IRS will amend FATCA regs to extend various transitional rules
IRS will amend FATCA regs to extend various transitional rules
Notice 2015-66, 2015-41 IRB
In a Notice, IRS has announced that it will amend the Foreign Account Tax Compliance Act (FATCA) regs to extend the period of time that certain transitional rules will apply and to modify the rules for grandfathered obligations in relation to collateral held by withholding agents. The Notice also provides information on the exchange of information by Model 1 IGA jurisdictions with respect to 2014.
Background on FATCA in general. The Hiring Incentives to Restore Employment Act of 2010 (P.L. 111-147) added Chapter 4 (Code Sec. 1471 through Code Sec. 1474, FATCA) to the Code. Chapter 4 generally requires withholding agents to withhold tax on certain payments to a foreign financial institution (FFI) unless it has entered into a FFI agreement with the U.S. 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. Chapter 4 also imposes withholding, documentation, and reporting requirements on withholding agents, with respect to certain payments made to certain non-financial foreign entities (NFFEs).
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 (Model 1 and Model 2 IGAs) that facilitate FATCA implementation.
Background—withholdable payments under FATCA. The amounts subject to withholding under chapter 4 are “withholdable payments.” Under Reg. § 1.1473-1(a), the term “withholdable payment” generally means any payment of U.S. source fixed or determinable annual or periodical (FDAP) income, and for sales or other dispositions occurring after Dec. 31, 2016, any gross proceeds from the sale or other disposition of any property of a type that can produce interest or dividends that are U.S. source FDAP income. Withholding on withholdable payments of U.S. source FDAP income generally began on July 1, 2014.
Under a transitional rule in Reg. § 1.1473-1(a)(4)(vi), a payment made on or before Dec. 31, 2016, with respect to an “offshore obligation” is not treated as a withholdable payment if the payment is made by a person that is not acting as an intermediary, withholding foreign partnership, or withholding foreign trust with respect to the payment.
Under Reg. § 1.1471-2(b), a withholdable payment does not include a payment made under a “grandfathered obligation.” A grandfathered obligation includes any obligation, as defined in Reg. § 1.1471-2(b)(2)(ii), outstanding on Jul. 1, 2014. Under Reg. § 1.1471-2(b)(2)(i)(A)(3), a grandfathered obligation also includes an agreement requiring a secured party to make a payment with respect to collateral posted to secure a grandfathered obligation. If collateral secures both grandfathered and non-grandfathered obligations, the collateral posted to secure the grandfathered obligations must be determined by allocating, pro rata by value, the collateral to all outstanding obligations secured by the collateral (the pro rata rule).
Furthermore, under a transitional rule in Reg. § 1.1473-1(a)(4)(vii), a payment made on or before Dec. 31, 2016, by a secured party, or to a secured party other than a nonparticipating FFI, with respect to collateral securing one or more transactions under a collateral arrangement, is not treated as a withholdable payment, provided that only a commercially reasonable amount of collateral is held by the secured party (or by a third party for the benefit of the secured party) as part of the collateral arrangement.
Background—foreign passthru payments. In order for an FFI to obtain the status of a participating FFI, it must agree to all the requirements of being a participating FFI, including withholding on passthru payments made to recalcitrant account holders and nonparticipating FFIs. (Code Sec. 1471(b)(1)(D)(i)) A passthru payment is defined in the regs to mean a withholdable payment and any foreign passthru payment.
A transitional rule in Reg. § 1.1471-4(b)(4) provides that a participating FFI is not required to withhold tax on a foreign passthru payment made to a recalcitrant account holder or a nonparticipating FFI before the later of Jan. 1, 2017, or the date of publication in the Federal Register of final regs defining foreign passthru payment.
Background—limited branches and limited FFIs. In order for an FFI that is a member of an expanded affiliated group (EAG) to obtain the status of a participating FFI or registered deemed-compliant FFI, Reg. § 1.1471-4(a)(4) requires that each FFI that is a member of the EAG have the chapter 4 status of a participating FFI, deemed-compliant FFI, or exempt beneficial owner.
