The IRS announced on Friday, July 12, in Notice 2013-43 (the
"Notice") that the earliest deadlines under the Foreign
Account Tax Compliance Act ("FATCA") have been extended
by six months. FATCA withholding will now not begin until July 1,
2014. Thus, foreign financial institutions ("FFIs") can
delay entering into their agreements with the IRS based on this new
deadline and, in particular, may want to wait to do so pending
negotiation of an intergovernmental agreement ("IGA")
between the U.S. and their governing jurisdiction. (Such IGAs will
probably be easier for FFIs to comply with than the U.S. statutory
withholding and other rules that apply if there is no IGA.)
"Grandfather" treatment is extended to obligations
outstanding on July 1, 2014. Several other FATCA deadlines are
extended accordingly, including those for an FFI's "due
diligence" to search its accounts and investors for U.S.
individuals and entities. The IRS also will post on its web site an
official list of countries that have signed an IGA, which can be
relied on by withholding agents even if the IGA is not ratified (or
otherwise finalized).
FATCA Overview
To recap FATCA itself, the FATCA rules (Sections 1471 through 1474
of the Internal Revenue Code) require a U.S. withholding agent
(e.g., a U.S. person who is an obligor on a debt instrument, an
issuer of stock, or a counterparty on an ISDA derivative) to
withhold 30 percent of any U.S. source payment (e.g., interest on
the debt instrument or the collateral posted on the derivative or
dividends paid on the stock) made to an FFI unless the FFI enters
into an agreement with the IRS (by registering on the IRS web site)
and satisfies significant IRS reporting requirements (or qualifies
for one of the exemptions from the rules).
All non-U.S. banks are FFIs for this purpose, as are many non-U.S.
investment funds (including hedge funds, CDOs, CLOs, private equity
funds, and in some cases real estate funds). As a result, beginning
on the FATCA effective date, any U.S. source payment made to a
non-exempt FFI will be subject to 30-percent withholding unless the
FFI (i) registers with and enters into an agreement with the IRS
requiring it to obtain and report information regarding its U.S.
account holders and investors and meets other requirements and (ii)
provides the withholding agent (as described above) with a new type
of form (W-8BEN-E) attesting to its IRS registration and providing
its FATCA identification number (called a GIIN). Under final U.S.
Treasury Regulations released this January, withholding was to
begin on January 1, 2014, so that non-exempt FFIs were generally
required to register and obtain their GIINs from the IRS by that
date to avoid withholding.
New FATCA Withholding and IRS Registration
Deadlines
Under the Notice, the earliest date for FATCA withholding will now
be July 1, 2014. The Notice states that the IRS's registration
web site will be accessible as of August 19, 2013, and thus an FFI
can begin to input its information at that time. An FFI will not be
able to finalize its registration, however, until January 1, 2014,
and no GIINs will be issued until that date. The IRS will
electronically post the first monthly list of GIINs for use by
withholding agents on June 2, 2014, and the Notice states that FFIs
will need to finalize their registrations by April 25, 2014 to be
on that list. It is, however, not necessary for an FFI to be on
that first list to avoid withholding for payments on the first
withholding date—i.e., July l, 2014—but it must be on a
list soon thereafter. Although FFIs that are covered by an IGA will
also need to obtain a GIIN, payments to them will generally be
exempt from withholding as long as the GIIN is issued and listed by
the IRS prior to January 1, 2015.
Extended "Grandfather" Treatment
The grandfather rules, which eliminate FATCA withholding entirely
for certain obligations, are now extended to obligations
outstanding on July 1, 2014. For this purpose, all of the favorable
rules added by the final regulations continue to apply. For
example, where an obligation is grandfathered, collateral posted to
secure the obligation is also generally grandfathered (even if such
collateral was not outstanding on July 1, 2014). As before,
however, a "material modification" after July 1, 2014
will cause the obligation to lose its grandfather protection.
So Why Did the IRS Do This?
Deferral of the FATCA deadlines was not expected in the market, and
thus the Notice came as a pleasant surprise to most practitioners.
Although we are reluctant to look this "gift horse" in
the mouth, the IRS obviously came to appreciate some of the
problems faced by both FFIs and withholding agents in meeting the
previous January 1, 2014 deadline, especially for their information
systems. In particular, although the U.S. Treasury is focusing on
entering into new IGAs to facilitate compliance, to date it has
completed only nine out of more than 50 negotiations announced.
This summer and fall, many FFIs would have been forced to gear up
for compliance with the U.S. statutory rules even though an IGA
with their jurisdiction may still be likely (which would change the
compliance process very significantly).
Other Deferred Dates
The requirement that a registering FFI implement FATCA procedures
for opening new accounts is deferred until July 1, 2014. The Notice
also defers by six months the dates by which an FFI must perform
"due diligence" with respect to "preexisting"
obligations to determine the holders of accounts or interests who
are U.S. persons or noncompliant FFIs; for institutional holders,
due diligence must be completed by six months after June 30, 2014
(for FFIs registering on or before this date) and for other holders
by two years after this date. A "preexisting" obligation
for these purposes will now be an obligation outstanding on June
30, 2014 (for FFIs registering on or before this date).
Unchanged Dates
The Notice makes clear that no change is being made to the dates
for withholding on "foreign passthru
payments"—i.e., payments by an FFI to another foreign
entity—and payments of gross proceeds of dispositions of U.S.
source assets. These both will still be subject to FATCA
withholding no earlier than January 1, 2017. FFIs will still be
required to file their first FATCA information returns by March 31,
2015, but will now have to supply information for the 2014 year
only (instead of 2013 and 2014) and only with respect to the
smaller number of U.S. accounts required to be identified in 2014
(under the revised due diligence rules above).
IGA List
Another positive development is that the IRS will provide an
official list on its web site of IGAs that have been signed, even
if they have not been ratified under a required foreign procedure
or foreign implementing legislation has not yet been passed. The
Notice says that U.S. withholding agents are allowed to treat the
countries on this list as having an IGA (with the effect that their
FFIs will almost never be subject to withholding) until they are
removed from the list. This should further ease anxiety for FFIs in
countries where an IGA seems likely (e.g., major U.S. trading
partners) but where the negotiation and ratification process may
linger on.
We do not expect any further deferral of the FATCA deadlines at
this point, and it would not be prudent to assume that the IRS will
show such generosity again. But we will continue to update you on
any major developments regarding FATCA, both before and after the
new July 1, 2014 effective date.
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.