The Foreign Account Tax Compliance Act (FATCA), enacted by the US Congress in 2010, becomes operational on July 1, 2014. And while the Internal Revenue Service (IRS) has recently released some important guidance, many critical issues remain unresolved.
FATCA requires foreign financial institutions (FFIs) to perform certain due diligence procedures to identify US persons who have invested in either non-US financial accounts or non-US entities. The intent behind FATCA is to keep US persons from hiding income and assets overseas, as they are required to report to the IRS on their worldwide income—regardless of their residency. The US Treasury has entered into intergovernmental agreements (IGAs) with many countries in order to alleviate some of the burdens associated with FATCA compliance. The US-Canada IGA was released on February 5, 2014.
Extended registration deadline
The IRS previously announced that April 25, 2014 was the deadline for FFIs to register on the FATCA portal in order to receive a Global Intermediary Identification Number (GIIN) and to be included on the first list of registered financial institutions published on June 2, 2014. FFIs that are required to register, and who will be receiving US source income after June 30, 2014, should ensure that they have registered on the FATCA portal and are included on this list. Those FFIs that should register, but do not appear on the list risk being subject to 30% FATCA withholding on their US source income.
The IRS has announced that the deadline to register has been moved forward by 10 days to May 5, 2014, which allows those FFIs who have not registered some additional time to do so.
Draft Canadian legislation
In order for the US-Canada IGA to become effective, Canada must adopt legislation to implement the IGA.
The draft Canadian legislation implementing the IGA has generated controversy in the cross-border tax community, as it appears that such legislation significantly narrows the application of FATCA in the Canadian marketplace. The definition of an FFI in the draft Canadian legislation would exclude many entities otherwise thought to be required to register and comply with FATCA. While this would appear to benefit many Canadian entities, such narrow interpretation has caused some uncertainty. A US withholding agent that knows or has reason to know that a claim for exemption from withholding is unreliable or incorrect is not permitted to rely on it. A Canadian entity taking the position that it is not an FFI (and thus a Non-Financial Foreign Entity), but appears to be an FFI under the US regulations and under the IGA, may have issues in dealing with US withholding agents. US withholding agents may decide to not accept such Canadian entity's Form W-8 BEN-E and impose 30% withholding on such entity's US source income.
In addition, this narrow interpretation creates a potentially greater concern that the United States will not accept the Canadian draft legislation and will terminate the US-Canada IGA. This would be disruptive to Canadian FIs who have registered on the FATCA portal on the basis that the IGA will be implemented and have registered on the FATCA portal as "registered deemed compliant" FFIs. In the absence of an IGA, this registration may need to be changed, and reporting Canadian FIs could be required to enter into FFI agreements with the IRS.
Final W-8 BEN and Form W-8 BEN-E
The IRS has released final forms W-8 BEN and W-8 BEN-E to include necessary FATCA certifications. Form W-8 BEN-E refers to guidance contained in the form's instructions, but the final form was released without instructions.
Form W-8 BEN is now exclusive to non-US individuals and Form W-8 BEN-E is now exclusive to non-US corporations and trusts. The IRS has extended the date until which past W-8 forms are valid to the end of 2014. These new forms should both be embedded into new account opening procedures for FFIs that are required to do so for new accounts opened on or after July 1, 2014.
Revised registration Q&A
In the recently released FATCA frequently asked questions and answers, one area of particular interest addresses the mechanics of how a Sponsoring Entity registers a Sponsored Entity. This is relevant in many circumstances, including, for example, when a fund manager wants to sponsor its investment funds. The sponsoring entity provisions allows a fund manager to undertake FATCA compliance and due diligence procedures on behalf of its funds. The mechanics of how this would work on the FATCA portal were not clear. In the FAQ, the IRS states that, until January 1, 2016, a Sponsored Entity can provide the GIIN of the Sponsoring Entity and that the Sponsored Entity need not separately register on the FATCA portal.
Proposed and temporary regulations under FATCA
The IRS further provided FATCA guidance with the release of proposed and temporary regulations on February 20, 2014. This guidance does not change the July 1, 2014 effective date when FATCA becomes operational, but provided many helpful clarifications to the application of FATCA. For example, the definition of an "expanded affiliated group" was changed such that FFIs will no longer need to apply the complex indirect constructive ownership provisions. In addition, these regulations provide that a partnership or trust can elect to be a common parent of an expanded affiliated group.
These regulations also introduced a new category, referred to as a "Direct Reporting NFFE." This new category allows passive NFFEs (foreign entities that are not financial institutions) to provide documentation on their substantial US owners to the IRS directly rather than to their FFIs or withholding agents. A direct reporting NFFE is required to register with the IRS on the FATCA portal, obtain a GIIN and report its substantial US owners.
Next steps for Canadian FIs
The IRS has acknowledged that it will not be able to release all required guidance on FATCA before July 1. Canadian entities that are FFIs under the IRS regulations or under the IGA should register on the FATCA portal before May 5, 2014, and not rely on the potential exclusion from FFI status under the draft Canadian legislation until there is confirmation that the IRS accepts the Canadian definition. Those who are registering should also focus on the required changes in new account opening procedures; these generally increase the questions asked of new individual and new entity clients to determine whether any new individual clients and any significant beneficial owners of entity clients are US persons.
For more information, please contact your local Grant Thornton US tax adviser.
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The information contained herein is prepared by Grant Thornton LLP for information only and is not intended to be either a complete description of any tax issue or the opinion of our firm. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein. You should consult your Grant Thornton LLP adviser to obtain additional details and to discuss whether the information in this article applies to your specific situation.