FATCA: Postponed Deadlines
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- Dinah Payne
- 5 years ago
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1 IRS and Treasury Department Propose "Phase-In" of FATCA Requirements SUMMARY On July 14, 2011, the Internal Revenue Service (the "IRS") and Treasury Department released Notice (the "Notice"), which announces their intended schedule for implementing the foreign account provisions ("FATCA") of the Hiring Incentives to Restore Employment Act of FATCA establishes a complex set of withholding, information reporting and due diligence requirements for foreign financial institutions ("FFIs"), and imposes a penalty tax on FFIs that do not sign an agreement (an "FFI Agreement") to become "Participating FFIs" and comply with these rules. FATCA also imposes withholding on certain payments made to non-financial foreign entities ("NFFEs") that do not provide certain information regarding their beneficial owners. The Notice outlines a "phased implementation timeline that extends many FATCA-related deadlines beyond the January 1, 2013 effective date provided by the statute. The Notice explains that this approach was adopted in light of discussions with financial institutions and foreign governments, which highlighted the administrative and legal challenges presented by FATCA. The proposed schedule: Defers the imposition of FATCA withholding on U.S.-source payments of "fixed or determinable, annual or periodical income" made to FFIs, such as interest and dividends for one year until January 1, 2014; Delays the date on which FATCA withholding will apply to other "withholdable payments" made to FFIs until January 1, 2015; Phases in the due diligence rules that Participating FFIs will be required to use to classify foreign accounts; States that the IRS will begin accepting FFI Agreements no later than January 1, 2013 and gives FFIs until June 30, 2013 to enter into an FFI Agreement in order to be identified by the IRS as being a Participating FFI as of January 1, 2014; and New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney
2 Limits the scope of information required in the first round of FATCA reports that Participating FFIs will need to file (which will be due on September 30, 2014 for accounts that have been identified as U.S. accounts by June 30, 2014). As drafted, the Notice does not indicate whether the IRS and Treasury Department intend to provide an analogous extension for the rules requiring withholding on payments made to NFFEs, so it is uncertain whether NFFE withholding will commence on January 1, The Notice also supplements and clarifies some prior guidance issued under FATCA. In particular, the Notice indicates that the IRS and Treasury Department intend to issue further guidance: Regarding the "private banking" procedures that were first outlined in Notice that will (i) allow a Participating FFI to delegate certain account review responsibilities to parties other than "private banking relationship managers" and (ii) limit the need to re-review certain accounts; Providing transition rules for qualified intermediaries, withholding foreign partnerships and withholding foreign trusts; and Defining "grandfathered obligations" to include legal agreements that produce "passthru payments" (even if they do not produce "withholdable payments"). BACKGROUND FATCA was enacted in March 2010, and is intended to promote tax compliance by U.S. citizens and residents by encouraging FFIs to report information to the IRS regarding their U.S. customers. To accomplish this goal, the main compliance provisions of FATCA encourage: (i) FFIs to agree to report information on their U.S. account holders to the IRS and (ii) other foreign entities to provide information regarding their beneficial owners to U.S. withholding agents. In the absence of compliance, FATCA imposes a 30% withholding tax on payments of U.S.-source "withholdable payments." 1 FATCA also requires Participating FFIs to withhold on "passthru payments" (discussed below) made to "recalcitrant account holders" and "nonparticipating" FFIs (i.e., FFIs that do not sign an FFI agreement with the Treasury Department). In addition, FATCA imposes a tax on "withholdable payments" made to an NFFE unless the NFFE recipient either: (i) provides information to the payor regarding its beneficial ownership or (ii) is in a class of NFFEs that is exempted. Under the statute, FATCA's withholding provisions generally take effect for payments made on or after January 1, "Withholdable payments," under FATCA, include payments of U.S.-source interest, dividends and other fixed or determinable, annual or periodical income, as well as any gross proceeds from the sale or disposition of an obligation of a type that can produce U.S-source interest or dividends. Additional background on FATCA can be found in the Sullivan & Cromwell LLP publication entitled "Hiring Incentives to Restore Employment Act Enacted: Legislation Includes Foreign Account Provisions and Employment Incentives" (March 24, 2010), which can be obtained by following the instructions at the end of this publication. -2-
