If one were to divide the US Foreign Account Tax Compliance Act ("FATCA") into two phases, 2018 would be the line of demarcation. The first phase was one of implementation—since the enactment of the HIRE Act in 2010 through the conclusion of the first certification period in 2017, financial institutions had to take affirmative steps, including updating policies, procedures and IT systems, in order to implement the new information reporting regime known as FATCA. Guidance published by the Internal Revenue Service ("IRS") during the first phase had an implementation focus and guided non-US financial institutions ("FFIs") in their implementation efforts.
2018 saw the beginning of the IRS's shift away from implementation towards enforcement, as the inaugural FATCA certifications came due. These FATCA certifications required impacted FFIs to certify to the IRS that the entity has been compliant with its FATCA onboarding, reporting and withholding obligations pursuant to the US tax law, its FFI Agreement, and, if applicable, a Model 2 IGA. Equipped with data collected from the initial certifications, as well as several years' worth of information returns relating to FATCA, the IRS was now in a position to focus its efforts on a post-implementation/enforcement phase of FATCA.
One aspect of the IRS enforcement of FATCA will be related to FFIs which failed to comply with its certification requirements. For example, after the deadline for submitting the FATCA certifications, the IRS will review the list of entities that have been identified as requiring a FATCA certification. To the extent an entity fails to submit a required FATCA certification, the IRS will likely follow up with the FFI's Responsible Officer ("RO"). This communication from the IRS may take the form of a "notice of default" followed by a "notice of termination." Failure to timely respond to a "notice of termination" will result in the removal of the entity's Global Intermediary Identification Number ("GIIN") from the IRS FFI list. In other words, failure to timely respond to a "notice of termination" will result in the entity becoming subject to FATCA's 30% withholding tax on income it receives from sources within the United States, including payments on debt and equity issued by US entities. This Legal Update describes how entities may choose to go about responding to a "notice of default" and appealing a "notice of termination" in an effort to remain compliant with FATCA and avoid becoming subject to FATCA's 30% withholding tax. This Legal Update also describes the reinstatement procedures for an entity whose GIIN has been terminated by the IRS.
There are two general types of FATCA certifications—(i) Certification of Preexisting Accounts ("COPA") and (ii) Periodic Certification. Whether an entity is obligated to submit one or both certifications will depend on the entity's classification for FATCA purposes, as well as the entity's jurisdiction of tax residence. In general, COPA certifies to the IRS that the entity has complied with applicable due diligence procedures for preexisting accounts within certain timeframes, and the Periodic Certification certifies to the IRS that an entity has complied with ongoing FATCA requirements.
The COPA must be submitted to the IRS at the same time as the first Periodic Certification. For a participating FFI resident in a non-IGA or Model 2 IGA jurisdiction, the first Periodic Certification period begins on the effective date of the FFI agreement and ends on the close of the third full calendar year following the effective date of the FFI agreement. Therefore, for participating FFIs with an FFI agreement effective date of July 1, 2014, the first certification period ended on December 31, 2017. Each subsequent certification period comprises a period of three calendar years that follow the prior certification period. The Periodic Certificate of compliance must be submitted to the IRS by July 1 of the year following the applicable certification period.1 The RO is responsible for completing and submitting each certification by the respective submission deadlines.
Material Failure and/or Event of Default Identified Pursuant to the Certification
Each certification is completed and submitted by an FFI's RO through the online FATCA Registration System.2 Upon the certification's submission, the IRS will review the certification and, to the extent necessary, will follow up with the RO to ask additional questions based on the information provided. These follow-up questions may request additional information regarding the occurrence of a material failure or event of default.
In general, a material failure occurs when an entity fails to comply with FATCA requirements due to (i) a deliberate action of the entity's employees (or agents, sponsors, or compliance Financial Institution, as applicable) to avoid the entity's FATCA requirements or (ii) an error attributable to the entity's failure to establish sufficient internal systems to ensure compliance with FATCA requirements. A material failure may give rise to an event of default if the material failure occurs in more than limited circumstances when an entity has not substantially complied with its FATCA requirements. An event of default occurs if an entity fails to (i) perform material obligations required with respect to the due diligence, verification, withholding, or reporting FATCA requirements or (ii) substantially comply with its FATCA requirements.
