IRS Publishes Long-Awaited Final Regs on FATCA Implementation

IRS Publishes Long-Awaited Final Regs on FATCA Implementation

The IRS has published final regulations (T.D. 9610) for implementing the Foreign Account Tax Compliance Act, which requires information reporting by foreign financial institutions (FFIs) regarding U.S. accounts and withholding on some payments to FFIs and other foreign entities. Effective January 28, 2013, the final regs adopt, with changes, proposed regs (REG-121647-10) published in February 2012. The IRS received comments covering a broad range of issues, including the procedural and systems aspects of registering and reporting. Most commentators, however, expressed concerns regarding the costs and burdens associated with implementing FATCA and the legal impediments to compliance in a number of jurisdictions. Accordingly, the final regs address potential administrative burdens and refine the scope of FATCA. The regs broaden the grandfather rule for some obligations, treat passive entities that are not professionally managed as nonfinancial foreign entities (NFFEs) rather than as FFIs, and expand the categories of FFIs that are deemed to comply with FATCA without the need to enter into an agreement with the IRS. The final regs include details on how they will interact with the model intergovernmental agreements (IGAs). In response to comments about account holder verification, the final regs reduce duplicative documentation requirements, facilitate documentation sharing, and provide more detailed rules regarding reliance on agents or third-party service providers. The regs allow a withholding agent to rely on a withholding certificate to establish the FATCA status of a payee without obtaining additional documentary evidence, unless the documentary evidence is required under chapter 3. The regs further expand the types of documentary evidence that a withholding agent may rely on regarding offshore obligations and clarify when an interest in an investment fund should be treated as an offshore obligation. In response to comments on the FFI agreement, the final regs set forth all the substantive requirements applicable to an FFI under the FFI agreement. The regs include the requirements for verifying compliance with the FFI agreement, allow participating FFIs to file collective refund claims on behalf of specified account holders and payees for amounts overwithheld, and provide procedural requirements if a participating FFI is legally prohibited from reporting or withholding as required under the FFI agreement. In response to comments concerning future withholding requirements for foreign passthrough payments, the final regs do not restrict a participating FFI's ability to terminate an FFI agreement and allow an FFI the flexibility to reconsider its status as further guidance is issued. To better align with IGA timelines, the final regs delay the effective date of the FFI agreement until December 31, 2013, for all participating FFIs that receive a global intermediary identification number before January 1, 2014. An FFI is not required to withhold on foreign passthrough payments until the later of January 1, 2017, or six months after the date that final regs defining the term "foreign passthrough payments" are published. Commentators requested additional exceptions from the definition of U.S. account for low-value accounts other than preexisting accounts and the depository account exception provided by section 1471(d)(1)(B). By amending the definition of financial account, the final regs create a $50,000 exception for cash value insurance contracts. The final regs clarify that an account held by a disregarded entity is treated as held by the person owning the entity and limit the scope of the term "depository account" in a number of ways. To avoid requiring multiple entities to document, withhold, and report regarding a financial account, the final regs identify the entity that will be treated as maintaining a financial account. The final regs also amend the definition of FFI to provide that IGAs determine whether a resident entity described in the applicable IGA is an FFI. The final regs expand the circumstances in which some classes of entities qualify as exempt beneficial owners and modify when an entity qualifies as an exempt beneficial owner under reg. section 1.1471-6(g). The final regs clarify that, in general, an entity cannot qualify as an exempt beneficial owner unless it is the beneficial owner of the payment. The definition of an exempt beneficial owner is expanded to include any entity identified as an exempt beneficial owner under an IGA. The final regs expand the definition of international organization and broaden the classes of pension funds qualifying as exempt beneficial owners by including several new categories of pension funds. The final regs provide that withholding agents are required to withhold under section 1472 only for withholdable payments made after December 31, 2013. Withholding agents are also not required to withhold under section 1472 on payments made before January 1, 2015, for a preexisting obligation to a payee that is not a prima facie FFI and for which a withholding agent does not have documentation indicating the payee's status as a passive NFFE with one or more substantial U.S. owners. For purposes of the exception from withholding for payments to active NFFEs, the final regs clarify the scope of and expand the exceptions to passive income. The final regs suspend the withholding requirement on gross proceeds and foreign passthrough payments until 2017. The final regs replace the ordinary course of business exception to withholdable payments with a more comprehensive exception for excluded nonfinancial payments. The final regs clarify the reporting requirements for a withholding agent and a participating FFI or registered deemed-compliant FFI that acts as an intermediary or is a flow-through entity. The preamble to the final regs provides information on the FATCA registration portal that will be accessible to financial institutions by July 15, 2013. The IRS will electronically post the first list of participating FFIs and registered deemed-compliant FFIs on December 2, 2013. The list will be updated monthly. A financial institution must register by October 25 to ensure its inclusion on the December 2013 list. Before the portal opens for registration, Treasury and the IRS will issue a revenue procedure with the terms and conditions applicable to FFIs for chapter 4 purposes and for FFIs also assuming chapter 3 responsibilities.