3 In August 2010, the IRS and Treasury Department issued Notice , the first round of guidance issued under FATCA. 3 A second round of guidance, Notice , was released in April Both of these notices represented IRS and Treasury Department proposals, and did not include important details (such as proposed terms for FFI Agreements). Financial institutions had become increasingly concerned that there was insufficient time for them to develop the reporting and withholding systems necessary to comply with FATCA prior to the January 1, 2013 effective date that is specified by the statute, particularly given that regulations have not yet been issued. DISCUSSION The Notice: (i) announces a detailed, anticipated timetable for implementing the provisions of FATCA that apply to FFIs, and (ii) supplements the guidance that was issued in Notice and Notice As drafted, the Notice only applies to the deadlines relevant to FFIs and does not provide an analogous extension for the provisions of FATCA that require withholding on payments made to NFFEs. Accordingly, it is unknown whether NFFE withholding (which could still, to the extent "withholdable payments" are made, have implications for both FFIs and U.S. financial institutions) will commence on January 1, Notice provided the IRS's initial views regarding how a number of provisions of FATCA would be applied, including: (i) FATCA's grandfathering rules; (ii) the definition of a "financial institution" for FATCA purposes; (iii) what Participating FFIs will need to do to identify and classify their account holders; (iv) what U.S. financial institutions that make withholdable payments will need to do to identify and classify their account-holder payees; (v) how exemptions from withholding will be applied; and (vi) what information a Participating FFI will be required to report. For additional background on Notice , please see the Sullivan & Cromwell LLP Publication entitled "FATCA Guidance: IRS Releases Preliminary Guidance on the FATCA Provisions of the HIRE Act" (Sept. 13, 2010), which can be obtained by following the instructions at the end of this publication. Notice discussed the IRS and Treasury Department's intent regarding certain provisions of FATCA that were not addressed by Notice , including: (i) the anticipated definition of "passthru payments;" (ii) which entities may be treated as "deemed compliant" FFIs; (iii) the treatment of qualified intermediaries, foreign withholding partnerships and foreign withholding trusts; and (iv) the application of FATCA's reporting rules to affiliated groups of FFIs. Notice also revised and modified the preexisting individual account identification procedures and U.S. account reporting requirements that were announced in Notice Most significantly in this regard, Notice added enhanced due diligence procedures for "private banking accounts," which placed significant responsibilities on "private banking relationship managers." For a discussion of Notice , please see the Sullivan & Cromwell LLP Publication entitled "New FATCA Guidance: Supplemental Notice Provides Additional Guidance on the Information Reporting and Withholding Rules for Foreign Financial Institutions" (April 14, 2011), which can be obtained by following the instructions at the end of this publication. -3-
4 A. IMPLEMENTATION TIMETABLE The Notice includes a detailed, "phased" schedule under which the IRS and Treasury Department intend to implement FATCA, which is illustrated and discussed below: Regulations/Due Diligence Jul.14,2011: Notice Dec.31,2011: IRSissues proposed regulations. Summer2012: IRSissues finalized regulations. Jan.1,2013: IRSbegins acceptingffi applications. Jun.30,2013: Signing deadline; agreements takeeffecton Jul.1. Jun.30,2014: Duediligence on highrisk ($500,000or more)private banking accountsmust becompleted. Jan.1,2015: Duediligence onother private banking accountsmust becompleted. Jun.30,2015: Duediligence onother accountsmust becompleted Withholdingand Reporting March18,2012: Issuanceof grandfathered obligations ends. Jan.1,2014: Withholding onu.s.source FDAPbegins. Q1,2014: Firstpossible datefor passthru payment percentage publication. Sept.30,2014: FirstFATCA reportsdue fromffis. Jan.1,2015: Withholding onother income (potentially including passthru payments) begins. 1. IRS Milestones December 31, 2011: Proposed Regulations The IRS and Treasury Department anticipate releasing proposed FATCA regulations by this date. Summer 2012: Final Regulations The IRS and Treasury Department expect to issue final FATCA regulations during the summer of The Notice indicates that draft, followed by final, versions of the required FFI Agreement and reporting forms are also expected to be released during this period. January 1, 2013: IRS Begins Accepting FFI Applications On or before this date, the IRS anticipates having infrastructure in place to permit FFIs to apply for Participating FFI Status. 2. FFI Agreement Deadlines and Account Due Diligence June 30, 2013: Signing Deadline This will be the last day for FFIs to sign FFI Agreements to "ensure" that they will be exempt from FATCA withholding as of January 1, FFI Agreements signed on or before this date will be deemed "effective" on July 1,
