THE FATCA PROPOSED REGULATIONS: THE U.S. TREASURY DEPARTMENT STRIVES TO MAKE COMPLIANCE MORE USER FRIENDLY

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1 THE FATCA PROPOSED REGULATIONS: THE U.S. TREASURY DEPARTMENT STRIVES TO MAKE COMPLIANCE MORE USER FRIENDLY By Alan Winston Granwell and Witold M. Jurewicz On February 8, 2012, the U.S. Treasury Department issued proposed regulations to implement the Foreign Account Tax Compliance Act, commonly referred to as FATCA. The proposed regulations are voluminous, totaling 388 pages. Concurrently, the U.S. Treasury Department issued a joint statement with the governments of France, Germany, Italy, Spain and the United Kingdom regarding an intergovernmental approach to improving international tax compliance and implementing FATCA (the Alternative Approach to FATCA). The issuance of the Joint Statement establishes a framework for countries to collect and report information on a reciprocal basis and exchange that information on an automatic basis. It is a groundbreaking development in international efforts to expand the exchange of information and tax transparency. Procedurally, the regulations are issued in proposed form and subject to comment prior to finalization. The U.S. Treasury Department has requested comments by April 30, 2012; a public hearing will be held at the Internal Revenue Service on May 15, Thus, there is continuing opportunity for interested parties to comment. This article highlights and comments on key developments contained in the Proposed Regulations. Subsequent publications will provide a more in-depth analysis of the Proposed Regulations by area and/or industry. The key areas addressed are: (1) the Alternative Approach to FATCA and its implications (2) the extended time period for Grandfathered Obligations (3) FATCA withholding rules phase-in (4) transitional rules for FFI affiliates with legal prohibitions to comply with FATCA (5) due diligence procedures for preexisting accounts relaxed (6) due diligence procedures for new accounts relaxed (7) reporting rules phased-in (8) financial account definition narrowed (9) deemed compliant categories expanded (10) FFI agreements and other forms (11) FFI verification procedures clarified and (12) passthru payments delayed and requests for comments as to implementation

2 Background: FATCA s ultimate goal FATCA was enacted in 2010 as the legislative response to high-profile U.S. tax evasion cases, at a time when the G-20 countries were continuing to pressure offshore financial centers and tax havens to end bank secrecy and become more transparent. FATCA requires foreign (i.e., non-u.s.) financial institutions (FFIs) and non-u.s. non-financial entities (NFFEs) to identify and disclose their direct and indirect U.S. financial account holders or become subject to a new 30 percent U.S. withholding tax on withholdable payments U.S. source income and gross proceeds (not gains) from the sale of equity or debt instruments of U.S. issuers. The ultimate goal of FATCA is for the United States to obtain information with respect to the investment activities of certain U.S. taxpayers not to collect the new 30 percent withholding tax. FATCA extends the third-party information reporting regime that is currently imposed on third-party U.S. payors to FFIs that maintain U.S. financial accounts and on certain NFFEs that present a high risk of U.S. tax avoidance. The rationale, as expressed in the Preamble to the Proposed Regulations, for the expansion of the thirdparty reporting regime to offshore accounts is that in today s globalized economy, FFIs (and certain NFFEs) are generally in the best position to identify and report with respect to their U.S. account holders or members. This rationale does not explain how non-u.s. reporting entities are to rationalize local law conflicts with FATCA reporting and U.S. withholding obligations. Alternative Approach to FATCA The Proposed Framework Agreement. Under the Alternative Approach to FATCA, an FFI could satisfy the reporting requirements of FATCA if (i) the residence country of an FFI enters into an agreement to report the information required to be reported under FATCA pursuant to an income tax treaty, tax information exchange agreement, or other agreement with the United States (the FATCA Partner) and (ii) the FFI collects the information required under FATCA and reports this information to its residence country government for automatic exchange by that government with the United States. The quid pro quo for this undertaking by FATCA Partners would be that the U.S. Internal Revenue Service (IRS) would agree to report information on FATCA Partner taxpayers and automatically exchange such information with FATCA Partners. The benefits of this alternative approach are that: (i) FFIs established in the host country of the FATCA partner would not have to enter into an individual agreement with the IRS; (ii) the FFI would report U.S. account holder information to the FATCA Partner tax authority, pursuant to domestic enabling legislation; (iii) FATCA withholding on payments to FFIs would be eliminated; and (iv) the closing of recalcitrant account holder accounts and the