The final regs include two transitional rules to provide limited relief to FFIs with branches or affiliates that are located in jurisdictions whose laws prohibit such branches or affiliates from complying with an FFI agreement.
Under the transitional rule for a “limited branch,” an FFI that otherwise satisfies the requirements for participating FFI status can become a participating FFI, notwithstanding that one or more branches cannot satisfy the requirements of a participating FFI, provided that all noncompliant branches satisfy the conditions for limited branch status and the FFI meets the other requirements described in Reg. § 1.1471-4(e)(2)(i).
Under the transitional rule for a “limited FFI,” an FFI can become either a participating FFI or a registered deemed-compliant FFI, notwithstanding that one or more other FFIs in its EAG cannot comply with all of the requirements of a participating FFI, provided that any such noncompliant FFIs meet the definition of a “limited FFI” under Reg. § 1.1471-4(e)(3). Under Reg. § 1.1471-4(e)(2)(v) and Reg. § 1.1471-4(e)(3)(iv), limited branch and limited FFI statuses will be unavailable after Dec. 31, 2015.
Background—sponsored entity global intermediary identification numbers (GIINs). Under Code Sec. 1471, a withholding agent is not generally required to withhold on payments to an FFI that is deemed to comply with the requirements of Code Sec. 1471(b) (a deemed-compliant FFI). The chapter 4 regs provide that a registered deemed-compliant FFI includes an FFI that satisfies the requirements of Reg. § 1.1471-5(f)(1)(i)(F)(1) or Reg. § 1.1471-5(f)(1)(i)(F)(2) to qualify as either a sponsored investment entity or a sponsored controlled foreign corporation (a sponsored registered deemed-compliant FFI). A sponsoring entity of a sponsored registered deemed-compliant FFI must agree to perform, on behalf of the FFI, all due diligence, withholding, reporting, and other requirements that the FFI would have been required to perform if it were a participating FFI. A sponsoring entity must register with IRS as a sponsoring entity and must also register the sponsored registered deemed-compliant FFI by the later of Jan. 1, 2016, or the date that the FFI identifies itself as qualifying as a registered deemed-compliant FFI under Reg. § 1.1471-5(f)(1)(i)(F)(1) or Reg. § 1.1471-5(f)(1)(i)(F)(2).
A transitional due diligence rule provides that, for payments prior to Jan. 1, 2016, a withholding agent may rely on a withholding certificate provided by a sponsored registered deemed-compliant FFI that includes only the GIIN of the FFI’s sponsoring entity. ( Reg. § 1.1471-3T(e)(3)(iv)(B))
Under the Model 1 IGA, if the sponsoring entity of a sponsored investment entity or sponsored controlled foreign corporation identifies any U.S. reportable accounts, the sponsoring entity must register the sponsored entity with IRS on or before the later of Dec. 31, 2015, and the date that is 90 days after such account is first identified. Under the Model 2 IGA, the sponsoring entity must register the sponsored entity prior to Dec. 31, 2015.
Under Code Sec. 1472, a withholding agent generally is required to withhold on payments to a NFFE unless the NFFE provides the withholding agent with certain information identifying the NFFE’s substantial U.S. owners (or a certification that the NFFE does not have any such owners), and the withholding agent reports such information to IRS. The final regs except withholding agents from withholding or reporting under Code Sec. 1472 with respect to payments beneficially owned by entities qualifying as excepted NFFEs. The temporary regs issued under chapter 4 add direct reporting NFFEs as a class of excepted NFFEs.
A direct reporting NFFE is an NFFE that elects to report information about its substantial U.S. owners directly to IRS (rather than to its withholding agent) and that meets the requirements of Reg. § 1.1472-1(c)(3). A direct reporting NFFE must register with IRS and obtain a GIIN.
