FATCA: Updates and Coordinating Regulations

Transcription

1 FATCA: Updates and Coordinating Regulations Treasury Releases Last Substantial Regulations Package Necessary to Implement FATCA SUMMARY On February 20, 2014, the IRS and the Treasury Department issued the last substantial package of regulations necessary to implement FATCA. The package consists of two Treasury Decisions: T.D. 9658, which modifies the nonresident alien withholding rules and the domestic backup withholding and reporting rules to coordinate with the FATCA regulations; and T.D. 9657, which revises the FATCA regulations regarding information reporting and withholding. The regulations have been released in final and temporary form, meaning that although they are subject to further comments and revision, they are generally effective as drafted when published in the Federal Register on March 6, The amendments to the regulations under FATCA and the coordinating rules released under T.D and T.D affect several broad areas of the federal income tax withholding regimes. For example, an entity s FATCA status is affected by: Modifications to the expanded affiliated group rules; and Changes to the rules used to determine whether an entity is subject to, or exempt from, FATCA. Adjustments have been made to FATCA compliance mechanisms and procedures, including: The addition of provisions allowing certain nonfinancial foreign entities to report information directly to the IRS, rather than to withholding agents; Changing the responsibilities of entities that sponsor foreign financial institutions; Limiting the circumstances under which a failure to reduce certain bad accounts maintained by a financial institution will be considered an event of default under FATCA; New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney

2 Allowing withholding agents to rely solely on an issuer s determination of whether an obligation has been subject to a material modification and is thus no longer grandfathered under FATCA; and Updating the FATCA due diligence procedures applicable to various types of payees. Withholding and reporting requirements under FATCA and other areas of the Internal Revenue Code have been amended to: Allow certain withholding agents to elect to withhold under the existing domestic backup withholding regime rather than under FATCA; Apply existing rules for credits and refunds to claims for refund or credit of amounts withheld under FATCA; Narrow the scope of payees in respect of which an FFI has to report non-u.s. source payments; and Temporarily suspend the FATCA withholding requirement for certain payments under collateral agreements. In addition, T.D announces an extension of the sunset date for the portfolio interest withholding exemption applicable to certain foreign-targeted obligations to January 1, BACKGROUND Chapter 3 of the Internal Revenue Code (the Code ) provides rules on reporting and withholding on payments of certain U.S.-source income to non-u.s. persons. Chapter 61 and Section 3406 of the Code provide rules for reporting and withholding on payments made to certain U.S. persons. The Foreign Account Tax Compliance Act ( FATCA ), enacted in March 2010, and the regulations thereunder provide additional withholding and reporting rules intended to promote tax compliance by U.S. citizens and residents by encouraging foreign financial institutions to report information to the IRS regarding their U.S. customers. FATCA generally establishes a complex set of withholding, information reporting and due diligence requirements for U.S. withholding agents and Foreign Financial Institutions ( FFIs ), and imposes a 30% penalty withholding tax on FFIs that do not comply with these rules. 1 FFIs that sign an agreement ( FFI Agreement ) with the U.S. to comply with these rules are referred to as participating FFIs. FATCA also requires participating FFIs to withhold on certain payments made to recalcitrant account holders and nonparticipating FFIs. Under the statute, FATCA s withholding provisions would have been effective for payments made on or after January 1, 2013, but this effective date was administratively postponed to July 1, A detailed discussion of the regulations under FATCA, including many of its defined terms, can be found in the Sullivan & Cromwell LLP publication entitled FATCA: Final Regulations (February 26, 2013), which can be obtained by following the instructions at the end of this publication. Additional background on changes to the FATCA regulations and FATCA guidance issued by the Treasury Department subsequent to the publication of the final FATCA regulations can be found in -2-