obligations to withhold on passthru payments to others in FATCA Partner would be eliminated. On a longer term basis, the United States and its FATCA Partners would commit to developing a practical, workable and effective alternative approach to achieve the policy objectives of passthru payment withholding and to working with other FATCA Partners, the OECD and, where appropriate, the EU, on adapting FATCA in the medium term to a common model for automatic exchange of information, including the development of reporting and due diligence standards. Implications. The Alternative Approach to FATCA is a groundbreaking international tax development because of its implications with respect to tax transparency and exchange of information. It is not, however, an exemption for FFIs resident in FATCA Partners to comply with FATCA. The Alternative Approach is intended to minimize or eliminate local law conflicts that, but for the approach, could prevent FFIs from complying with FATCA. These conflicts included privacy and data protection laws, account opening/ closing provisions, anti-discrimination provisions and local laws that would prevent an FFI from withholding U.S. tax under the FATCA passthru payment provisions. Absent a THE FATCA PROPOSED REGULATIONS DLA Piper 2

3 coordination of local law with FATCA, FFIs that opt to comply with FATCA could become subject to regulatory sanction or proceedings that could result in civil or criminal penalties. The Alternative Approach also should reduce administrative and cost burdens for FFIs to comply with FATCA. Nonetheless, FFIs still will have to implement procedures to identify and report U.S. account holders, albeit to their home country tax authority. Further, the Alternative Approach to FATCA will not solve local law conflicts of branches or subsidiaries of FFIs situated in countries that are not FATCA Partners. Although the Alternative Approach currently only covers five EU countries, it is anticipated that other countries (EU and non-eu) will become FATCA Partners. Further, it is highly likely that the Alternative Approach may further spur countries to adopt automatic exchange of information agreements with respect to financial account information. In order to reciprocate, the United States undertakes to automatically exchange information. Currently, the United States only automatically exchanges information with Canada. The automatic exchange of a nonresident s U.S. bank account information is contentious. 1 Grandfathered obligations time period extended The Proposed Regulations extend the grandfathering date for obligations from March 18, 2012 to January 1, The Proposed Regulations exclude from the definition of withholdable payment and passthru payment any payment under an obligation outstanding on January 1, 2013 and any gross proceeds from the disposition of such an obligation. The new effective date of grandfathered obligations was inserted to facilitate implementation of FATCA withholding by withholding agents and FFIs. Note that the exclusion from FATCA withholding does not negate information reporting by FFIs under the phased in reporting rules. The term obligation for purposes of the grandfathering provision means any legal agreement that produces or could produce withholdable payments other than any instrument treated as equity for U.S. tax purposes or any legal agreement that lacks a definitive expiration term. Thus, in order to be grandfathered, the obligation must be outstanding on January 1, 2013 and not materially modified thereafter. In that regard, revolvers entered into prior to the new effective date are covered, provided that on the agreement s issue date the agreement fixes the material terms (including a stated maturity date) under which the credit will be provided. Withholding transitional rules January 1, Withholding on FDAP income payments. This withholding obligation encompasses not only U.S. withholding agents but also FFIs, who will be required to withhold on passthru payments that are withholdable payments. The term FDAP income payments include interest (including original 1 The IRS has re-proposed regulations (originally proposed in 2002) to obtain nonresident alien bank account reporting of interest income, but there has been strong opposition from the financial community and certain members of Congress. Opponents of this proposal assert that an automatic exchange of information of such information would jeopardize foreign deposits in U.S. financial institutions, particularly in Florida, California, New York and Texas, because many foreign nationals would withdraw their deposits and close their U.S. accounts rather than risk having their personal accounts and investments be reported to the IRS and shared with their home governments. As a consequence, opponents contend that the resulting outflow of deposits would significantly reduce an important source of funding that supports economic growth and would hinder economic recovery. Based on the undertakings of the Alternative Approach, the United States will have to be able to obtain and exchange information to reciprocate for the information that it will receive from its FATCA Partners. THE FATCA PROPOSED REGULATIONS DLA Piper 3