A direct reporting NFFE may elect to be treated as a sponsored direct reporting NFFE if another entity, other than a nonparticipating FFI, agrees to act as its sponsoring entity for performing all of the due diligence, reporting, and other requirements that the NFFE would have been required to perform as a direct reporting NFFE. A sponsoring entity of a sponsored direct reporting NFFE must register with IRS as a sponsoring entity and must register the NFFE. The temporary regs include a transitional due diligence rule for payments prior to Jan. 1, 2016, that allows a withholding agent to rely on a withholding certificate provided by a sponsored direct reporting NFFE that includes only the GIIN of the NFFE’s sponsoring entity.
Background—IGAs. Ann. 2014-17, 2014-18 IRB 1001, provides that, in addition to jurisdictions that had already signed IGAs, jurisdictions treated as having an IGA in effect would include jurisdictions that, before July 1, 2014, reached agreements in substance with the U.S. on the terms of an IGA and consented to be included on the list of such jurisdictions. An FFI that is resident in, or organized under the laws of, a jurisdiction that is treated as having an IGA in effect is permitted to register on the FATCA registration website and to certify to a withholding agent its status as an FFI covered by an IGA.
On Dec. 1, 2014, IRS published Ann. 2014-38, 2014-51 IRB 951 (see Weekly Alert ¶ 21 12/04/2014), which provides that certain jurisdictions that reached an agreement in substance after June 30, 2014, and before Nov. 30, 2014, also would be treated as having an IGA in effect.
The Model 1 and Model 2 IGAs provide that if a resident FFI has a related entity or branch that operates in a jurisdiction that prevents such entity or branch from complying with FATCA, or the FFI has a related entity or branch that is treated as a nonparticipating FFI solely due to the expiration of the transitional rule for limited FFIs and limited branches under the chapter 4 regs, such FFI must continue to be in compliance with the IGA and be treated as a participating FFI, deemed-compliant FFI, or exempt beneficial owner, as appropriate, if certain other the conditions in the IGAs are satisfied.
There are two versions of the Model 1 IGA. With respect to the first of these, the Model 1A IGA, the obligation to exchange information only begins after the competent authorities provide notification that each is satisfied that the other jurisdiction has necessary safeguards in place. Model 1B does not have this requirement.
Once an IGA has entered into force and any relevant notifications described above for the Model 1A IGA have been provided, both versions of the Model 1 IGA require the partner jurisdiction to obtain and exchange information within nine months after the end of the calendar year to which the information relates. 2014 information should be exchanged by the partner jurisdiction by Sept. 30, 2015.
New FATCA guidance. In Notice 2015-66, IRS announced that it intends to amend the FATCA regs to extend the period of time that certain transitional rules will apply and to modify the rules for grandfathered obligations with respect to collateral.
Extension of dates for when withholding begins. IRS intends to amend the chapter 4 regs under Code Sec. 1473 to extend the start date of gross proceeds withholding by providing that the definition of the term “withholdable payment” means any payment of U.S. source FDAP income, and for sales or other dispositions occurring after Dec. 31, 2018, any gross proceeds from the sale or other disposition of any property of a type that can produce interest or dividends that are U.S. source FDAP income.
And, IRS intends to amend the regs under Code Sec. 1471 to extend the start date of withholding on foreign passthru payments to provide that a participating FFI is not required to withhold tax on a foreign passthru payment made to a recalcitrant account holder or a nonparticipating FFI before the later of: (i) Jan. 1, 2019, or (ii) the date that final regs defining the term “foreign passthru payment” are published in the Federal Register. (Notice 2015-66, Sec. III)
Extension of limited branch and limited FFI statuses. To provide FFIs and other stakeholders additional time to determine whether to continue operating in jurisdictions where limited branches or limited FFIs exist, IRS intends to amend the regs under Code Sec. 1471 to provide that the availability of limited branch and limited FFI statuses will terminate on Jan. 1, 2017. A limited FFI or limited branch that becomes able to comply with the terms of the FFI agreement or becomes a participating FFI or deemed-compliant FFI pursuant to an applicable IGA should amend its registration to reflect its modified status.