3 The FATCA regulations provide certain FFIs with the option of becoming deemed-compliant. Provided that the requirements for deemed-compliance are met, such FFIs will not have to enter into an FFI Agreement to avoid FATCA withholding. Certain deemed-compliant FFIs are still required to register with the IRS ( registered deemed-compliant FFIs ). Other deemed-compliant FFIs are not required to register but must certify to withholding agents that they meet the requirements to be treated as deemed-compliant ( certified deemed-compliant FFIs ). In certain cases, an FFI can be deemed-compliant if another entity will agree to be its sponsor and take on FATCA withholding and reporting responsibilities on its behalf. Since 2012, the Treasury Department has entered into intergovernmental agreements ( IGAs ) to facilitate the implementation of FATCA. IGAs are intended to remove domestic legal impediments to compliance and reduce burdens on FFIs located in jurisdictions ( partner jurisdictions ) that enter into IGAs. There are two models of IGAs. Under the first model ( Model 1 IGA ), covered FFIs report FATCA information to the partner jurisdiction, which then transmits the information to the IRS. Model 1 IGAs can either be reciprocal (with the United States providing certain information about U.S.-source income of residents of the partner jurisdiction to that country s tax authorities) or nonreciprocal. FFIs subject to, and in compliance with, a Model 1 IGA are generally treated as registered deemed-compliant FFIs under FATCA. Under the second model ( Model 2 IGA ), a partner jurisdiction agrees to facilitate FATCA compliance by its resident FFIs, but those FFIs generally must still register with the IRS and report information about U.S. accounts directly to the IRS. FFIs subject to, and in compliance with, a Model 2 IGA are generally treated as participating FFIs under FATCA. In Notice , the Treasury Department announced that it will treat a jurisdiction that has signed an IGA as having an IGA in effect, even if that IGA has not yet come into force. 3 The IRS has opened an online registration system that can be used by financial institutions to register with the IRS under FATCA. The online FATCA registration system can be used by both (i) financial institutions entering into a FATCA Agreement with the IRS and (ii) financial institutions and branches that otherwise need to register with the IRS under FATCA (including, generally, FFIs covered by a Model 1 IGA, other registered deemed-compliant entities, and sponsoring entities). Entities registering with the IRS will be issued a Global Intermediary Identification Number ( GIIN ) that will be used by withholding agents to ensure that such entities are in compliance with FATCA (i.e., are not subject to FATCA withholding) by verifying the GIIN against a list containing the GIINs of all FATCA-compliant foreign entities. This list will be published and regularly updated by the IRS beginning June 15, the Sullivan & Cromwell LLP publications entitled FATCA: Delayed Start Dates (July 15, 2013) and FATCA: Updates and Draft FFI Agreement (November 4, 2013) which can be obtained by following the instructions at the end of this publication. The Treasury Department maintains a list of jurisdictions treated as having an IGA in effect at -3-

4 THE AMENDED REGULATIONS CHANGES AFFECTING MEMBERS OF AFFILIATED GROUPS A. EXPANDED AFFILIATED GROUP PROVISIONS The FATCA regulations generally prohibit membership of a participating FFI in an expanded affiliated group ( EAG ) unless all other members of the group are participating FFIs, deemed-compliant FFIs, or otherwise exempt from FATCA. The FATCA regulations previously defined the term Expanded Affiliated Group by cross-reference to the existing consolidated return rules under the Code, with some modifications. The regulations issued under T.D (the Temporary Regulations ) now provide that the term is to be defined in accordance with the principles of the consolidated return rules. This change allows for greater flexibility with respect to group members that are non-corporate entities, such as trusts or partnerships. Specifically, the Temporary Regulations provide that a non-corporate entity may now elect to be treated as the common parent entity of an EAG. Once this election is made, it cannot be changed in a later year without the approval of the Commissioner. Additionally, the Temporary Regulations specify that a partnership or trust will be considered owned by another member entity (and will thus be part of an EAG) if more than 50 percent by value of such partnership or trust is owned by one or more EAG members. This is in contrast to the ownership test for corporations, which requires that a member entity own more than 50 percent of the value and vote of the tested corporation. B. NONFINANCIAL GROUP ENTITY EXCEPTION Under FATCA, a non-u.s. holding company, treasury center, or captive finance company may be treated as an FFI. The FATCA regulations however, provide an exception for a holding company, treasury center, or captive finance company that (i) does not act as a depository or custodial institution other than for members of its EAG; (ii) is a member of a nonfinancial group; and (iii) does not hold itself out as, and was not formed in connection with or availed of by, a private equity fund-type investment vehicle or arrangement. The Temporary Regulations make changes to the latter two requirements. In general, the FATCA regulations provide that an EAG may qualify as a nonfinancial group if no more than 25 percent of the gross income of the EAG consists of passive income and no more than 25 percent by value of the assets held by the EAG consist of passive assets. The FATCA regulations were previously amended to clarify that income derived from transactions between members of the EAG is not considered when measuring the passive income of the group. The Temporary Regulations now further clarify that assets resulting from transactions between related members of the EAG should also be excluded when applying this test. -4-