4 issue discount) dividends, rents, salaries, wages, premium annuities, compensations, remunerations, emoluments and other fixed or determinable annual or periodical gains, profits and income, if such payment is from sources within the United States. Derivative payments are also included in this category. Under the Proposed Regulations, the following are excluded from withholdable payments: (i) commercial paper and similar debt with a term of under 183 days; (ii) income effectively connected with a U.S. trade or business; and (iii) payments made in the ordinary course of the withholding agent s business for nonfinancial services, goods and the use of property (e.g., wages, office and equipment leases, software licenses, transportation, freight, interest on nonfinancial accounts payable). January 1, Withholding on gross proceed payments. Gross proceed payments are any gross proceeds (not gains) from the sale or other disposition of any property of a type which can produce interest or dividends from U.S. sources (e.g., from the sale of disposition of U.S. stocks or securities or the repayment of principal on a debt). January 1, Withholding on foreign passthru payments. The Proposed Regulations reserve on the definition of a foreign passthru payment; the term essentially refers to a payment that would be foreign source under U.S. source of income rules but attributable to a withholdable payment. Participating FFIs will be required to report annually on the aggregate amount of foreign passthru payments to each nonparticipating FFI for the 2015 and 2016 calendar years. Transitional rules for FFI Affiliates with legal prohibitions on compliance with FATCA Each FFI that is a member of an expanded affiliated group (FFI Group) is required to be a participating FFI or a deemed compliant FFI. An FFI Group includes those entities that are more than 50 percent controlled, except as otherwise provided by regulations. In recognition of the fact that an FFI Group may have branches or subsidiaries in jurisdictions that have local law conflicts with FATCA, the Proposed Regulations provide a two-year transition period, until January 1, 2016, for these branches or subsidiaries to become either participating or deemed compliant FFIs. During this transition period, an FFI affiliate in a jurisdiction that prohibits the reporting or withholding required by FATCA will not prevent the other FFIs within the FFI Group from entering into an FFI agreement, provided that the FFI in the restrictive jurisdiction agrees to perform due diligence to identify its U.S. accounts, maintain certain records and meet certain other requirements. Note, during this interim period, the branches or subsidiaries in these jurisdictions are subject to FATCA withholding. Further, if the local law conflicts cannot be reconciled with FATCA by the end of the transitional period, then all the FFIs in the FFI Group will become non-compliant. This provision is extremely important for FFI Groups and will require timely action by affected FFIs. Due diligence on existing accounts relaxed Overview. The Proposed Regulations modify and relax the due diligence requirements with respect to the identification of preexisting U.S. accounts by establishing a higher dollar threshold, allowing FFIs to rely primarily on electronic reviews of preexisting accounts and limiting the scope for manual review, particularly of individual accounts. For pre-existing entity accounts, the due diligence procedures focus on passive investment entities with significant account balances, permit substantial reliance on documentation previously collected during account opening procedures and raise the threshold for further investigation into potential U.S. ownership. The modifications were made to reduce the administrative burden on FFIs and better focus on circumstances that present higher risks of tax evasion. Significantly, FFIs that adhere to the diligence THE FATCA PROPOSED REGULATIONS DLA Piper 4

5 guidelines of the Proposed Regulations will be treated as compliant with the requirement to identify U.S. accounts and will not be held to a strict liability standard. Preexisting individual accounts Accounts (both deposit and other accounts) with a balance or value that does not exceed U.S.$50,000 are exempt from review, unless the FFI elects otherwise. Certain cash value insurance and annuity contracts held by individual account holders that are preexisting accounts with a value or balance of U.S.$250,000 or less are exempt from review, unless the FFI elects otherwise. Accounts with a balance or value over U.S.$50,000 (U.S.$250,000 for a cash value insurance or annuity contract) but no more than U.S.$1 million are subject only to review of electronically searchable data for indicia of U.S. status. o U.S. indicia include: (i) identification of an account holder as a U.S. person; (ii) a U.S. place of birth; (iii) a U.S. address; (iv) a U.S. telephone number (a new requirement from prior Notices); (v) standing instructions to transfer funds to an account maintained in the United States; (vi) a power of attorney or signatory authority granted to a person with a U.S. address; or (vii) an in-care-of 2 or hold mail address that is the sole address the FFI has identified for the account holder. o No further search of records or contact with the account holder is required unless U.S. indicia are found through the electronic search. o The U.S.