United States: US Treasury Releases Substantial FATCA Guidance

FATCA Implementation Enters The Homestretch

Continuing its implementation of the Foreign Account Tax Compliance Act (FATCA), the US Treasury Department recently released a package of proposed and temporary regulations.

According to a fact sheet released by the US Treasury Department along with a preliminary version of the temporary regulations on February 20, 2014, this is "the last substantial package of regulations necessary to implement [FATCA]." For previous Dentons alerts on FATCA guidance, please see US Government Announces 6-Month Delay in Certain FATCA Rules; US Treasury Department Releases Latest Round of FATCA Guidance; US Issues Final FATCA Regulations.

The package includes two separate sets of regulatory changes. One set (the "FATCA amendments") makes changes to the final FATCA regulations issued in January 2013. Some of the FATCA amendments flesh out conceptual changes previously announced by the Treasury Department, but other changes in the FATCA amendments respond to comments from interested parties made after publication of the final regulations or are self-styled clarifications that the US Treasury Department thought necessary after further consideration on its part. The other set (the "Coordination amendments") makes changes to the regulations that govern non-FATCA withholding and reporting rules under Chapter 3, Chapter 61, and section 3406 of the Internal Revenue Code to ensure that those withholding and reporting rules are consistent with FATCA. Indeed, the two sets of regulatory changes produce an echo effect, in which the FATCA amendments even include rules to coordinate with changes made by the Coordination amendments that were initially made to coordinate with the final FATCA regulations.

FATCA amendments

Final regulations issued in January 2013 (the "FATCA regulations"), in conjunction with intergovernmental agreements ("IGAs") negotiated with various jurisdictions, generally require US withholding agents to withhold, at a 30% rate, on certain payments made to foreign financial institutions ("FFIs") and nonfinancial foreign entities ("NFFEs") that do not report certain information regarding their US accounts or substantial US owners, respectively. Although the FATCA regulations are ostensibly final, the US Treasury Department has continued to make changes to the rules in those final regulations. The FATCA amendments continue that trend, making numerous changes to the FATCA regulations. Many of those changes were expected, but there were also some surprises.

The FATCA amendments consist of four types of changes to the FATCA regulations:

  1. Changes in response to criticisms of the FATCA regulations. These include

    • changes to the rules for "grandfathered obligations" that are excluded from withholding under FATCA. In particular, the FATCA amendments provide relief for life insurance contracts that permit substitution of the insured and permit a withholding agent (other than the issuer of the obligation, or an agent of the issuer) to treat a modification of an obligation as material only if the withholding agent has actual knowledge that a material modification has occurred, such as if the withholding agent receives a disclosure indicating that there has been or will be a material modification to the obligation; and
    • significant modifications to the definition of limited life debt investment entities.
  2. Modifications to incorporate changes promised in guidance issued after the FATCA regulations were issued in January 2013, especially Notice 2013-43 and Notice 2013-69. These include provisions regarding

    • direct reporting NFFEs and sponsored direct reporting NFFEs, which are entities that elect to report information about their substantial US owners directly to the IRS rather than to withholding agents, and their sponsoring entities;
    • payments to US insurance brokers that are acting as intermediaries for or agents of a foreign insurer (the withholding agent can treat them as a payee unless the withholding agent has reason to know that the US insurance broker will not satisfy its withholding obligations);
    • coordination of FATCA withholding and backup withholding under section 3406 (a participating FFI that makes a withholdable payment that is also a reportable payment to a recalcitrant account holder is not required to apply backup withholding under section 3406 if it withholds on the payment under FATCA, and a participating FFI may satisfy its FATCA withholding obligations for a withholdable payment that is a reportable payment made to a recalcitrant account holder that is a US non-exempt recipient subject to backup withholding if the participating FFI elects for backup withholding under section 3406 to apply).
  3. Changes necessary to coordinate the FATCA regulations with other rules. These changes include

    • coordination of definitions to reflect the issuance of the Coordination amendments (the FATCA amendments add definitions of backup withholding, branch, chapter 4 withholding rate pool, exempt recipient, IGA, non-exempt recipient, reportable payment, and reporting Model 2 FFI and modify the definition of a U.S. branch treated as a U.S. person);
    • coordination with FFI Agreements (the definitions of financial institution, limited branch, limited FFI, and substantial U.S. owner are modified to ensure coordination between the FFI agreement and the temporary regulations);
    • harmonization of definitions with IGAs;
    • regarding the presumption rules for determining the status of a person as an individual or an entity and as U.S. or foreign, the FATCA amendments modify the FATCA regulations by cross-referencing the presumption rules under chapter 3, rather than restating the rules in detail; and
    • ensuring that the electronic transmission requirements under the FATCA regulations and under Chapter 3 match, along with the requirements for an intermediary to submit electronically a withholding statement with a withholding certificate to a withholding agent.
  4. "Clarifications", correcting "oversights", and further tweaks to the FATCA regulations by the Treasury Department For example, the definition of excepted NFFE in the FATCA amendments is expanded to include a NFFE that is a qualified intermediary, withholding foreign partnership, or withholding foreign trust.

The preamble to the FATCA amendments also promises future guidance regarding verification requirements for sponsoring entities and conforming changes to FFI agreements.