FFIs that continue to operate after Dec. 31, 2016, in jurisdictions where they cannot comply with the terms of an FFI agreement due to local law will jeopardize the chapter 4 status of participating FFIs and registered deemed-compliant FFIs (other than FFIs covered by an IGA) in the group. Similarly, branches that continue to operate after that date in jurisdictions where local law prohibits compliance with the terms of an FFI agreement will jeopardize the participating FFI status of the FFI of which the branch is part (as well as jeopardize any branches of the FFI that have participating FFI status under the FFI agreement), subject to the terms of an applicable IGA. (Notice 2015-66. Sec. IV)
After Dec. 31, 2015, all limited FFI and limited branch registrations will be placed in “registration incomplete” status on their online FATCA account. Limited FFIs and limited branches that seek to continue such status during the 2016 calendar year will be required to edit and resubmit their registrations after Dec. 31, 2015, on the FATCA registration website.
Extension of time to register sponsored entities and extension of reliance on sponsoring entity GIINs. As previewed in Notice 2013-69, 2013-46 IRB 503 (see Weekly Alert ¶ 38 10/31/2013), IRS is developing a streamlined process for sponsoring entities to register their sponsored entities on the FATCA registration website. In order to provide sufficient time for sponsored entity registration, IRS intends to amend the regs under Code Sec. 1471 and Code Sec. 1472 to provide that sponsoring entities must register their sponsored registered deemed-compliant FFIs and sponsored direct reporting NFFEs by Jan. 1, 2017. Beginning on such date, sponsoring entities must use the GIIN of the sponsored entity when reporting with respect to the sponsored entity on Form 8966 (FATCA Report) and must provide the GIIN to withholding agents making payments to the sponsored entity.
Sponsored investment entities and sponsored controlled foreign corporations covered by Annex II of a Model 1 IGA will maintain their deemed-compliant status as long as they are registered by the sponsoring entity on or before the later of Dec. 31, 2016 and the date that is 90 days after a U.S. reportable account is first identified. Sponsored investment entities and sponsored controlled foreign corporations covered by Annex II of a Model 2 IGA will maintain their deemed-compliant status as long as they are registered by the sponsoring entity on or before Dec. 31, 2016.
In addition, IRS intends to amend the regs under Code Sec. 1471 to provide that withholding agents can continue to rely on withholding certificates from sponsored registered deemed-compliant FFIs and sponsored direct reporting NFFEs that have only the sponsoring entity’s GIIN for payments made prior to Jan. 1, 2017. For a payment made on or after that date, a withholding agent will be required to obtain the GIIN of a payee that is a sponsored registered deemed-compliant FFI or a sponsored direct reporting NFFE by obtaining either: (1) a withholding certificate from the payee that includes its GIIN, or (2) if the withholding agent already has on file a withholding certificate for the payee that includes the GIIN of the sponsoring entity, oral or written confirmation of the payee’s GIIN (such as by e-mail).
If a withholding agent obtains oral or written confirmation of the payee’s GIIN, it will be required to retain a record of such information, which will become part of the withholding certificate. Whether the withholding agent receives the GIIN through a new withholding certificate, or by oral or written confirmation, the withholding agent will have 90 days from the date it obtains the GIIN to verify its accuracy against the published IRS FFI list.