5 In response to questions on what it means to be formed in connection with or availed of by an investment vehicle or arrangement, the Temporary Regulations add a safe harbor providing that, in the absence of other facts suggesting the existence of an investment strategy, any entity that existed at least six months prior to its acquisition by an investment vehicle or arrangement and which, prior to the acquisition, regularly conducted activities in the ordinary course of business will not be considered to be formed in connection with or availed of by such an investment vehicle or arrangement. CHANGES TO THE SCOPE OF FFI DEFINITIONS The Temporary Regulations make several changes to the rules that determine whether an entity is an FFI. In addition, it should be noted that the definition of financial institution under Chapter 3 of the Code has been amended to be consistent with the term financial institution as defined for FATCA purposes. A. HOLDING COMPANIES AND TREASURY CENTERS The changes discussed above under Nonfinancial Group Entity Exception affect whether a holding company or treasury center may qualify to be excluded from treatment as an FFI. However, the Temporary Regulations also make changes to determine whether a holding company or treasury center is to be treated as an FFI in the first instance. The safe harbor discussed above affects both holding companies and treasury centers. One requirement for a holding company or treasury center to be treated as an FFI subject to FATCA is that such entity must generally either (i) be a member of an EAG that includes an FFI or (ii) be formed in connection with or availed of by an investment vehicle. The second prong of this requirement is, logically, the converse of the exception to FFI treatment discussed above which requires that the subject holding company or treasury center not be formed in connection with or availed by an investment vehicle. Thus, the safe harbor discussed above under Nonfinancial Group Entity Exception would seem to be equally applicable to the use of formed in connection with or availed of in the definition of holding companies or treasury centers treated as FFIs, although the Temporary Regulations do not explicitly state this. In addition, the Temporary Regulations provide that a partnership or other non-corporate entity may now be treated as a holding company if substantially all of the activities of such non-corporate entity consist of holding more than 50 percent of the vote and value of the stock of one or more common parent corporation(s) of one or more EAG(s). In cases where the non-corporate holding company owns more than 50 percent of more than one common parent corporation, each common parent s EAG will be treated as a separate such group unless the non-corporate holding company makes the election (discussed above under Expanded Affiliated Group Provisions ) to be treated as the common parent of an EAG. Finally, the Temporary Regulations make certain changes affecting only treasury centers. An entity will generally be treated as a treasury center that is an FFI if the primary activity of such entity is to enter into -5-