Coordination amendments

A wealth of US withholding and reporting rules exist outside of FATCA, and withholding agents, issuers, and financial intermediaries must continue to comply with them, irrespective of FATCA. In particular there are withholding and reporting rules that apply to persons making payments of US source income to foreign persons ("Chapter 3" withholding and reporting), persons making payments to certain US persons ("Chapter 61" reporting), and withholding on payments to US persons who do not provide a Taxpayer Identification Number ("backup withholding"). The Coordination amendments also include guidance for foreign persons making claims for refund or credit of income tax withheld or claiming a statutory exclusion from withholding for so-called "portfolio interest.";

  • Under Chapter 3, foreign persons are generally subject to a 30% withholding tax on the gross amount of US-source interest, dividends, and other fixed or determinable annual or periodical (FDAP) income they receive. US withholding agents and certain types of foreign persons must withhold US tax on the payments (absent an exemption by US tax treaty) and report such payments to the IRS (generally on a Form 1042) and to the recipient of the payment (generally on a Form 1042-S).
  • Under Chapter 61, a payor must report to the IRS certain payments to or transactions with US individuals, partnerships, estates, and trusts ("non-exempt recipients") on the appropriate Form 1099 and furnish a copy of the completed form to the payee. The scope of the payor's reporting obligations depends on whether the payor is a US payor or a non-US payor, with US payors generally having to report both US and non-US source income and transactions.
  • Pursuant to backup withholding under section 3406, a payor making a payment to a person who does not provide his or her US Taxpayer Identification Number and who does not prove foreign status may be required to backup withhold at a 28% rate.

The bulk of the Coordination amendments are to modify the regulations for non-FATCA withholding and reporting (Chapter 3, Chapter 61, and backup withholding) so that they conform to the FATCA regulations (as amended by the FATCA amendments) and IGAs. The goal of this coordination is "to develop a more integrated set of rules that reduces burdens (including certain duplicative information reporting obligations) and conforms the due diligence, withholding, and reporting rules under these provisions to the extent appropriate in light of the separate objectives of each chapter or section." The Coordination amendments generally seek to accomplish this goal by importing certain definitions, rules, and procedures from the FATCA regulations:

  • Identification of payee and the payee's status. The Coordination amendments modify aspects of the documentation requirements that are inconsistent with FATCA, including the presumption rules which apply in the absence of valid documentation, provide guidance on the requirements for valid withholding certificates and the periods of validity of such withholding certificates, conform the rules for electronic transmission of withholding certificates and statements, and address when a withholding agent will be treated as having reason to know of a payee's US or foreign status.
  • Adoption of exceptions to eliminate, in certain cases, duplicative reporting under Chapter 61 and FATCA. The Coordination amendments generally implement the elimination of duplicative reporting burdens previously announced in Notice 2013-69 and also make additional changes to reduce or eliminate duplicative reporting, such as for US persons that act as stock transfer agents or paying agents of passive foreign investment companies. In certain cases, such as for US payors that are also FFIs, duplicative reporting is retained if the Treasury Department believed that reporting under both sets of rules is important from a tax compliance standpoint.
  • Coordination of withholding requirements. Because payments subject to withholding under FATCA may also be subject to withholding under Chapter 3 or backup withholding, the Coordination amendments make changes to the regulations under Chapter 3 to ensure that payments are not subject to withholding under both Chapter 3 and FATCA and to the regulations under section 3406 to ensure that payments are not subject to withholding under both section 3406 and FATCA. The Coordination amendments include changes that go beyond mere coordination, however, such as implementation of the repeal of the portfolio interest exception for certain foreign-targeted obligations that are not in registered form.

The Treasury Department also uses the Coordination amendments as an opportunity to adopt certain non-FATCA-related clean-ups to the Chapter 3, Chapter 61, and backup withholding regulations.

Conclusions

Both the FATCA amendments and the Coordination amendments make extensive changes to existing rules, making them difficult to summarize. Still, the following generalizations may be made.

  1. Make sure that you are consulting the most recent version of the package. The US Treasury Department has released several iterations of the package, and there are slight changes and refinements at each stage. The version that was released on February 20, 2014, is not the same as the version published in the Federal Register.
  2. Start reading if you have not already begun. The package includes a large number of technical changes, and affected entities will need time to digest the changes. Not only is there a lot of detail, but many of the changes will require you to take specific steps to implement them.
  3. There are still missing pieces waiting to be found. The preamble to the Coordination amendments does a good job of explaining why certain changes were made or not made, and one can read the Coordination amendments to see how the changes have been implemented. However, there are inevitably additional changes that should have been made but which were not so noted in the preamble. Discussions, and quick ones, will have to ensue regarding any omissions if additional changes must be made and effective before July 1, 2014.
  4. Nothing is ever final, especially in FATCA. Despite the drafters' best intentions, some of the changes in the package will be need be revised. For example, there is already acknowledgement that the change to the definition of "offshore obligation" was inadvertently narrowed when the FATCA amendments and Coordination amendments sought to conform definitions in the FATCA rules and the non-FATCA reporting rules.
  5. There is more than just coordination in the Coordination amendments. There are some helpful changes made to the non-FATCA withholding and reporting rules that go beyond merely those needed to coordinate the FATCA rules.
  6. Stay tuned. Despite the package being billed as the last major FATCA guidance, more guidance will be released. Final Forms W-8 were released on March 4, 2014, but additional forms need to be finalized, and the final FFI agreement needs to be revised.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Katten Muchin Rosenman LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Katten Muchin Rosenman LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions