IRS issues draft foreign financial institution agreement and new guidance
IRS issues draft foreign financial institution agreement and new guidance
November 11, 2013
IRS has issued a notice that contains a draft agreement and new guidance for participating foreign financial institutions (FFIs) directly engaging in agreements with IRS and those reporting through a Model 2 intergovernmental agreement (IGA).IRS also said that it will issue a final agreement by Dec. 31, 2013.
Background.On Mar. 18, 2010, the Hiring Incentives to Restore Employment Act of 2010 (P.L. 111-147) added Chapter 4 (Code Sec. 1471 through Code Sec. 1474) to the Code—commonly referred to as the Foreign Account Tax Compliance Act or FATCA.Chapter 4 requires withholding agents to withhold 30% of certain payments to a foreign financial institution (FFI) unless the FFI has entered into an agreement (FFI agreement; see below) with IRS.(The withholding rules are essentially a mechanism to enforce new reporting requirements.)Chapter 4 also imposes on withholding agents certain withholding, documentation, and reporting requirements with respect to certain payments made to certain non-financial foreign entities (NFFEs).The statutory provisions are generally effective for payments made after Dec. 31, 2012, but their implementation has been delayed and phased in over several years (see Weekly Alert ¶ 6 07/18/2013).
In its FFI agreement, a participating FFI generally agrees to:
- i. perform due diligence to identify accounts it maintains for U.S. persons,
- ii. verify compliance with the agreement,
- iii. report information on its U.S. accounts to IRS,
- iv. withhold on passthru payments, including foreign passthru payments, to recalcitrant account holders and nonparticipating FFIs,
- v. comply with requests for additional information on its U.S. accounts, and
- vi. under certain circumstances, close accounts of recalcitrant account holders.
An FFI that enters into such an agreement is referred to as a “participating FFI.”
IRS expanded its guidance on FFI agreements in final FATCA regs issued on Jan. 17, 2013.The final regs set forth all of the substantive requirements applicable to an FFI under the FFI agreement; define an event of default and procedures for remediating it; allow participating FFIs to file collective refund claims on behalf of certain account holders and payees for amounts overwithheld; and provide procedural requirements if a participating FFI is legally prohibited from reporting or withholding as required under the FFI agreement.
For more details on the operating rules of FFI agreements, as set out in the final regs, see Weekly Alert ¶ 17 01/24/2013.For more details on other aspects of the final regs, see Weekly Alert ¶ 12 01/24/2013,Weekly Alert ¶ 11 01/24/2013 , Weekly Alert ¶ 17 01/24/2013, Weekly Alert ¶ 42 01/24/2013,Weekly Alert ¶ 19 01/24/2013 , and Weekly Alert ¶ 13 01/31/2013.
In cases in which foreign law would prevent an FFI from complying with the terms of an FFI agreement, IRS has collaborated with other governments to develop two alternative model intergovernmental agreements (IGAs) that facilitate FATCA implementation.Reporting financial institutions under an applicable Model 1 IGA (reporting Model 1 FFIs) would satisfy their Chapter 4 requirements by reporting specified information about U.S. accounts to their government, followed by the automatic exchange of that information on a government-to-government basis with the U.S.Under a Model 2 IGA, reporting Model 2 FFIs would report specified information about U.S. accounts directly to IRS in a manner consistent with the final regs (as modified by the applicable Model 2 IGA), supplemented by a government-to-government exchange of information on request.Accordingly, an FFI, or branch of an FFI, that is a reporting Model 2 FFI will apply Reg. § 1.1471-4, as well as the terms of the FFI agreement, as modified by the applicable Model 2 IGA.
FFIs must register with IRS.Registering financial institutions will receive a notice of registration acceptance and will be issued a global intermediary identification number (GIIN).
An FFI agreement generally includes a qualified intermediary (QI) agreement, withholding foreign partnership (WP) agreement, or withholding foreign trust (WT) agreement that is entered into by an FFI and that has an effective date or renewal date on or after Dec. 31, 2013.(Reg. § 1.1471-1(b)(43)) QIs, WPs and WTs are parties that have entered into agreements to withhold tax under Chapter 3 of the Code, i.e., the portion of the Code under which tax is withheld on nonresident aliens and foreign corporations.(Reg. § 1.1471-1(b)(101), Reg. § 1.1471-1(b)(140) and Reg. § 1.1471-1(b)(142))
The draft agreement.The draft FFI agreement contained in the notice substantially incorporates the provisions set forth in Reg. § 1.1471-4.