$1 million threshold replaces the U.S.$500,000 threshold and, significantly, the private banking test proposed in the prior Notices. FFIs no longer will be required to distinguish between private banking accounts and other accounts. Accounts with a balance of more than U.S.$1 million are subject to review of electronic and nonelectronic files for U.S. indicia, including an inquiry of the actual knowledge of any relationship manager associated with the account. The review of non-electronic files is limited to the current customer files and certain other documents, and is required only to the extent that the electronically searchable files do not contain sufficient information about the account holder. Under the prior Notices, the review encompassed all available documents. Preexisting entity accounts Preexisting entity accounts with account balances of U.S.$250,000 or less are exempt from review until the account balance exceeds U.S.$1 million. For remaining preexisting entity accounts, FFIs can generally rely on AML/KYC records and other existing account information to determine whether the entity is an FFI, a U.S. person, excepted from the requirement to document its substantial U.S. owners (i.e., because entity is engaged in a nonfinancial trade or business), or a passive investment entity (i.e., a passive NFFE ). A passive NFFE is an NFFE that is not an excepted NFFE; e.g., a publicly traded entity or affiliate, an exempt beneficial owner, or an active NFFE (i.e., less than 50 percent of its gross income or assets for the preceding calendar year are passive). o Where a passive NFFE has an account balance of U.S.$1 million or less, an FFI may generally rely on information collected for AML/KYC due diligence purposes to identify substantial U.S. owners. o Where a passive NFFE has an account balance in excess of U.S.$1 million, the FFI must obtain information regarding all substantial U.S. owners or a certification that the entity does not have substantial U.S. owners. Due diligence on new accounts relaxed Overview. Accounts opened after the effective date of an FFI agreement will be subject to onboarding procedures used under AML/KYC unless U.S. indicia are identified. 2 Note that the Proposed Regulations provide that an FFI will not be required to treat an account holder as having U.S. indicia solely because the only address it has in its electronically searchable information is an in-care-of address outside of the United States. THE FATCA PROPOSED REGULATIONS DLA Piper 5

6 New individual accounts. FFI will be required to review the information provided at the opening of the account, including identification and any documentation collected under AML/KYC rules. If U.S. indicia are identified as part of that review, the FFI must obtain additional documentation or treat the account as held by a recalcitrant account holder. New entity accounts. An FFI can generally rely on documentary evidence. Passive NFFEs: An FFI will be required to determine whether the entity has any substantial U.S. owners upon opening a new account, generally by obtaining a certification from the account holder. Accounts exempt from documentation of substantial owners: o Accounts of another FFI (other than an owner-documented FFI for which the participating FFI has agreed to perform reporting); and o Accounts of an entity engaged in an active nonfinancial trade or business or otherwise exempt from documentation requirements. Reporting rules phased in To facilitate the implementation of FATCA, the Proposed Regulations phase in the reporting rules for U.S. accounts and accounts held by recalcitrant account holders. 3 Additionally, the Proposed Regulations allow FFIs to elect to report financial information either in the currency in which the account is maintained or in U.S. dollars. Reporting during For calendar years 2013 and 2014, participating FFIs are required to report only name, address, taxpayer identification number and account number. For calendar year 2013, FFIs must report by September 30, 2014 those accounts identified as U.S. accounts or held by recalcitrant account holders as of June 30, For calendar year 2014, FFIs must report by September 30, Reporting during For calendar year 2015, participating FFIs are required to report income associated with U.S. accounts, in addition to the aforementioned information. Commencing in 2015, FFI reporting is generally required to be made by March 31st of each year. Reporting during 2017 and thereafter. For calendar year 2016, full reporting, including gross proceeds from broker transactions, will be required. Financial account definition narrowed Overview. FATCA reporting is primarily required with respect to U.S. accounts. The term U.S. account is any financial account held by certain U.S. persons, directly or indirectly. The term financial account means, with respect to any financial institution, any depositary account maintained by such financial institution, any custodial account maintained by such financial institution, and any equity or debt interest in such financial institution (other than interests that are regularly traded on an established securities market). The definition of financial account has been narrowed in the Proposed Regulations to focus on bank accounts and custodial accounts, as summarized below. 