6 investment, hedging, and financing transactions with or for members of its EAG. The Temporary Regulations clarify that an entity that manages the working capital of an EAG (or any member thereof) will not cease to qualify as a treasury center-type FFI solely because it has no investments and does not trade in financial assets. The Temporary Regulations further clarify that equity-funded affiliates may qualify as treasury center-type FFIs. B. INVESTMENT MANAGERS AND ADVISORS The Temporary Regulations add a provision allowing certain investment entities to be treated as registered deemed-compliant FFIs. Specifically, if an entity is only treated as an investment entity-type FFI because its business primarily consists of investing or managing funds for or on behalf of customers and such entity does not maintain financial accounts, it is eligible to be treated as a registered deemedcompliant FFI if it registers with the IRS and fulfills certain other requirements. C. CUSTODIAL INSTITUTIONS A custodial institution will generally be treated as an FFI subject to FATCA if holding financial assets and related financial services accounts for at least 20 percent of its gross income. The FATCA regulations enumerate several potential sources of such income, including fees for providing financial advice. This broad definition had the potential to catch institutions that actually provide no custodial services but do provide financial advice. To remedy this, the Temporary Regulations now limit this rule to fees for providing financial advice with respect to financial assets held in (or potentially to be held in) custody by the entity. D. EXEMPT BENEFICIAL OWNERS In addition to providing for exclusions from the definition of FFI (e.g., the nonfinancial group entity exception discussed above) and providing for deemed-compliant status for certain FFIs, the FATCA compliance burden is also reduced for entities considered to be exempt beneficial owners. Such exempt beneficial owners include foreign governments, international organizations, and foreign central banks of issue. This exemption is not available however, with respect to payments derived from an obligation held in connection with a commercial financial activity of a type engaged in by an insurance company, depository institution, or custodial institution. The FATCA Regulations previously preserved this exemption for most types of exempt beneficial owners if, in general, (i) the entity undertakes such commercial financial activity solely for or at the direction of other exempt beneficial owners; (ii) the commercial financial activity is consistent with the purposes of the entity; (iii) the entity has no outstanding debt that would constitute an account for FATCA purposes; and (iv) the entity otherwise maintains financial accounts only for exempt beneficial owners. The Temporary Regulations modify this rule in a way that loosens the requirements somewhat while, at the same time, potentially narrowing its applicability. First, the Temporary Regulations broaden the final prong of this exception so that, in addition to maintaining financial accounts for other exempt beneficial -6-

7 owners, a qualifying entity may also maintain depository accounts for its current or former employees (and the spouses and children of such employees). However, under the second change to this rule, the exception to the limitation on commercial financial activity appears to now only apply to foreign central banks of issue in the first instance. Assuming that this second change (which is not discussed in the preamble) is intended, it would mean that exempt beneficial owners (other than foreign central banks and entities covered by an IGA) could be required to register as participating FFIs to be fully exempt from FATCA withholding if they, for example, provide deposit accounts or clearing services to other exempt beneficial owners. E. FOREIGN INSURANCE COMPANIES Under FATCA, a non-u.s. insurance company that issues, or is obligated to make payments with respect to, a cash value insurance or annuity contract (a specified insurance company ) is generally treated as an FFI. The Code, however, allows certain foreign insurance companies to elect to be treated as domestic corporations for U.S. federal income tax purposes. The FATCA regulations previously required this election to be disregarded in the determination of the FATCA status of an insurance company. Under the Temporary Regulations, this election is now taken into account so that a non-u.s. insurance company that has made an election to be treated as a domestic corporation for U.S. federal income tax purposes will be treated as a U.S. person for FATCA purposes provided that such insurance company either (i) is not a specified insurance company and is not licensed to do business in any State or (ii) is a specified insurance company and is licensed to do business in any State. AMENDED COMPLIANCE RULES A. ADDITION OF DIRECT REPORTING NFFES Under FATCA, nonfinancial foreign entities ( NFFEs ) are not required to enter into or comply with an FFI Agreement. FATCA does, however, obligate certain passive NFFEs (generally non-publicly traded NFFEs earning mostly passive income) to report information about their substantial U.S. owners to withholding agents and participating FFIs with which they hold accounts. As previously announced in Notice , the Temporary Regulations provide a new rule under FATCA to permit passive NFFEs to report directly to the IRS if they so choose. A direct reporting NFFE will report on Form 8966 directly to the IRS certain information about its direct or indirect substantial U.S. owners, in lieu of providing such information to withholding agents or participating FFIs with which the NFFE holds a financial account. The Temporary Regulations also allow a passive NFFE to be treated as a sponsored direct reporting NFFE if a sponsoring entity agrees (on the sponsored direct reporting NFFE s behalf) to report information about the sponsored direct reporting NFFE s direct or indirect substantial U.S. owners. This rule requires an NFFE that elects direct reporting to register with the IRS and obtain a GIIN (or have the sponsor do so on its behalf). -7-

