On July 12, 2013, insurance companies, banks and other financial institutions, received a reprieve from the Internal Revenue Service (“IRS”). The agency delayed, by six months, withholding and other requirements mandated by the Foreign Account Tax Compliance Act (“FATCA”). The IRS announced the delay in Notice 2013-43. FATCA places onerous reporting and withholding obligations on foreign financial institutions (“FFIs”) and nonfinancial foreign entities (“NFFEs”) to promote the disclosure of financial information of their account holders or owners. The delay will allow foreign governments and financial institutions more time to put in place the information technology structures necessary to comply with the reporting requirements of FATCA.
Life insurance companies which issue, or are obligated to make payments for a cash value insurance or annuity contract, are considered financial institutions for FATCA purposes. Foreign reinsurance entities must determine whether they are FFIs or NFFEs and comply with the requisite obligations. FFIs must either (1) enter into an agreement with the United States (becoming participating FFIs), subjecting them to comprehensive reporting, due diligence, withholding, record-keeping, and other obligations with respect to their U.S. account holders; or (2) be in a country which has entered into an inter-governmental agreement (“IGAs”) with the United States. Otherwise, they will be subject to a 30 percent withholding tax to be applied to certain U.S. source payments. NFFEs must disclose their substantial U.S. owners to their payors, who then must pass this information onto U.S. authorities.
Subject to certain exceptions, covered payments include any payment of U.S. source FDAP income. FATCA regulations specifically include as a withholdable payment, premiums for life insurance contracts or annuity contracts and amounts paid under cash value insurance or annuity contracts. In addition, reinsurance premiums paid by U.S. insurance companies to foreign reinsurers are treated as U.S. source FDAP and thus a withholdable payment that may have to be withheld upon.
The 6-month delay will allow withholding agents (reinsurance intermediaries and other insurance brokers may be classified as withholding agents), U.S. or otherwise, to begin withholding 30 percent on payments made to noncompliant FFIs for payments made after June 30, 2014, rather than the previously scheduled January 1, 2014, start date. The delay does not affect the timing provided in the final regulations for withholding on gross proceeds, pass-through payments, and payments of U.S. source FDAP on offshore obligations by persons not acting in an intermediary capacity. For the first FFI reports due March 31, 2015, FFIs will now only be required to report information for the 2014 calendar year (for U.S. accounts identified by December 31, 2014) rather than including information for 2013 as well. This will also apply to companies in countries which sign IGAs. Transition rules may apply to certain offshore obligations.
Initially targeted for July 15, 2013, the FATCA registration portal website was made accessible to financial institutions on August 19, 2013. Prior to January 1, 2014, any information entered into the system will not be regarded as a final submission. The IRS will not issue any global intermediary identification numbers (“GIINs”) in 2013. Instead, it will begin issuing GIINs as registrations are finalized in 2014. The IRS will now electronically post the first IRS FFI list by June 2, 2014, and will update the list on a monthly basis thereafter. To ensure inclusion in the June 2014 IRS FFI List, FFIs would need to finalize their registration by April 25, 2014.