3 Participating FFIs are required to annually report information on recalcitrant account holders in separate categories. The separate categories of accounts held by recalcitrant account holders are: (i) accounts with U.S. indicia; (ii) accounts with no U.S. indicia; and (iii) dormant accounts. Generally, a dormant account is an account treated as dormant or inactive under applicable laws or regulations or normal operating procedures of the participating FFI that are consistently applied for all accounts maintained by the participating FFI. THE FATCA PROPOSED REGULATIONS DLA Piper 6

7 Exclusions include: Retirement and pension accounts Tax-favored savings accounts established under non-u.s. law that limit annual contributions to U.S.$50,000 or less Debt or equity interests that are regularly traded on an established securities market. Debt and equity interests in an FFI (other than investment fund) such as banks, custodians or insurance companies, if the value of the interest is not determined primarily by reference to assets that give rise to withholdable payments Insurance contracts that provide pure insurance protection, such as term, life, disability, health and property and casualty Accounts held solely by or on behalf of owners who are beneficial owners and exempt from the FATCA withholding tax, to include foreign governments Deemed Compliant status Overview. The Proposed Regulations expand the deemed compliant category to focus the application of FATCA on financial institutions that provide services to the global investment community and reduce or eliminate burdens on truly local entities and other entities for which entering into an FFI is not necessary to carry out the purposes of FATCA. The Proposed Regulations provide two principal categories of deemed compliant FFIs: (i) Registered Deemed-Compliant FFIs and (ii) Certified Deemed-Compliant FFIs. There are five categories of Registered Deemed-compliant FFIs and four categories of Certified Deemed-Compliant FFIs. In addition, the other category is Owner-Documented FFIs. Finally, any FFI that is described in guidance published in the Federal Register or the Internal Revenue Bulletin in the future may qualify as a Deemed Compliant FFI. Registered Deemed-Compliant FFIs. This category includes local banks, certain investment funds and certain members of a Participating FFI Group. A Registered Deemed-Compliant FFI also includes any FFI that is deemed to comply with FATCA pursuant to an agreement between the government of the United States and a foreign government. A Registered Deemed-Compliant FFI, among other obligations, must obtain an FFI-EIN and certify to the IRS that it meets the requirements every three years. Local FFIs. To qualify, generally, a stand-alone FFI or each FFI in an FFI Group (i) must be organized in the same country and meet certain licensing and regulation requirements in its country of organization as a bank or similar organization authorized to accept deposits in the ordinary course of its business; (ii) cannot have a fixed place of business or solicit account holders outside its country of organization; (iii) must be required to perform information reporting or withholding of tax with respect to its resident account holders by its country of organization; (iv) at least 98 percent of the accounts maintained by the FFI or the FFI Group are held by residents of its country of organization (with a broader rule for EU member states); and (v) the FFI or the FFI Group must have implemented certain policies and procedures to ensure that it does not open or maintain accounts for any specific U.S. person not resident of the country in which the FFI is organized, any non-participating FFI, or any entity controlled or beneficially owned by one or more specified U.S. persons. Nonreporting members of Participating FFI Group. A member of an FFI Group that would otherwise be a nonparticipating FFI can become Registered Deemed-Compliant FFI if the member implements policies and procedures to ensure that if it opens or maintains any U.S. accounts or accounts held by nonparticipating FFIs, it either (i) transfers any such accounts to an affiliate that is a participating FFI or U.S. financial institution, (ii) becomes a participating FFI itself or (iii) closes such account. Significantly, this type of deemed compliant FFI is not limited to those FFIs that operate within a single country and that solicit account holders in such country. This category ring fences U.S. accounts in affiliated entities and applies to non-u.s. account holders. A number of FFIs in counties have already adopted this ring fence approach to deal with FATCA. THE FATCA PROPOSED REGULATIONS DLA Piper 7