8 B. CHANGES AFFECTING SPONSORING ENTITIES As noted above, the FATCA regulations may allow an FFI to be sponsored by another entity and thus be granted deemed-compliant status. The Temporary Regulations make clear that a sponsoring entity is not liable for any failure to comply with the obligations placed upon the sponsoring entity unless the it is a withholding agent that is separately liable for a failure to withhold or report with respect to a payment made to the sponsored FFI. In cases where the sponsoring entity is a withholding agent that is separately liable, the sponsored FFI remains jointly liable with the sponsoring entity. In addition, the Temporary Regulations place an additional requirement upon sponsoring entities by requiring them to perform verification procedures. The verification procedures are referred to by crossreference to other sections of the Temporary Regulations that are reserved, i.e. forthcoming guidance on the verification procedures for sponsoring entities is expected. C. EVENT OF DEFAULT CHANGES In general, certain compliance failures that rise to the level of an event of default may result in termination of participating FFI status if uncorrected after notice by the IRS. The FATCA regulations previously provided that a failure to significantly reduce, over a period of time, the number of account holders or payees that the participating FFI is required to treat as recalcitrant account holders or nonparticipating FFIs would constitute one such event of default. The Temporary Regulations slightly modify this rule by adding that a failure to reduce such bad accounts and payees will only constitute an event of default if it is a result of a participating FFI s failure to comply with the due diligence procedures for identifying and documenting such account holders and payees. D. MATERIAL MODIFICATION DETERMINATIONS The FATCA regulations treat certain obligations issued before July 1, 2014 as grandfathered, meaning, in general, that withholding and reporting under FATCA are not required with respect to such obligations. The FATCA regulations provide, however, that a grandfathered obligation that undergoes a material modification on or after July 1, 2014 will lose its grandfathered status. Previously, a withholding agent might have been expected to make a determination as to whether a grandfathered obligation had been subject to a material modification even in the absence of confirmation of such fact from the issuer. In response to comments indicating that withholding agents may find it difficult to determine whether a material modification has occurred, the FATCA regulations have been modified to provide that a withholding agent (other than the issuer) is only required to treat a modification as material if it has actual knowledge thereof, such as if the withholding agent receives a disclosure from the issuer indicating that an obligation has undergone (or will undergo) a material modification. E. UPDATES TO DILIGENCE PROCEDURES The Temporary Regulations provide updates on the diligence procedures applicable to various types of payees and with respect to payments on various types of obligations. In general, the FATCA regulations -8-

9 require withholding agents to obtain a Form W-8 with a GIIN (where applicable) in order to make payments to non-u.s. entities free of FATCA withholding. If registration is in process but a GIIN has not yet been assigned, a payee can write applied for in the GIIN box of a W-8. A withholding agent will then have 90 days to verify the GIIN. A Form W-8 (or other written statement, if acceptable) without a GIIN (where one is required) or a GIIN that is not on the FFI list will be invalid beginning on the date 90 days after the date that the claim is made by the payee. The payee will then be treated as an undocumented payee beginning on the date the form is invalid and will be subject to withholding on payments made on or after that date until valid documentation is provided. A Form W-8 is generally not required for payments made with respect to offshore obligations, although the payee is generally still required to provide certifications and documentary evidence as to its FATCA status in addition to a GIIN (where applicable). The IRS has drafted new Forms W-8 that are designed to capture information required by FATCA (e.g. the payee s GIIN). However, in certain cases, a pre-fatca Form W-8 may be relied on for payments to foreign entities made before January 1, 2017 if it is supported by documentary evidence of exempt FATCA status and is accompanied by a GIIN (where applicable) and other information required under FATCA. Under this transitional rule, the GIIN can generally be provided orally or in writing. In addition, until January 1, 2016, sponsored registered deemed-compliant FFIs and sponsored direct-reporting NFFEs may provide the sponsor s GIIN if such sponsored entity has not yet obtained its own GIIN. The FATCA regulations provide for additional transitional relief that varies depending on the type of payee and the type of payment being made, some of which were modified by the Temporary Regulations. The table below summarizes selected transitional rules: Payee General Documentation Requirement Transitional Relief for Certain Payments Participating or Registered Deemed- Compliant FFI Participating or registered deemed-compliant FFIs (other than Model 1 FFIs) are always required to provide a GIIN on a Form W-8 beginning July 1, General transitional rule allowing a pre-fatca Form W-8 and a GIIN provided orally or in writing prior to January 1, 2017 only applies to payments on obligations issued prior to July 1, 2014 ( preexisting obligations ). Model 1 FFI Certified Deemed- Compliant FFI (other than a Sponsored Closely Held Investment Vehicle) Model 1 FFIs are not required to obtain a GIIN until January 1, Prior to January 1, 2015, a GIIN is not required if the FFI provides a Form W-8 and (i) indicates orally or in writing that it is a Reporting Model 1 FFI and (ii) provides its country of residence. On or after January 1, 2015, for payments that are not U.S.-source FDAP, a withholding agent can continue to rely on documentation and certification already provided as long as a GIIN is obtained orally or in writing. Certified deemed-compliant FFIs are not required to obtain a GIIN. Instead, an FFI must provide a Form W-8 and certification that it meets the requirements to be treated as a certified deemed-compliant FFI. General transitional rule allowing a pre-fatca Form W-8 prior to January 1, 2017 only applies to payments on preexisting obligations. Prior to January 1, 2017, a pre-fatca Form W-8 may be relied upon if it is accompanied by (i) documentary evidence of FATCA status and (ii) certification that it meets the requirements to be treated as a certified deemed-compliant FFI. -9-