Procedures for Issuance of Notice of Default and Notice of Termination
On April 7, 2020, the Commissioner of the Large Business and International Division of the IRS ("LB&I") published a memorandum addressed to LB&I employees describing the procedures by which the IRS plans to issue notices of default and notices of termination relating to an entity's FATCA certification requirement, as well as remediation and appeals procedures for entities which are issued either of the aforementioned notices (referred to herein as the "Memorandum").3
Following the FATCA certification deadline, the IRS will review the list of entities that have been identified by the FATCA Registration System as requiring a FATCA certification. (Again, this determination will be based on the entity's FATCA status as well as its jurisdiction of tax residence.) To the extent an entity is otherwise required to submit a FATCA certification and has failed to do so, the IRS will issue a notice of default.
It is important to note that all notices described herein will be sent to the RO via the entity's FATCA registration system message board. It is vital for the RO's contact information on the FATCA registration system to remain current in order to avoid a situation where a notice of default or a notice of termination goes unnoticed. Failure to timely respond to IRS notices will (eventually) result in the removal of an entity's GIIN from the IRS FFI list.
A notice of default will be issued in the event an entity (i) failed to timely complete and submit a required FATCA certification; (ii) indicated that the entity was unable to submit a required certification; (iii) indicated that the entity was not required to submit a certification, contrary to the entity's FATCA classification or jurisdiction of tax residence; or (iv) completed and submitted a certification that had a "failure to certify" result. The notice of default will specify the event of default (e.g., failure to submit a required certification) and request the entity remediate the default within 60 days of the notice (e.g., by submitting the required certification). If the entity fails to timely respond to the notice of default, the IRS (taking into account any particular terms of an applicable Model 2 IGA) may issue a second notice of default or a notice of termination. A second notice of default, to the extent issued, will provide an additional 30 days for the entity to remediate the event of default before a notice of termination is issued.
A notice of termination will notify the RO that, due to a lack of response or remediation of the event of default identified in the notice of default, the IRS will terminate the entity's FATCA status, which will result in removal of the entity's GIIN from the FFI list. Upon issuance of a notice of termination, the entity may appeal to the IRS by responding within 90 days of the issuance of notice of termination.
Failure to timely respond to and appeal these notices may result in a waiver of the entity's ability to request a reconsideration of or to appeal the IRS's determination. At this point, the IRS will initiate the process of terminating the entity's FATCA status, and the entity's GIIN will be removed from the FFI list. (While the termination process described in the Memorandum does not apply to Reporting FIs under an applicable IGA, it is likely that Reporting Model 2 IGA FFIs will be subject to similar procedures, albeit with the involvement of local tax authorities.)
The Memorandum explains that an entity that has its registration terminated and GIIN removed from the FFI list should not re-register for a new GIIN in the FATCA Registration System. To the extent the entity requires the GIIN to be reinstated, the Memorandum explains that the entity must contact the IRS to make the request.
In general, a request for reinstatement should be made on the FATCA Registration System and must include—
- A written request for the GIIN to be reinstated;
- Submission of the applicable qualified certification(s) on the Registration System;
- A detailed explanation as to why the entity was not compliant with its FATCA certification obligations within the certification submission;
- A detailed remediation plan; and
- Response to IRS inquiries in a comprehensive and timely manner, no later than 30 days.
After a complete request has been submitted, the IRS may request additional information as part of the review process. The duration of the IRS review process is at least one month from the time a complete request is submitted, including all additional information requested by the IRS. If the IRS approves the request, the entity will receive a message on the Registration System and its GIIN will appear on the subsequent month's FFI list. The entity can be considered to have had a valid GIIN retroactively from the time of removal following a reinstatement despite prior FFI lists not being amended. (Note, however, that withholding agents may take different positions as to how to treat entities which reappear on the FFI list. Therefore an entity may need to discuss the retroactive treatment of its GIIN with its withholding agent.)
For assistance in handling a FATCA certification notice of default, notice of termination, or reinstatement request, please contact any of the lawyers listed above.
1 For example, an FFI whose certification period is 2019 through 2021 is obligated to file its periodic certification by July 1, 2022. However, please note that the due date for the initial certification (i.e., the certification period ending on December 31, 2017) was extended. Moreover, in light of the COVID-19 virus, the IRS has automatically extended the due date for certifications due July 15, 2020, to December 15, 2020. See Q13 and Q21 under the "FACTA Certifications" heading on the IRS's FATCA FAQ webpage, available at https://www.irs.gov/businesses/corporations/frequently-asked-questions-faqs-fatca-compliance-legal#FATCA-certifications.
2 The FATCA Registration System is available at https://sa.www4.irs.gov/fatca-rup/reg/login/userLogin.do.
3 The Memorandum is available at https://www.irs.gov/pub/foia/ig/spder/lbi-04-0120-0002.pdf.
Originally published 1 May, 2020
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