Because withholding agents will be required to obtain the GIIN of each sponsored entity for payments made after Dec. 31, 2016, sponsoring entities should consider registering to obtain GIINs well in advance of Jan. 1, 2017, in order to give withholding agents sufficient time to complete this requirement (and thereby avoid being withheld upon). (Notice 2015-66, Sec. V)
Treatment of collateral under the grandfathered obligation rule—pooled collateral. IRS has received comments stating that it would be burdensome for financial institutions to comply with the pro rata rule described in Reg. § 1.1471-2(b)(2)(i)(A)(3) for “pooled collateral”—i.e., collateral that secures both grandfathered and non-grandfathered obligations. IRS agrees that, to ease administrative burdens, the secured party in this situation should be permitted either to withhold on all collateral or to apply the pro rata approach with respect to such collateral, and accordingly intends to amend Reg. § 1.1471-2(b)(2)(i)(A)(3) to provide that the pro rata rule is not mandatory. (Notice 2015-66, Sec. VI.A)
Substitute payments made with respect to a grandfathered obligation. The chapter 4 regs treat obligations that are outstanding on July 1, 2014, as grandfathered obligations. If, after July 1, 2014, a payee pledges a grandfathered obligation as collateral, and the secured party acts as an intermediary for payments made under the grandfathered obligation that is posted as collateral, then payments made by the secured party to the payee with respect to such collateral remain covered by the grandfathered obligation rule and are not treated as withholdable payments. Commenters have noted, however, that the definition of a “grandfathered obligation” does not include an obligation that is created as a result of the posting of collateral that is itself a grandfathered obligation. As a result, to the extent that a secured party is treated as the beneficial owner of collateral that is a grandfathered obligation, payments made by the secured party would not be payments made under a grandfathered obligation, but would instead be substitute payments made under a newly created obligation that is not covered by the grandfathered obligation rule.
IRS agrees that a substitute payment made with respect to a grandfathered obligation that has been posted as collateral should also be treated as a payment made under a grandfathered obligation, and therefore not subject to withholding under Code Sec. 1471 or Code Sec. 1472 . Accordingly, it intends to amend the definition of grandfathered obligation in Reg. § 1.1471-2(b)(2)(i)(A) to include any obligation that gives rise to substitute payments and that is created as a result of the payee posting collateral that is otherwise treated as a grandfathered obligation under Reg. § 1.1471-2(b)(2)(i)(A)(1). (Notice 2015-66, Sec. VI.B)
Timing of exchange of 2014 information under a Model 1 IGA. Pursuant to its authority under Code Sec. 1471(b)(2)(B), and consistent with Ann. 2014-38, for Model 1 IGAs that have not yet entered into force on Sept. 30, 2015, IRS intends to continue to treat FFIs covered by the IGA as complying with, and not subject to withholding under, FATCA so long as the partner jurisdiction continues to demonstrate firm resolve to bring the IGA into force and any information that would have been reportable under the IGA on Sept. 30, 2015, is exchanged by Sept. 30, 2016, together with any information that is reportable under the IGA on Sept. 30, 2016.
This policy is consistent with memoranda of understanding (MOUs) that the U.S. has entered into with certain partner jurisdictions and letters that IRS has sent to certain other partner jurisdictions.Notice 2015-66 clarifies that this policy applies to all partner jurisdictions that have signed or agreed in substance to a Model 1 IGA, even if such a jurisdiction has not entered into the MOU or received the letter described above. However, Notice 2015-66 does not affect the timing of when FFIs should report information to a partner jurisdiction, which remains governed by local law. (Notice 2015-66, Sec. VII.A)
Notice 2014-33, 2014-21 IRB 1033 (see Weekly Alert ¶ 31 05/08/2014) states that calendar years 2014 and 2015 are regarded as a transition period for purposes of IRS enforcement and administration of the due diligence, reporting, and withholding provisions under chapter 4. Consistent with treating 2014 and 2015 as a transition period, IRS will treat FFIs covered by an IGA as complying with, and not subject to withholding under, FATCA even if the relevant partner jurisdiction has not exchanged 2014 information by Sept. 30, 2015, as long as the partner jurisdiction notifies the U.S. competent authority before Sept. 30, 2015, of the delay and provides assurance that the jurisdiction is making good faith efforts to exchange the information as soon as possible. Notice 2015-66 does not affect the timing of when FFIs should report information to a partner jurisdiction, which remains governed by local law. (Notice 2015-66, Sec. VII.B)
Taxpayer reliance. Prior to the issuance of the regulatory amendments described above, taxpayers may rely on the provisions of Notice 2015-66. (Notice 2015-66, Sec. VIII)
References: For withholdable payments to FFIs and other foreign entities, see Federal Tax Coordinator 2d ¶ O-13070 et seq.; United States Tax Reporter ¶ 14,714 et seq.