5 This effective date triggers a variety of compliance requirements for an FFI (e.g., Participating FFIs will be required to apply the new account procedures set out in Notice to accounts opened after this date). FFI Agreements entered into after June 30, 2013 will be effective as of the date of the FFI Agreement. June 30, 2014: Due Diligence on "High-Risk" Private Banking Accounts An FFI that signs an FFI Agreement prior to the deadline above will be required to complete its review of "private banking" accounts with a balance or value of at least $500,000 by this date. Other Participating FFIs will have one year from the effective date of their FFI Agreements to finish this review. December 31, 2014: Due Diligence on Other Private Banking Accounts A Participating FFI will be required to complete its due diligence on other "private banking" accounts by this date or, if later, one year from the effective date of its FFI Agreement. June 30, 2015: Due Diligence on Other Accounts A Participating FFI will be required to complete the "existing account" due diligence procedures for all other accounts by this date (or if later, two years from the effective date of its FFI Agreement). 3. FATCA Withholding March 18, 2012: Issuance of Grandfathered Obligations Ends Instruments issued after this date will not be "grandfathered obligations" and will be subject to FATCA withholding once FATCA withholding begins. January 1, 2014: Withholding on FDAP Payments Made to FFIs Begins On this date, FATCA withholding is expected to begin on payments of U.S.-source "fixed or determinable, annual or periodical" income (e.g., interest and dividends), including "passthru payments" that are U.S-source FDAP income (e.g,, payments of U.S.-source interest and dividends made through a custodial account). First Calendar Quarter, 2014: Passthru Payment Percentage Publication This will be the earliest possible deadline for publishing "passthru payment percentages." January 1, 2015: Non-FDAP Withholding Begins on Payments Made to FFIs FATCA withholding is expected to begin on other "withholdable payments" (e.g., gross proceeds on obligations that generate U.S.-source "fixed or determinable, annual or periodical" income) on this date. January 1, 2015 will also be the possible implementation date for "passthru payment" withholding on "passthru payments" that are not U.S.-source FDAP income. -5-
6 4. FATCA Reporting September 30, 2014: First FATCA Reports Due September 30, 2014 will be the deadline for Participating FFIs to file their first reports for accounts that were identified and documented as "U.S. Accounts" (with a Form W-9) on or before June 30, For the reports due in September 2014, Participating FFIs may (but will not be required to) report limited information regarding their U.S. accounts. For these reports, the IRS anticipates permitting Participating FFIs to report the following limited details on U.S. accounts that were identified and documented with a Form W-9 by June 30, 2014: The name, address and U.S. taxpayer identification number of each "specified U.S. person" (i.e., individual or other U.S. person that is not exempted from FATCA reporting) that is an account holder (and, in the case of each account owned by a U.S.-owned foreign entity, the name address and U.S. taxpayer identification number of each "substantial U.S. owner" of that entity); 5 The account balance as of December 31, 2013 (unless the account was closed after the Participating FFI's FFI Agreement became effective, in which case the FFI will be asked to report the balance of the account immediately before the closure); and The account number. 6 In contrast to the above, Notice (which is still expected to apply to later reporting years) also requires that Participating FFIs report annually the gross dividends, interest, other income and sale proceeds for each account. Notwithstanding the abbreviated reporting rules for U.S. accounts, Participating FFIs will be required to report aggregate information on "recalcitrant account holders" (including persons who do not waive foreign law restrictions on reporting) to the IRS by September 30, B. ADDITIONAL UPDATES 1. Private Banking Rules The Notice indicates that the IRS's proposed and final regulations will provide additional guidance regarding the scope of the "private banking" rules. These provisions which were introduced by Notice require enhanced due diligence on "private banking accounts" 7 and place significant responsibilities on the "private banking relationship manager." For this purpose, a "substantial U.S. owner" is generally a specified U.S. person owning more than 10% of an entity, but in the case of grantor trusts and certain "investment vehicle" entities, includes any U.S. owner. During this abbreviated reporting season, if the Participating FFI has also elected to comply with FATCA reporting as if it were a U.S. financial institution filing information statements about the account activity of a U.S. individual, it will be permitted to report only the items listed in the first and third bullet points above. In general, a "private banking account" is an account maintained by the FFI's "private banking department" or serviced as part of a "private banking relationship." "Private banking accounts" -6-