Finalizing REG-121647-10 <a href="/lr/resolve//vdbf"> <img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/doclink.gif" border="0" alt="2012 TNT 27-7: IRS Proposed Regulations"/></a>. Obsoleting Announcement 2012-42 <a href="/lr/resolve//vn9d"> <img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/doclink.gif" border="0" alt="2012 TNT 207-9: Internal Revenue Bulletin"/></a>. Obsoleting Notice 2011-34 <a href="/lr/resolve//vt1p"> <img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/doclink.gif" border="0" alt="2011 TNT 69-16: Internal Revenue Bulletin"/></a>. Obsoleting Notice 2011-53 <a href="/lr/resolve//vxz3"> <img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/doclink.gif" border="0" alt="2011 TNT 136-9: Internal Revenue Bulletin"/></a>. Obsoleting Notice 2010-60 <a href="/lr/resolve//wbb5"> <img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/doclink.gif" border="0" alt="2010 TNT 167-10: Internal Revenue Bulletin"/></a>. Corrected by <a href="//s3.amazonaws.com/pdfs.taxnotes.com/2013/2013-21334-1.pdf" title="PDF: 2013-21334"><img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/pdficon_small.gif" width="14" height="14" border="0"/></a>.

Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities

The IRS has published final regulations for implementing the Foreign Account Tax Compliance Act, which requires information reporting by foreign financial institutions regarding U.S. accounts and withholding on some payments to foreign financial institutions and other foreign entities.

