Compliance with the Foreign Account Tax Compliance Act (“FATCA”) has been causing a great deal of anxiety as the July 1, 2014, start date for FATCA withholding grows nearer. Compliance has been partially hampered by the lack of published instructions for new complex forms such as Form W-8BEN-E that U.S. withholding agents and foreign financial institutions (“FFIs”) will need to receive to document the status of payees and account holders and determine if they must withhold or report under FATCA. On May 2, 2014, the Internal Revenue Service (the “IRS”) announced a general relaxation of some of the FATCA deadlines that should allow U.S. withholding agents and FFIs to breathe a sigh of relief, but it will not halt the need to continue efforts to comply with FATCA as some may have hoped.
In Notice 2014-33, the IRS announced that, to facilitate an orderly transition for compliance with FATCA, calendar years 2014 and 2015 will be regarded as a “transition period” for purposes of IRS enforcement and administration of the law's due diligence, reporting, and withholding provisions that were modified by temporary FATCA coordination regulations released in February 2014. With respect to this transition period, the IRS will take into account the extent to which an FFI or withholding agent (or, if applicable, a sponsoring entity or direct reporting non-financial foreign entity) has made “good faith efforts” to comply with the requirements of the FATCA regulations and the temporary coordination regulations. An entity that has not made good faith efforts to comply with the new requirements will not be given any relief from IRS enforcement during the transition period. As a result, withholding agents do not have to strive for perfection to escape FATCA withholding, which could drive agents to possibly over-withhold to ensure they have no liability for FATCA withholding taxes. At the same time, it is not “pens down” since FATCA compliance still needs to be pursued. The IRS itself acknowledges the need to get out instructions for FATCA-related forms and this notice gives them some breathing room as well.
On a more objective basis, the IRS also announced that the FATCA regulations will be amended so as to allow a withholding agent or FFI to treat an obligation that is held by an entity and that is issued, opened, or executed on or after July 1, 2014, and before January 1, 2015, as a “preexisting obligation” for purposes of the applicable FATCA due diligence, withholding, and reporting requirements. As a result, a withholding agent or FFI that treats an obligation as a preexisting obligation pursuant to this amendment will have more time to document an entity that is a payee or account holder of the obligation to determine whether the entity is a payee or account holder subject to FATCA withholding or reporting. This amendment will not apply to obligations held by individuals because the procedures for documenting individual accounts are less complex and the forms and instructions were already published in final form in March 2014 for documenting individual accounts (Form W-9, W-8BEN and related instructions).
Reason to Know Standards
In addition, the temporary coordination regulations regarding reason to know standards will be amended to provide that direct account holder will be considered documented before July 1, 2014, without regard to whether the withholding agent obtains renewal documentation for the account holder on or after July 1, 2014. Therefore, a withholding agent that has documented a direct account holder prior to July 1, 2014, is not required to apply the reason to know standards relating to a U.S. telephone number or U.S. place of birth until the withholding agent is notified of a change in circumstances with respect to the account holder’s foreign status or reviews documentation for the account holder that contains a U.S. place of birth.
Claims of Foreign Status and Limited FFIs
With respect to a reasonable explanation supporting a claim of foreign status by an individual, the FATCA regulations will be modified to conform to temporary coordination regulations, which permit a withholding agent to rely on the foreign status of an individual account holder irrespective of specific U.S. indicia in some cases, if the account holder provides a reasonable explanation supporting the account holder's claim of foreign status.
Furthermore, the final FATCA regulations will be amended to provide that if an FFI is prohibited under local law from registering as a limited FFI, the prohibition will not prevent the members of its expanded affiliated group from obtaining status as participating FFIs or registered deemed-compliant FFIs. According to the notice, the FFI in the foreign jurisdiction with the prohibition must be identified as a limited FFI on the FATCA registration website by a member of the expanded affiliated group that is a U.S. financial institution or an FFI seeking status as a participating FFI (including a reporting Model 2 FFI) or reporting Model 1 FFI. Also, a limited FFI or limited branch will be permitted to open U.S. accounts for persons resident in the jurisdiction where the limited branch or limited FFI is located, as well as accounts for nonparticipating FFIs that are resident in that jurisdiction, subject to certain conditions.
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The Treasury Department will update in a similar fashion the applicable due diligence procedures outlined in the FATCA Model 1 and Model 2 intergovernmental agreements, so as to make corresponding deadlines coincide, and to make certain other amendments.
The bottom line is that FATCA compliance efforts must continue but now the race is not to be perfect by July 1 of this year, but to move towards that goal line that has now been moved to the start of 2016.