7 Under prior guidance, it appeared that private banking relationship managers could be required to personally review account files. However, the Notice clarifies that "private banking relationship managers" will generally be permitted to delegate account review procedures to other persons designated by the Participating FFI (although they will still be required to identify any clients for which they have actual knowledge that the client is a U.S. person and solicit a Form W-9 from any such client). The Notice also announces that private banking accounts that have been through due diligence procedures and identified as either U.S. accounts or non-u.s. accounts will not need to be re-reviewed unless a "change in circumstances" (which will presumably be more specifically defined in future guidance) occurs. 2. Grandfather Rules Payments made on any "obligation" that is outstanding on March 18, 2012 are not subject to withholding under FATCA. In Notice , the IRS proposed a definition for the term "obligation" that generally included any fixed-term legal agreement (other than an instrument that is treated as equity for U.S. tax purposes) that "produces or could produce withholdable payments." Various parties had observed that it was not clear whether this definition encompassed legal agreements that could produce passthru payments that are not necessarily withholdable payments 9 (including, for example, debt instruments of Participating FFIs that pay foreign-source interest, that may, under the proposal in Notice , be treated as partially giving rise to passthru payments). In response to these comments, the Notice clarifies that the IRS and Treasury Department intend to issue regulations clarifying that the term "obligation" will mean any legal agreement that produces or could produce passthru payments (including withholdable payments), but will continue to exclude instruments that are treated as equity for U.S. tax purposes and agreements that lack a definitive expiration or term. 3. Qualified Intermediary, Withholding Foreign Partnership and Withholding Foreign Trust Agreement Transition Rules Under current law, a foreign financial institution or clearing organization (or foreign branch of a U.S. bank or clearing organization) may enter into an agreement with the IRS to become a qualified intermediary ("QI") that is, it takes on certain information reporting and withholding responsibilities under the "traditional" U.S. withholding rules for payments of U.S.-source income that it receives as a custodian. Foreign partnerships and trusts may also, under current law, agree with the IRS to assume certain information reporting and withholding responsibilities similar to those taken on by a QI and become "withholding foreign partnerships" ("WFPs") or "withholding foreign trusts" ("WFTs"). Notice include accounts held by entities, nominees or other persons to the extent such accounts are associated with a private banking relationship with an individual client. A "private banking relationship manager" is an officer or employee of an FFI who is assigned responsibility for specific account holders on an ongoing basis and advises such clients on their private banking needs. See, e.g., New York State Bar Ass'n, Report on Notice (November 16, 2010), at
8 announced that the IRS and Treasury Department intend to issue guidance that will require all QIs, WFPs and WFTs that are FFIs to become Participating FFIs unless they are deemed compliant FFIs. Entities that are currently QIs, WFPs or WFTs would, under that proposal, have been required to consent to include in their QI, WFP or WFT agreement the requirements for a Participating FFI. These consents would have been effective as of January 1, The Notice provides a transition rule that is intended to make this requirement compatible with the extended FATCA implementation timetable announced by the Notice. Under the Notice, existing QI, WFP and WFT agreements of FFIs that expire on December 31, 2012 will be automatically extended until December 31, 2013, and any FFI that enters into an FFI Agreement on or before December 31, 2013 will be considered to have renewed its QI, WFP or WFT agreement. * * * Copyright Sullivan & Cromwell LLP
9 ABOUT SULLIVAN & CROMWELL LLP Sullivan & Cromwell LLP is a global law firm that advises on major domestic and cross-border M&A, finance, corporate and real estate transactions, significant litigation and corporate investigations, and complex restructuring, regulatory, tax and estate planning matters. Founded in 1879, Sullivan & Cromwell LLP has more than 800 lawyers on four continents, with four offices in the United States, including its headquarters in New York, three offices in Europe, two in Australia and three in Asia. CONTACTING SULLIVAN & CROMWELL LLP This publication is provided by Sullivan & Cromwell LLP as a service to clients and colleagues. The information contained in this publication should not be construed as legal advice. Questions regarding the matters discussed in this publication may be directed to any of our lawyers listed below, or to any other Sullivan & Cromwell LLP lawyer with whom you have consulted in the past on similar matters. If you have not received this publication directly from us, you may obtain a copy of any past or future related publications from Jennifer Rish ( ; rishj@sullcrom.com) or Alison Alifano ( ; alifanoa@sullcrom.com) in our New York office. CONTACTS New York Andrew S. Mason masona@sullcrom.com Andrew P. Solomon solomona@sullcrom.com Diana L. Wollman wollmand@sullcrom.com Judith R. Fiorini fiorinij@sullcrom.com Aditi Banerjee banerjeea@sullcrom.com Washington, D.C. Donald L. Korb korbd@sullcrom.com London S. Eric Wang wangs@sullcrom.com Michael Orchowski orchowskim@sullcrom.com LONDON: B -9-
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