10 Payee General Documentation Requirement Transitional Relief for Certain Payments Sponsored Closely Held Investment Vehicle A sponsored closely held investment vehicle must provide a Form W-8 on which it indicates that it is a sponsored FFI and provides the sponsor s GIIN. Prior to January 1, 2017, a pre-fatca Form W-8 may be relied upon if it is accompanied by documentary evidence of FATCA status. Non-FFI Investment Advisors and Investment Managers NFFE Non-FFI investment advisors and managers are not required to obtain a GIIN. Such entities must provide a Form W-8 and the withholding agent must ensure that AML documentation does not indicate that the payee has financial accounts. NFFEs are generally not required to register and obtain a GIIN. They must provide a Form W-8. A passive NFFE must also include a written certification (on the W-8 or a separate written statement) that it does not have any substantial U.S. owners or the name, address, and TIN of each substantial U.S. owner Prior to January 1, 2017, a pre-fatca Form W-8 may be relied upon if it is accompanied by documentary evidence of FATCA status. Prior to January 1, 2017, a pre-fatca Form W-8 may be relied upon if it is accompanied by documentary evidence of FATCA status. Direct Reporting NFFE Must provide a Form W-8 with a GIIN. Prior to January 1, 2017, a pre-fatca Form W-8 may be relied upon if it is accompanied by documentary evidence of FATCA status. Sponsored Direct Reporting NFFE Must provide a Form W-8 with a GIIN. For payments prior to January 1, 2016, the GIIN of the sponsoring entity is acceptable if the payee has not yet obtained its own GIIN. Prior to January 1, 2017, a pre-fatca Form W-8 may be relied upon if it is accompanied by documentary evidence of FATCA status. CHANGES TO WITHHOLDING AND REPORTING RULES A. ELECTION TO WITHHOLD UNDER DOMESTIC BACKUP WITHHOLDING RULES In addition to withholding on payments to nonparticipating FFIs, FATCA requires participating FFIs to withhold on payments to U.S. persons who are subject to FATCA reporting but either fail to provide a U.S. TIN or from whom the participating FFI cannot obtain consent to report account information to the IRS (generally, recalcitrant account holders ). As part of the effort to coordinate withholding agents responsibilities under FATCA with the domestic backup withholding rules of the Code, the Temporary Regulations allow a participating FFI to satisfy its withholding obligation under FATCA by applying the backup withholding rules when making a payment to a recalcitrant account holder that is a U.S. nonexempt recipient subject to domestic backup withholding. However, the reverse application of the rules is also acceptable; i.e., withholding under FATCA will generally also satisfy backup withholding obligations. B. REFUND PROCEDURES The Code generally provides for refund procedures in all cases in which there has been an overpayment of tax due to withholding. The regulations that provide the procedures for claiming a refund in such cases have been modified to accommodate claims for refund or credit of tax withheld under FATCA. In addition, the Temporary Regulations clarify that if a participating FFI has made a collective claim for refund with -10-

