IRS releases long-awaited draft FFI Agreement and previews updates to FATCA regulations

by DLA Piper
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The IRS has released Notice 2013-69, including a draft FFI Agreement and several intended updates to the existing Treasury Regulations implementing the Foreign Account Tax Compliance Act (FATCA).

The draft FFI Agreement outlines the obligations of foreign financial institutions (FFIs) that will register with the IRS to become participating FFIs (PFFIs) under FATCA.

FFIs and their branches located in countries that have entered into a Model 2 intergovernmental agreement (IGA) with the United States (Model 2 FFIs) will also be required to agree to comply with the terms of an FFI Agreement, as modified by the terms of the applicable Model 2 IGA. PFFIs and Model 2 FFIs will avoid the new 30 percent FATCA withholding tax on US source payments made to FFIs, beginning July 1, 2014.

THE DRAFT FFI AGREEMENT

The draft FFI Agreement comes on the heels of the opening of the FATCA Registration Website in August this year.i PFFIs and Model 2 FFIs must agree to comply with the terms of an FFI Agreement as part of their FATCA registration.

The draft FFI Agreement is substantially consistent with the final Treasury Regulations implementing FATCA and subsequent Treasury guidance. The Notice provides that the draft FFI Agreement will be finalized by December 31, 2013. With respect to a PFFI or a branch of a PFFI, the effective date of an FFI Agreement is the later of the date on which the IRS issues a Global Intermediary Identification Number (GIIN) to the PFFI or its branch, or June 30, 2014. An FFI Agreement entered into by a PFFI or Model 2 FFI will expire on December 31, 2016, unless terminated under the terms of the FFI Agreement on an earlier date. An FFI Agreement may be renewed by a PFFI or Model 2 FFI under the procedure set forth in the FFI Agreement.

NEW FATCA CATEGORY FOR PASSIVE NFFES – A WELCOME CHANGE

Under forthcoming Treasury Regulations, non-financial foreign entities (NFFEs)ii that would otherwise be classified as “passive NFFEs”iii will be able to avoid being so classified if they:

(i) elect to report directly to the IRS on Form 8966 (FATCA Report)iv certain information about their direct or indirect substantial US owners, in lieu of providing such information to withholding agents or PFFIs, and

(ii) register with the IRS to obtain a GIIN.

Withholding agents and PFFIs will have to identify and document these “direct reporting NFFEs” in a manner similar to how they will document a PFFI, including by verifying the direct reporting NFFE’s GIIN on the published IRS FFI List.v

This new category is a welcome development because it allows NFFEs to avoid disclosure of their ownership structure to withholding agents and PFFIs – a particularly sensitive issue for certain foreign trusts and property and casualty insurance and reinsurance companies.

CERTAIN SECTION 953(d) COMPANIES NOW CONSIDERED US PERSONS

The Notice specifies that the IRS and Treasury Department intend to modify the definition of “US person” in the final Treasury Regulations implementing FATCA to include certain foreign insurance companies that have elected to be treated as domestic corporations for federal tax purposes.

As a result, property and casualty insurers and reinsurers and other insurers and reinsurers that are not “specified insurance companies”vi that have made such an election generally should not be subject to FATCA reporting. The final Treasury Regulations implementing FATCA exclude such electing entities from the definition of a US person if such entities are not licensed to do business in any state.

COORDINATION OF BACKUP WITHHOLDING WITH FATCA WITHHOLDING

In the case of a withholdable paymentvii that is also a reportable paymentviii made by a PFFI or Model 2 FFI to a recalcitrant account holder, backup withholding will not apply if tax is withheld under FATCA, unless backup withholding is elected.

COORDINATION OF FORM 1099 REPORTING WITH FATCA REPORTING

PFFIs and FFIs that are not US payors or US middlemen and that are located in IGA countries will be excused from Form 1099 reporting if they report relevant account information pursuant to an FFI Agreement or pursuant to an applicable Model 1 IGA.

FATCA ENTERS INTO FORCE SOON – ARE YOU READY?

Withholding under FATCA begins July 1, 2014. Financial institutions that have not already considered the steps necessary to become FATCA compliant should do so now.

Financial institutions worldwide can begin entering their registration information into the FATCA Registration Website now, using the remainder of 2013 to become familiar with the website. Starting in January 2014, financial institutions will be expected to finalize their registration information. This should be done by April 25, 2014, in order to be included on the first monthly IRS FFI List, which will be posted on June 2, 2014 and used for verification by withholding agents.

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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