8 Qualified collective investment vehicles. In general, an FFI regulated in its country of organization as an investment fund may become Registered Deemed-Compliant if all of its holders of record of a direct interest are participating FFIs, Registered Deemed-Compliant FFIs, exempt beneficial owners (such as a controlled entity of a foreign government) or certain U.S. persons that are exempt from FATCA reporting, such as publicly traded corporations and their affiliates. Restricted funds. An FFI can obtain Registered Deemed-Compliant status if: (i) it is regulated as an investment fund under the law of its country of organization; (ii) each distributor of the FFI s interests is either a participating FFI, a Registered Deemed-Compliant FFI, a Nonregistering Local Bank (a Certified Deemed-Compliant FFI described below) or a Restricted Distributor ; (iii) each agreement that governs the distribution of the FFI s debt or equity interests (other than interests that are both distributed by and held through a Participating FFI) prohibit sales of debt or equity interests in the FFI to U.S. persons, nonparticipating FFIs, or passive NFFEs with one or more substantial U.S. owners; (iv) the FFI s prospectus and marketing materials must indicate that sales to U.S. persons, passive NFFEs, and nonparticipating FFIs (other than interests which are both distributed by and held through a participating FFI) are prohibited; and (v) the FFI must also establish certain other agreements and procedures. Certified Deemed-Compliant FFIs. Certified Deemed-Compliant FFIs include nonregistering local banks, retirement funds, nonprofit organizations and FFIs with small-value accounts. These entities are not required to register with the IRS, but must certify their compliance with a Certified Deemed-Compliant category on a W-8 filed with the withholding agent. Nonregistering local bank. Generally, certain banks will qualify for Certified Deemed-Compliant status if: (i) the FFI is licensed to conduct business solely as a bank in its country of organization; (ii) the FFI offers basic banking services; (iii) the FFI operates solely in its country of incorporation (or if it is a member of an FFI Group, all members operate in the same country); (iv) the FFI does not solicit account holders outside of its country of organization; (v) the assets on each member FFI s balance sheet are no more than U.S.$175 million (and the entire FFI Group assets are no more than U.S.$500 million on their combined balance sheets); and (vi) the FFI is required under the tax laws of the country in which it is organized to perform either information reporting or tax withholding with respect to resident accounts. Retirement funds. Certain retirement funds qualify under this category. As a general matter, in order to qualify as a Certified Deemed-Compliant retirement fund, the FFI must be organized for the provision of retirement or pension benefits under the law of each country in which it is established or in which it operates. Under the first qualification standard, (i) contributions to the FFI must consist only of employer, government, or employee contributions and be limited by reference to earned income, (ii) no single beneficiary may have a right to more than 5 percent of the FFI s assets and (iii) contributions to the FFI must be excluded from the income of the beneficiary and/or taxation of the income attributable to the beneficiary must be deferred under the laws of the country in which the FFI is organized or operates, or the FFI must receive 50 percent or more of its total contributions from the government or employers. Under the second qualification standard, (i) the retirement fund has fewer than 20 participants, (ii) is sponsored by an employer that is not an FFI-investment fund or passive NFFE, (iii) contributions are limited to earned income; (iv) participants that are not residents of the FFI s country of organization are not entitled to more that 20 percent of the FFI s assets and (v) no participant that is not a resident of the FFI s country of organization is entitled to more than U.S.$250,000 of the FFI s assets. Nonprofit organizations. A Nonprofit Organization will qualify for Certified Deemed-Compliant status if: (i) it is established and maintained in its country of residence exclusively for religious, charitable, scientific, artistic, cultural or educational purposes; (ii) it is exempt from income tax in its country of residence; (iii) it has no shareholders or members that have a proprietary interest in its income or assets; and (iv) it is subject to restrictions preventing the private inurement of its income and assets. THE FATCA PROPOSED REGULATIONS DLA Piper 8

