (FFIs) in Model 1 jurisdictions will be governed by the laws implemented by their own countries while those in Model 2 jurisdictions will need to follow the regulations.

Modifications to earlier guidance

To help minimize the burden of FATCA and target the concerns FATCA seeks to address, the preamble to the final regulations outlines several changes and modifications to the rules originally introduced in the proposed regulations and previous notices including the following:

Transition relief – Generally adopts the transition relief introduced in Announcement 2012-42.

Grandfathered obligations – Extends the date grandfathered obligations must be entered into to January 1, 2014.

FFI Agreements – Details substantive requirements that will be included in the FFI Agreement when published. (The Agreement itself will take the form of a revenue procedure.)

Responsible Officers – Outlines the certification requirements that must be followed by Responsible Officers.

Payee identification and documentation – Eases rules dealing with payee identification and documentation including allowing the use of forms prepared and completed in foreign languages (subject to certain requirements) and reinstituting the “eyeball test” to determine whether a payee is a U.S. exempt recipient absent a Form W-9 as long as documentary evidence establishes the entity is a U.S. entity.

Investment Entity FFIs – Adopts the definition of an Investment Entity FFI introduced in the IGA which generally excludes many smaller entities that are not professionally managed and includes other entities such as investment advisors and asset managers.

Depository Institution FFIs – Narrows the definition of a Depository Institution FFI to generally exclude entities such as finance companies that do not fund operations with deposits and entities acting as networks for credit card banks that hold cash collateral from such banks.

New FFI category – Explicitly adds a new FFI category for certain holding companies and treasury centers that include an FFI in their expanded affiliated group or are formed in connection to or availed by investment vehicles such as collective investment vehicles, mutual funds, hedge funds, venture capital funds, etc.

FFI status, deemed compliant FFI categories – Adds additional exceptions to FFI status and additional deemed compliant FFI categories including the following deemed compliant FFI categories:

• New registered deemed compliant statuses – These include:
  1. Qualified credit card issuers – Credit card issuers that agree to prevent customers from having a deposit in excess of $50,000 and
     
  2. Sponsored investment entities and controlled foreign corporations – Sponsoring entity that agrees to perform all FFI responsibilities for sponsored FFI(s) and certain other requirements.
     
• New certified deemed compliant statuses – These include:
  1. Sponsored, closely held investment vehicles – Similar to registered deemed compliant category for sponsored FFIs and
     
  2. Limited life debt investment entities – Status available before January 1, 2017 for certain investment vehicles that are unable to comply with FFI requirements.

Ordinary course of business exception – Replaces the ordinary course of business exception to withholding with a more comprehensive exception for excluded nonfinancial payments including a list of payments that are withholdable.

Collective refund claims – Allows participating FFIs to file a collective refund claim on behalf of its account holders and payees where amounts were overwithheld, subject to certain conditions and requirements.
Use of sub-agents – Allows the use of sub-agents, but the withholding agent remains liable.

FATCA Registration Portal

The preamble also provides additional details on the future FATCA Registration Portal that should be accessible no later than July 15, 2013, including the following:

• Model 1 FFIs will also use the system and will be treated as registered-deemed compliant FFIs;
  
• IGA FFIs can register even if the jurisdiction has not yet ratified the IGA as long as the jurisdiction appears on the list published by the IRS as having in effect an IGA;
  
• FFI-EIN/FATCA ID replaced by a single ID called the Global Intermediary Identification Number (GIIN) which will be assigned no later than October 15, 2013;
  
• The first GIIN List to be published on December 2, 2013 and intended to be published monthly; and
  
• Financial institutions must register by October 25, 2013, to ensure issuance of a GIIN by the December 31, 2013, deadline.

New & updated forms

Regarding the release of new and updated forms, the preamble indicates that the IRS intends to release updated draft Form W-8BEN-E (for entities) and Form W-8BEN (for individuals) shortly. Additionally, a draft of the new Form 8966 and revised Forms 1042 and 1042-S are expected to be released soon. The IRS expects final versions of the Form 8966 and Form 1042-S including XML-based schemas for electronic filing to be released later in 2013 or in early 2014.

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