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IRS issues final foreign financial institution agreement & new FATCA guidance

December 27, 2013

In a Revenue Procedure, IRS has provided guidance to foreign financial institutions (FFIs) entering into an FFI agreement with IRS to be treated as “participating FFIs” under Code Sec. 1471(b) and Reg. § 1.1471-4, including the text of the finalized FFI agreement itself. IRS also provided guidance to FFIs and branches of FFIs treated as reporting financial institutions under an applicable Model 2 intergovernmental agreement (IGA), on complying with the terms of the FFI agreement.

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, the “Foreign Account Tax Compliance Act” or FATCA) to the Code. Chapter 4 requires withholding agents to withhold 30% of certain payments to a foreign financial institution (FFI) unless the FFI has entered into a “FFI agreement” with IRS to, among other things, report certain information with respect to U.S. accounts. (The withholding rules are essentially a mechanism to enforce new reporting requirements.) FFIs that have entered into FFI agreements are referred to as “participating FFIs.” Chapter 4 also imposes withholding, documentation, and reporting requirements on withholding agents with respect to certain payments made to certain non-financial foreign entities. 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.

IRS issued final FATCA regs on Jan. 17, 2013 that, among other things, provided for a phased implementation of the FATCA requirements over the period beginning on Jan. 1, 2014 and continuing through 2017 (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). Subsequently, in Notice 2013-43, 2013-31 IRB 113, Treasury and IRS provided revised timelines for implementing various FATCA requirements with the goal of a more orderly implementation of FATCA (see Weekly Alert ¶  6  07/18/2013).

In the preamble to the final regs (see ), IRS announced that it would create a new FATCA registration website which would serve as the primary way for FFIs to interact with IRS to complete the required registration, agreements, and certifications. In IR 2013-69 (see Weekly Alert ¶  3  08/22/2013), IRS announced that its online FATCA registration system was open for business, effective Aug. 19, 2013. IRS encouraged financial institutions (FIs) to become familiar with the system, create their online accounts, and begin submitting their information. It also said that, starting in January, 2014, financial institutions will be expected to finalize and submit their registration information and, upon finalization and approval in 2014, registering financial institutions will receive a notice of registration acceptance and will be issued a global intermediary identification number (GIIN).

Under the final regs, 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))

To ease the burdens of FATCA implementation and compliance, the U.S. also issued two model IGAs to be implemented between the U.S. and other countries (“FATCA partners”). The IGAs represent an alternate means to implement FATCA in a way that is designed to increase reporting compliance by FFIs while addressing difficulties with implementation under FATCA partner local law. In general, under the Model 1 agreements, FFIs would satisfy their chapter 4 requirements by reporting information about U.S. accounts to their respective tax authorities, which in turn would exchange that information on a government-to-government basis with the U.S. (see Weekly Alert ¶  13  08/02/2012). Under Model 2 agreements, FFIs would provide specified information directly to IRS, supplemented by government-to-government exchange of information on request (see Weekly Alert ¶  15  11/21/2012).

In Notice 2013-69, 2013-46 IRB 503, IRS issued a draft FFI agreement (see Weekly Alert ¶  38  10/31/2013), and in Ann. 2014-1, 2014-1 IRB, IRS provided updated registration information (see Weekly Alert ¶  35  12/19/2013). In both releases, IRS also indicated that the FFI agreement would be finalized prior to Jan. 1, 2014.

New guidance—FATCA registration for participating FFI or reporting Model 2 FFI status. An FFI may register on Form 8957, Foreign Account Tax Compliance Act (FATCA) Registration, via the FATCA registration website to enter into the FFI agreement on behalf of one or more of its branches to treat such a branch as a participating FFI and receive a GIIN. A branch of an FFI that is legally unable to satisfy all of the terms of the FFI agreement will be treated as a “limited branch” and will be subject to withholding under Code Sec. 1471 as a nonparticipating FFI. A reporting Model 2 FFI may also register on the FATCA registration website on behalf of one or more of its branches to obtain a GIIN and to agree to comply with the terms of the FFI agreement, as modified by an applicable Model 2 IGA.

In general, the FFI agreement does not apply to a reporting Model 1 FFI, or any branch of such an FFI, unless the reporting Model 1 FFI has registered a branch located outside of a Model 1 IGA jurisdiction so that such branch may be treated as a participating FFI or reporting Model 2 FFI. In such a case, the terms of the applicable FFI agreement apply to the operations of such branch. With respect to an FFI (or branch of an FFI) that is a QI or an FFI that is a WP or a WT, the revised QI, WP, and WT agreements will incorporate by reference the requirements of the FFI agreement (including the modifications to the terms of the FFI agreement that are applicable to a reporting Model 2 FFI), and the terms of the FFI agreement will apply to an FFI (or a QI branch of an FFI) that is treated as a participating FFI or reporting Model 2 FFI. Each branch of a participating FFI or reporting Model 2 FFI that is registered, other than a limited branch, will be issued a GIIN to use in connection with complying with the FFI agreement and to identify itself to withholding agents.

FFI Agreement—changes from earlier draft version. The FFI agreement (Rev Proc 2014-10, Sec. 5) contains a number of changes to the earlier draft version (Weekly Alert ¶  38  10/31/2013). Highlights follow:


… Elective transition period. The FFI agreement provides for a 2-year transition period during which a reporting Model 2 FFI may elect to apply the due diligence procedures described in the FFI agreement in lieu of those in Annex I of an applicable Model 2 IGA. This election is made by the reporting Model 2 FFI and not the reporting Model 2 IGA jurisdiction.
… Conforming changes to upcoming temporary regs. Rev Proc 2014-10 refers to two sets of temporary regs—one providing further clarifications and modifications to the final FATCA regs and the other providing coordinating rules under chapters 3, 4, and 61 of the Code—that are expected to be published in early 2014. The FFI agreement changes a number of cross-references that originally appeared in the draft agreement and makes other conforming changes in anticipation of the issuance of these regs. Also, as contemplated in Notice 2013-69, the FFI agreement provides that, with respect to calendar years 2015 and 2016, participating FFIs that are required to report foreign reportable amounts paid to nonparticipating FFIs should report this information on Form 8966.
… Miscellaneous corrections. The FFI agreement contains revisions to correct minor technical errors in the draft FFI agreement, including the removal of an incorrect reference to an escrow procedure due to a change in circumstances of an account holder or payee, substitution of a 90- vs. 30-day period for such change of circumstances, and removal of the separate subsection for pooled reporting for a reporting Model 2 FFI, which described types of income that are not chapter 4 reportable amounts and would not be reported on Form 1042-S.


Effective date. Rev Proc 2014-10 is effective Jan. 1, 2014, i.e., the date of its publication in the IRB.