9 FFIs with only low-value accounts. An FFI will qualify for Certified Deemed-Compliant status if: (i) the FFI is an FFI solely because it accepts deposits in the ordinary course of a banking or similar business as described or, as a substantial portion of its business, holds financial assets for the account of others; (ii) no financial account maintained by the FFI (or, in the case of an FFI that is a member of an FFI Group, by any member of the FFI Group) has a balance or value in excess of U.S.$50,000; and (iii) the FFI (or the entire FFI Group) has no more than U.S.$50 million in assets on its balance sheet. Owner-Documented FFIs. An Owner-Documented FFI is eligible for deemed compliant status if: (i) it is not an investment fund and is not affiliated with another FFI that is an investment fund; (ii) it does not maintain financial accounts for nonparticipating FFIs or issue debt that constitutes a financial account in excess of U.S.$50,000 to any person; and (iii) it provides a withholding agent with all required documentation regarding its owners and the withholding agent must agree to report to the IRS the information required with respect to any of the owners of the FFI that are specified U.S. persons. An Owner-Documented FFI may only be deemed compliant with respect to a specific withholding agent that agrees to report to the IRS on its behalf. FFI agreement and other forms FFI agreement and forms. The Proposed Regulations state that the IRS will make available an online process for registering FFIs as Participating FFIs or Deemed-Compliant FFIs no later than January 1, The online process will allow each FFI to: (i) register for participating, limited 4, or Registered Deemed-Compliant FFI status; (ii) enter into an FFI Agreement; (iii) complete a required certification; and (iv) obtain an FFI-EIN, if applicable. In addition, the IRS will modify the qualified intermediary (QI) agreement, the foreign withholding partnership and foreign withholding trust agreement to incorporate FATCA. Further, the IRS will also have to amend other forms, including the W-8 forms, Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons) and Form 1042-S (Foreign Person's U.S. Source Income Subject to Withholding). These modifications are anticipated to be done within the next few months FFI registration process. Special online registration procedures must be followed by FFIs that are members of an FFI Group. Each member of an FFI Group must designate a Lead FFI to initiate and manage the online registration process for the FFI Group. The Lead FFI that assumes this role must enter the system to register itself and, as part of that process, identify each FFI that is a member of the FFI Group that will register for participating, limited, or Registered Deemed-Compliant FFI status. An FFI, subject to the transitional rule for FFI affiliates with legal prohibitions on compliance with FATCA, will not be permitted to become a participating FFI unless every FFI that is a member of the FFI Group is either a participating FFI or a Deemed-Compliant FFI. Verification of FFI Agreements modified Verification. FATCA requires a participating FFI to adopt written policies and procedures governing its due diligence procedures for identifying and documenting account holders and its withholding and reporting requirements under the FFI Agreement. A participating FFI will be required to conduct periodic reviews of its compliance with these policies and procedures and its FATCA obligations. A responsible officer of the participating FFI will be required to periodically certify to the IRS the FFI s compliance with its obligations under its FFI Agreement (see below) and may be required to provide certain factual information and to disclose material failures with respect to the FFI s compliance with any of the requirements of its FFI Agreement. The IRS may verify the participating FFI s compliance with its FFI Agreement through an audit, performed by an external auditor approved by the IRS, of one or more issues selected by the IRS. Verification of an FFI s compliance through third-party audits no longer is 4 A limited FFI is an FFI that, under the laws of each jurisdiction that apply with respect to the accounts maintained by the affiliate, cannot report or withhold as required under the FFI Agreement. THE FATCA PROPOSED REGULATIONS DLA Piper 9

10 mandated under the Proposed Regulations. If an FFI complies with the obligations set forth in an FFI agreement, it will not be held strictly liable for failure to identify a U.S. account. Certifications. The Proposed Regulations provide that a responsible officer of a participating FFI must make certain additional certifications. The first certification is required to confirm, with respect to its preexisting accounts that are high-value accounts, that within one year of the effective date of the FFI agreement the participating FFI has completed the required review and to the best of the responsible officer s knowledge, after conducting a reasonable inquiry, the participating FFI did not have any formal or informal practices or procedures in place at any time from August 6, 2011 (120 days from the release of Notice to the public) through the date of such certification to assist account holders in the avoidance of Chapter 4. The second certification by a responsible officer is required to confirm, with respect to all of its preexisting accounts, that within two years of the effective date of its FFI agreement the participating FFI has completed the account identification procedures and documentation requirements or, if it has not obtained the documentation required to be obtained with respect to an account, the participating FFI treats the account holder of such