IRS Notice 2014-33 – IRS Grants Relief for Good-Faith Efforts Under FATCA

On May 2, 2014, the Internal Revenue Service (“IRS”) issued Notice 2014-33 (the “Notice”) providing that calendar years 2014 and 2015 will be regarded as a transition period for purposes of IRS enforcement and administration of the due diligence, reporting and withholding provisions of the Foreign Account Tax Compliance Act (“FATCA”).  In addition, the Notice amends the existing regulations to provide other relief measures including the treatment of accounts opened after July 1, 2014 and before January 1, 2015 as preexisting accounts, revisions to the standards of knowledge and reasonable statements, and an alternative registration process for certain foreign financial institutions (“FFIs”).

Background

FATCA imposes a 30% withholding tax on “withholdable payments” made to FFIs and to “non-financial foreign entities” (“NFFEs”), unless certain certification, information reporting, withholding and other specified requirements are satisfied.  FFIs which agree to comply with such requirements  (“participating FFIs”) and certain other FFIs that register with the IRS and meet certain requirements (“registered deemed-compliant FFIs”) are not subject to FATCA withholding.  In addition, the Treasury has entered into several intergovernmental agreements (so called “Model 1 and “Model 2 IGAs”) intended to facilitate the implementation of FATCA in such partner jurisdictions, and FFIs that are organized or located in such jurisdictions are permitted to register with the IRS and also are treated as “registered deemed-compliant” FFIs. 

The term “withholdable payment” means (i) any payment of U.S. source interest, dividends, rents and other types of fixed or determinable annual or periodical income (to the extent treated as a withholdable payment in the Regulations, “U.S. FDAP”), and (ii) gross proceeds from the sale or other disposition of any property of a type that can produce interest or dividends payments that would be U.S. source FDAP income (“Gross Proceeds”).  The effective date of FATCA was extended by Notice 2013-43 to July 1, 2014 for withholding with respect to withholdable payments of U.S. FDAP (see IRS Notice 2013-43 discussed in the July 16, 2013 Financial Services Alert).  Withholding on withholdable payments of gross proceeds is scheduled to begin with respect to dispositions that occur on or after January 1, 2017.

On February 20, 2014, Treasury and the IRS released temporary regulations under FATCA (temporary chapter 4 regulations) that clarify and modify certain provisions of the final chapter 4 regulations issued on January 17, 2013, including incorporating the revised timeline for the implementation of FATCA set forth in Notice 2013-43.  At the same time, Treasury and the IRS also released temporary regulations under chapter 3, relating to withholding on nonresident aliens and foreign corporations, and under chapter 61 and section 3406, relating to information reporting and backup withholding (temporary coordination regulations), to coordinate those regulations with the requirements provided in the final and temporary chapter 4 regulations.  In addition, the IRS has published updated final versions of all forms in the Forms W-8 series and certain instructions to these forms to incorporate the documentation requirements of chapter 4. The IRS expects to publish all of the remaining instructions in this series in the near future.

Good-Faith Relief

In order to facilitate an orderly transition for withholding agents and FFIs that are working to get their systems in place to implement FATCA, the Notice provides that the IRS will treat calendar years 2014 and 2015 as a transition period for the purposes of IRS enforcement of the due diligence, reporting and withholding provisions under FATCA, as well as the provisions under chapters 3 and 61 that were modified by the temporary coordination regulations.  During the transition period, the IRS will take into account the extent to which a FFI, NFFE or withholding agent has made good faith efforts to comply with the requirements of FATCA and the temporary regulations thereunder.  For example, the IRS will take into account whether a withholding agent has made reasonable efforts during the transition period to modify its account opening practices and procedures to document the status of payees, apply the required standards of knowledge and the FATCA withholding presumption rules.  As a further example, the IRS will consider the good faith efforts of an FFI to identify and facilitate the registration of the other members of its expanded affiliated group (“EAG”).  The Notice provides, however, that an entity that has not made good faith efforts to comply will not be given any relief from IRS enforcement during the transition period.

Amendments to Existing Regulations

The Notice also announces certain relief measures that Treasury and the IRS intend to adopt as amendments to existing the final and temporary regulations.

Preexisting Account Treatment

Under the chapter 4 regulations, withholding agents and FFIs are generally required to implement new account opening procedures beginning on July 1, 2014.  Comments received after the publication of the temporary chapter 4 regulations indicated that the release dates of the final Forms W-8 and accompanying instructions present practical problems for both withholding agents and FFIs to implement new account opening procedures beginning on July 1, 2014.  In consideration of these comments, the Notice provides that withholding agents and FFIs are permitted to treat accounts held by an entity opened after July 1, 2014 and before January 1, 2015 as a preexisting account for the purposes of the due diligence and withholding requirements applicable to preexisting obligations (provided, however, that the exception in those requirements for accounts having a balance of $250,000 or less will not apply).  The effect of this change is to generally allow withholding agents and FFIs until June 30, 2016 to document such entity accounts.  The Notice emphasizes that this treatment will not apply to accounts held by individuals, as the procedures for documenting individual accounts are less complex than those for documenting entities.

Certain Technical Issues

The Notice also addresses certain technical compliance issues that commentators had raised.

Standards of Knowledge and Reasonable Statements.  The Notice provides certain relief with respect to the implementation of temporary regulations under chapters 3 and 61, which will allow a withholding agent to continue to treat an individual as foreign notwithstanding certain “indicia” of U.S. status, and allows withholding agents to rely on certain reasonable explanations contained in the chapter 3 regulations (but not listed in the temporary chapter 4 regulations) for purposes of establishing a person’s foreign status for chapter 4 purposes.

Alternative Registration Process for Limited FFIs and Limited Branches.  In general, in order for any FFI that is a member of an EAG to obtain status as a participating FFI or registered deemed-compliant FFI, each FFI member of the EAG must qualify for such status, be an exempt FFI or qualify as a “limited FFI.”  Similarly, any FFI or branch of a participating FFI must be registered with the IRS and agree to certain conditions in order to be treated as a limited FFI or limited branch.  The Notice addresses two issues related to obtaining limited FFI status:

  • First, it allows a limited FFI or limited branch to open U.S. accounts for persons resident in the jurisdiction where it is located, and accounts for nonparticipating FFIs resident in that jurisdiction. 
  • Second, it provides that, if an FFI is prohibited under local law from registering as a limited FFI but otherwise would be able to comply with the requirements of limited FFI status, the prohibition will not prevent the members of its EAG from obtaining statuses as participating FFIs or registered deemed-compliant FFIs if the FFI prohibited from registering is identified as a limited FFI on the FATCA registration website by another member of its EAG that is either 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.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Topics:  Banks, Compliance, Due Diligence, Enforcement, FATCA, FFI, Good Faith, IRS, Reporting Requirements, Withholding Requirements

Published In: Finance & Banking Updates, International Trade Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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