For example, pursuant to Code Sec. 1471(b) and Reg. § 1.1471-4, a participating FFI must comply with certain due diligence, reporting, and other requirements with respect to its financial accounts.A participating FFI is also required to verify its compliance with the requirements of the FFI agreement by periodically certifying to IRS about its satisfaction of the requirements.The FFI agreement requires, for an FFI to maintain its status as a participating FFI, that each member of the FFI group other than an exempt beneficial owner maintains one of the following chapter 4 statuses: participating FFI (including a reporting Model 2 FFI), limited FFI, registered deemed-compliant FFI (including a reporting Model 1 FFI), or nonreporting Model 1 or 2 FFI.(Section III.01(A))
The FFI agreement also incorporates into each relevant section of the FFI agreement the modifications that apply to a reporting Model 2 FFI under the applicable Model 2 IGA, which include, for example, the suspension of withholding on non-consenting U.S. accounts.In the absence of any modification to the terms of the FFI agreement for a reporting Model 2 FFI, a reporting Model 2 FFI may substitute “reporting Model 2 FFI” for “participating FFI” to determine its requirements to comply with the FFI agreement.(Section III.01(B))
IRS said that it will finalize the FFI agreement by Dec. 31, 2013.(Section I)
The new guidance.Notice 2013-69 describes the following updates to regs that IRS intends to make:
…Coordination with Form 1099 reporting.IRS intends to issue regs under Chapter 61 (Form 1099 reporting) to provide that a payor other than a U.S. payor or U.S. middleman as defined in Reg. § 1.6049-5(c)(5) (i.e., a non-U.S. payor) that is a participating FFI (including a reporting Model 2 FFI) or reporting Model 1 FFI will satisfy its reporting obligations under Chapter 61 with respect to a U.S. payee (or presumed U.S. payee) that is a non-exempt recipient if such FFI reports such account holder pursuant to the FFI agreement or the applicable Model 1 IGA.Notwithstanding the preceding sentence, an FFI is required to report on Form 1099 to the extent the FFI is required to apply backup withholding to the payment.(Section III.02(A))
…Coordination with Section 3406 (backup withholding).IRS intends to issue regs to provide that withholding under Code Sec. 3406 (backup withholding) will not apply to a reportable payment if a participating FFI (including a reporting Model 2 FFI) has withheld on the payment under Reg. § 1.1471-4(b).A reportable payment that is not subject to withholding under Chapter 4 remains subject to withholding under Code Sec. 3406.Alternatively, a participating FFI may elect to satisfy its withholding obligations under Reg. § 1.1471-4(b) with respect to accounts held by recalcitrant account holders that are known U.S. persons by withholding pursuant to Code Sec. 3406 at the backup withholding rate.(Section III.02(B))
…Transitional reporting of foreign reportable amounts paid to nonparticipating FFIs.IRS intends to modify the transitional reporting requirements under the Chapter 4 regs for calendar years 2015 and 2016 with respect to payments of foreign reportable amounts made to nonparticipating FFIs.The current rules provide that a participating FFI is required to report the aggregate amount of foreign reportable amounts paid to each payee that is a nonparticipating FFI, even where such payments are not associated with a financial account.The modified rules will provide that a participating FFI is only required to report foreign reportable amounts paid with respect to a financial account that it maintains for a nonparticipating FFI.Such reporting will be required on Form 8966 instead of Form 1042-S.Additionally, a participating FFI will be permitted to report all payments made to the account if it does not want to distinguish foreign reportable amounts from other amounts paid to the account.(Section III.02(C))
…Direct reporting NFFEs or sponsored direct reporting NFFEs.IRS intends to issue regs under Chapter 4 to provide that an NFFE will not include an NFFE that is a direct reporting NFFE or sponsored direct reporting NFFE.A direct reporting NFFE will mean an NFFE that elects to report on Form 8966 directly to 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 Chapter 4 regs will be modified to provide that a direct reporting NFFE will be treated as an excepted NFFE.A direct reporting NFFE will be required to register with IRS to obtain a GIIN and to agree to comply with the provisions to be provided in the modified Chapter 4 regs on reporting information about its substantial U.S. owners directly to IRS on Form 8966.
Instructions to the FATCA registration website will be modified to provide instructions to direct reporting NFFEs on how to register.In general, withholding agents and participating FFIs will identify and document a direct reporting NFFE in a manner similar to how withholding agents and participating FFIs will document a participating FFI, including by verifying that the GIIN of the direct reporting NFFE is listed on the IRS FFI List.
Notwithstanding that a direct reporting NFFE will document itself to withholding agents and participating FFIs in a manner similar to a participating FFI, it will not be treated as a participating FFI and will not enter into an FFI agreement.Therefore, since the definition of a passive NFFE will be updated to exclude a direct reporting NFFE, an account held by a direct reporting NFFE will not be treated as a U.S. account and will not be reported by a participating FFI with which the direct reporting NFFE has a financial account to IRS.(Section III.02(D))
…NFFEs that are QIs, WPs, and WTs.IRS intends to modify the Chapter 4 regs to provide that a passive NFFE does not include an NFFE that is acting as a QI or that is a WP or WT. An NFFE that is acting as a QI and receiving a withholdable payment on behalf of a passive NFFE will be required pursuant to the updated QI agreement to report directly to IRS information about the passive NFFE and its substantial U.S. owners, in addition to the QI’s other obligations as a withholding agent under Chapters 3 and 4.An NFFE that is a WP or WT will be required pursuant to the updated WP or WT agreement, as applicable, to report directly to IRS information about its direct or indirect substantial U.S. owners, in addition to its other obligations as a withholding agent under Chapters 3 and 4. (Section III.02(E))
…Section 953(d) entities.IRS intends to modify the definition of U.S. person in the Chapter 4 regs to include a foreign insurance company that is not a specified insurance company and that elects pursuant to Code Sec. 953(d) to be subject to U.S. income tax as if it were a U.S. insurance company.(Section III.02(F))