11 respect to its account holders, a taxpayer that has been repaid under such procedures cannot make a separate claim for refund or credit. C. REPORTING OF FOREIGN REPORTABLE AMOUNTS The FATCA regulations include a transitional rule requiring participating FFIs and registered deemedcompliant FFIs to report foreign reportable amounts paid to nonparticipating FFIs for each of the calendar years 2015 and The Temporary Regulations both amend the definition of foreign reportable amount and narrow the scope of payees for which this reporting is required. The FATCA regulations previously required reporting of payments of foreign reportable amounts when making such payment to any payee that is a nonparticipating FFI. The Temporary Regulations clarify that such reporting is only required when a participating or registered-deemed compliant FFI makes such payment to a nonparticipating FFI that is an account holder. Additionally, a foreign reportable amount was previously described as a payment of FDAP income that would be a withholdable payment if paid by a U.S. person. The Temporary Regulations simplify this definition by describing a foreign reportable amount as, in general, an amount of foreign source payments paid to an account. The Temporary Regulations also provide additional flexibility to ease compliance with this transitional rule. First, the Temporary Regulations provide that instead of reporting only foreign reportable amounts paid to account holders that are nonparticipating FFIs, a participating FFI may choose to report all payments with respect to such accounts. Second, the Temporary Regulations allow for reporting of an aggregate amount of payments of foreign reportable amounts in cases where a participating FFI is prohibited under domestic law form reporting on a specific payee basis without consent from the account holder and has been unable to obtain such consent. D. FATCA WITHHOLDING ON COLLATERAL-RELATED PAYMENTS Under FATCA, withholdable payments generally 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 ( gross proceeds ). The FATCA regulations provide for several types of payments that would otherwise meet this definition to nevertheless be excluded from treatment as withholdable payments for FATCA purposes. The Temporary Regulations extend this exclusion to payments made prior to January 1, 2017 by a secured party with respect to collateral securing a transaction subject to a collateral arrangement (provided that only a commercially reasonable amount of collateral is held by the secured party) to allow the industry time to develop the systems necessary to identify commingled collateral. FOREIGN-TARGETED REGISTERED OBLIGATION SUNSET DATE Under the Code, U.S.-source interest paid to non-u.s. persons is generally subject to a 30 withholding tax unless (i) the interest qualifies as portfolio interest or (ii) the beneficial owner of the payment is -11-

12 entitled to a reduced rate of, or exemption from, this tax under an income tax treaty. Among other requirements, portfolio interest must be paid on an obligation issued in registered form and the U.S. withholding agent must generally receive a Form W-8 from the beneficial owner of the payment. Under the rules in effect prior to March 18, 2012, U.S. borrowers could issue foreign-targeted bearer debt that paid portfolio interest even if the beneficial owner of the obligation did not provide a Form W-8. In connection with the repeal of the foreign-targeted bearer rules, the IRS and Treasury Department announced in a 2012 notice 4 that the foreign-targeted registered obligation rules (which apply to certain instruments issued in registered form but similarly allow portfolio interest to be paid on such obligations even in the absence of a Form W-8) would be temporarily extended for obligations issued after March 18, but before January 1, A 2013 notice extended the expiration date of the foreign-targeted registered rules to July 1, The amendments in T.D extend this date further to obligations issued prior to January 1, Although these regulations do not modify the regulatory definition of the term registered form (to, for example, include immobilized bearer instruments, a change that was announced in the 2012 notice), the preamble acknowledges that the 2012 notice remains current law. * * * Copyright Sullivan & Cromwell LLP See Notice A detailed discussion of foreign-targeted obligations can be found in the Sullivan & Cromwell LLP publication entitled Foreign-Targeted Bearer Bonds (March 8, 2012), which can be obtained by following the instructions at the end of this publication. In 2006, the IRS announced that the foreign-targeted registered obligation rules would be phased out for obligations issued after December 31, 2006 or, in some cases, December 31,

13 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 Stefanie S. Trilling ( ; trillings@sullcrom.com) in our New York office. CONTACTS New York Andrew P. Solomon solomona@sullcrom.com Dana E. Brodsky brodskyd@sullcrom.com London S. Eric Wang wangs@sullcrom.com Michael Orchowski orchowskim@sullcrom.com SC1: