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.


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.

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