The IRS has published final regulations (T.D. 9610) for implementing the Foreign Account Tax Compliance Act, which requires information reporting by foreign financial institutions (FFIs) regarding U.S. accounts and withholding on some payments to FFIs and other foreign entities. Effective January 28, 2013, the final regs adopt, with changes, proposed regs (REG-121647-10) published in February 2012. The IRS received comments covering a broad range of issues, including the procedural and systems aspects of registering and reporting. Most commentators, however, expressed concerns regarding the costs and burdens associated with implementing FATCA and the legal impediments to compliance in a number of jurisdictions. Accordingly, the final regs address potential administrative burdens and refine the scope of FATCA. The regs broaden the grandfather rule for some obligations, treat passive entities that are not professionally managed as nonfinancial foreign entities (NFFEs) rather than as FFIs, and expand the categories of FFIs that are deemed to comply with FATCA without the need to enter into an agreement with the IRS. The final regs include details on how they will interact with the model intergovernmental agreements (IGAs). In response to comments about account holder verification, the final regs reduce duplicative documentation requirements, facilitate documentation sharing, and provide more detailed rules regarding reliance on agents or third-party service providers. The regs allow a withholding agent to rely on a withholding certificate to establish the FATCA status of a payee without obtaining additional documentary evidence, unless the documentary evidence is required under chapter 3. The regs further expand the types of documentary evidence that a withholding agent may rely on regarding offshore obligations and clarify when an interest in an investment fund should be treated as an offshore obligation. In response to comments on the FFI agreement, the final regs set forth all the substantive requirements applicable to an FFI under the FFI agreement. The regs include the requirements for verifying compliance with the FFI agreement, allow participating FFIs to file collective refund claims on behalf of specified account holders and payees for amounts overwithheld, and provide procedural requirements if a participating FFI is legally prohibited from reporting or withholding as required under the FFI agreement. In response to comments concerning future withholding requirements for foreign passthrough payments, the final regs do not restrict a participating FFI's ability to terminate an FFI agreement and allow an FFI the flexibility to reconsider its status as further guidance is issued. To better align with IGA timelines, the final regs delay the effective date of the FFI agreement until December 31, 2013, for all participating FFIs that receive a global intermediary identification number before January 1, 2014. An FFI is not required to withhold on foreign passthrough payments until the later of January 1, 2017, or six months after the date that final regs defining the term "foreign passthrough payments" are published. Commentators requested additional exceptions from the definition of U.S. account for low-value accounts other than preexisting accounts and the depository account exception provided by section 1471(d)(1)(B). By amending the definition of financial account, the final regs create a $50,000 exception for cash value insurance contracts. The final regs clarify that an account held by a disregarded entity is treated as held by the person owning the entity and limit the scope of the term "depository account" in a number of ways. To avoid requiring multiple entities to document, withhold, and report regarding a financial account, the final regs identify the entity that will be treated as maintaining a financial account. The final regs also amend the definition of FFI to provide that IGAs determine whether a resident entity described in the applicable IGA is an FFI. The final regs expand the circumstances in which some classes of entities qualify as exempt beneficial owners and modify when an entity qualifies as an exempt beneficial owner under reg. section 1.1471-6(g). The final regs clarify that, in general, an entity cannot qualify as an exempt beneficial owner unless it is the beneficial owner of the payment. The definition of an exempt beneficial owner is expanded to include any entity identified as an exempt beneficial owner under an IGA. The final regs expand the definition of international organization and broaden the classes of pension funds qualifying as exempt beneficial owners by including several new categories of pension funds. The final regs provide that withholding agents are required to withhold under section 1472 only for withholdable payments made after December 31, 2013. Withholding agents are also not required to withhold under section 1472 on payments made before January 1, 2015, for a preexisting obligation to a payee that is not a prima facie FFI and for which a withholding agent does not have documentation indicating the payee's status as a passive NFFE with one or more substantial U.S. owners. For purposes of the exception from withholding for payments to active NFFEs, the final regs clarify the scope of and expand the exceptions to passive income. The final regs suspend the withholding requirement on gross proceeds and foreign passthrough payments until 2017. The final regs replace the ordinary course of business exception to withholdable payments with a more comprehensive exception for excluded nonfinancial payments. The final regs clarify the reporting requirements for a withholding agent and a participating FFI or registered deemed-compliant FFI that acts as an intermediary or is a flow-through entity. The preamble to the final regs provides information on the FATCA registration portal that will be accessible to financial institutions by July 15, 2013. The IRS will electronically post the first list of participating FFIs and registered deemed-compliant FFIs on December 2, 2013. The list will be updated monthly. A financial institution must register by October 25 to ensure its inclusion on the December 2013 list. Before the portal opens for registration, Treasury and the IRS will issue a revenue procedure with the terms and conditions applicable to FFIs for chapter 4 purposes and for FFIs also assuming chapter 3 responsibilities.

Section 1471 -- Foreign Financial Institution Withholding

Section 1472 -- Foreign Entity Withholding

Section 1473 -- Foreign Financial Institution Withholding Definitions

Section 1474 -- Foreign Institution Withholding Special Rules

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IRS Publishes Long-Awaited Final Regs on FATCA Implementation