an account as a recalcitrant account holder or nonparticipating FFI. Passthru payments FATCA requires participating FFIs to withhold on passthru payments made to nonparticipating FFIs and recalcitrant account holders. The Treasury Department received numerous comments expressing concern about the costs, administrative complexity, and legal impediments associated with identifying and withholding on passthru payments. The comments indicated that, without additional time to work through these issues, it would be impossible for many FFIs to commit to fulfill their obligations under Chapter 4. In recognition of these concerns, and to facilitate implementation of FATCA by FFIs, the Proposed Regulations provide that withholding will not be required with respect to foreign passthru payments before January 1, However, to reduce incentives for nonparticipating FFIs to use participating FFIs to serve as blockers, the Proposed Regulations require participating FFIs to report annually to the IRS the aggregate amount of certain payments made to each nonparticipating FFI. With respect to the scope and ultimate implementation of withholding on foreign passthru payments, the Treasury Department requests comments on approaches to reduce burdens, for example, by providing a de minimis exception from foreign passthru payment withholding and a simplified computational approach or safe harbor rules to determine an FFI s passthru payment percentage. In the case of FATCA Partners, the Treasury Department will work with the governments of such jurisdictions to develop practical alternative approaches to achieving the policy objectives of passthru payment withholding. In addition, where such an agreement provides for the FATCA Partner to report to the IRS information regarding U.S. accounts and recalcitrant account holders, FFIs in such jurisdictions may not be required to withhold on any foreign passthru payments to recalcitrant account holders. Conclusion The Joint Statement with respect to the Alternative Approach to FATCA reflects the Treasury Department s recognition that local law conflicts may impede the effective implementation of FATCA. The Proposed Regulations, although they contain a massive amount of detailed guidance to assist affected entities in implementing FATCA, represent a good faith attempt to make FATCA implementation user friendly by easing the compliance burden and costs associated with implementing FATCA consistent with the objectives of the legislation to obtain the requisite information. Affected entities, including U.S. withholding agents, FFIs and NFFEs now will need to evaluate their operations in the context of the Proposed Regulations to evaluate how they will be able to navigate FATCA. THE FATCA PROPOSED REGULATIONS DLA Piper 10

11 At the present time, it is important that each FFI affected by FATCA take the following eight preliminary steps: (1) Create a global FATCA action plan. (2) Establish milestones for FATCA implementation and compliance. (3) Identify current onboarding procedures with respect to customers and how that information and documentation comports with the information requirements of the Proposed Regulations. (4) Develop policies and procedures and a detailed corporate governance program for implementing, complying with and verifying FATCA. (5) Educate and train staff on FATCA, including on how to communicate with customers about FATCA. (6) Revise information reporting manuals and documentation flowcharts. (7) If the Proposed Regulations raise issues, be proactive and prepare comments with suggested solutions during the IRS comment period. (8) Remain flexible based on developments of the Alternative Approach to FATCA and promulgation of final treasury regulations. Institutions affected by FATCA, to include international and U.S. financial institutions, investment funds, certain insurance/reinsurance companies and trust companies and those making payments and doing business with such institutions, will need to modify their existing documentation, compliance and verification procedures if they are to successfully navigate FATCA within the timelines provided by the proposed regulations. The time to start is now, because the due dates for compliance with FATCA are fast approaching. For more information on building a FATCA compliance program, please contact: Alan Winston Granwell T alan.granwell@dlapiper.com Witold M. Jurewicz T witold.jurewicz@dlapiper.com This bulletin is intended as a general overview and discussion of the subjects dealt with. It is not intended, and should not be used, as a substitute for taking legal advice in any specific situation. DLA Piper will accept no responsibility for any actions taken or not taken on the basis of this publication. Pursuant to applicable Rules of Professional Conduct, it may constitute advertising. Circular 230 Notice: In compliance with US Treasury Regulations, please be advised that any tax advice given herein (or in any attachment) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax penalties or (ii) promoting, marketing or recommending to another person any transaction or matter addressed herein. THE FATCA PROPOSED REGULATIONS DLA Piper 11