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January 2017 deadline set for jurisdictions to bring their FATCA agreements into force

Ann. 2016-27, 2016-33 IRB

IRS has announced that on Jan. 1, 2017, Treasury will begin updating the list of countries with Model 1 and Model 2 intergovernmental agreements (IGAs) to provide that certain jurisdictions that have not brought their IGA into force will no longer be treated as if they have an IGA in effect. Such jurisdictions that wish to continue to be treated as having an IGA in effect must provide an explanation of why the IGA hasn’t been brought into force and a plan for doing so, by Dec. 31, 2016, to Treasury.

Background. The Hiring Incentives to Restore Employment Act of 2010 (P.L. 111-147) added Chapter 4 to the Code—i.e., Code Sec. 1471 through Code Sec. 1474, the Foreign Account Tax Compliance Act or FATCA. 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. Chapter 4 also imposes withholding, documentation, and reporting requirements on withholding agents, with respect to certain payments made to certain non-financial foreign entities.

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.

In Ann. 2014-17, 2014-18 IRB 1001, and Ann. 2014-38, 2014-51 IRB 951, IRS provided that, in addition to jurisdictions that had already signed IGAs, jurisdictions treated as having an IGA in effect include jurisdictions that, before Nov. 1, 2014, reached agreements in substance with the U.S. on the terms of an IGA, as long as the jurisdiction continued to demonstrate firm resolve to sign the IGA as soon as possible. FFIs residing or organized in such jurisdictions can register on the FATCA registration website and certify to a withholding agent its status as an FFI covered by an IGA.

In Notice 2015-66, 2015-41 IRB 541, IRS announced that FFIs in partner jurisdictions with a signed or “agreed in substance” Model 1 IGA that had not entered into force as of Sept. 30, 2015, would continue to be treated as complying with, and not subject to withholding under, FATCA so long as the partner jurisdiction continued 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, was exchanged by Sept. 30, 2016, together with any information that was reportable under the IGA on Sept. 30, 2016.

New rules. In Ann. 2016-27, IRS indicated that on Jan. 1, 2017, Treasury will begin updating the list of jurisdictions treated as if they have an IGA in effect (the IGA List) (see https://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA.aspx ). As a result, certain jurisdictions that have not brought their IGA into force will no longer be treated as if they have an IGA in effect.

Each jurisdiction with an IGA that isn’t yet in force and that wishes to continue to be treated as having an IGA in effect must provide to Treasury by Dec. 31, 2016, a detailed explanation of why the jurisdiction has not yet brought the IGA into force and a step-by-step plan that the jurisdiction intends to follow in order to sign the IGA (if it has not yet been signed) and bring the IGA into force, including expected dates for achieving each step.

In evaluating whether a jurisdiction will continue to be treated as if it has an IGA in effect, Treasury will consider whether: (1) the jurisdiction has submitted the explanation and plan (with the requested dates); and (2) that explanation and plan, as well as the jurisdiction’s prior course of conduct in connection with IGA discussions, show that the jurisdiction continues to demonstrate firm resolve to bring its IGA into force.

With respect to the timing of the exchange of prior year information upon entry into force of a Model 1 IGA, Treasury doesn’t intend to find FFIs to be in significant non-compliance with the IGA as long as any information for prior years is exchanged before the next September 30th after the obligation under the IGA to exchange information has taken effect.

Jurisdictions that are initially determined to have demonstrated firm resolve to bring an IGA into force will not retain that status indefinitely. For example, failure to adhere to the expected timeline set out in the jurisdiction’s explanation could result in a determination that the jurisdiction is no longer demonstrating firm resolve to bring its IGA into force and therefore will no longer be treated as if it has an IGA in effect.

In order to provide notice to FFIs, a jurisdiction will not cease to be treated as having an IGA in effect until at least 60 days after the jurisdiction’s status on the IGA List is updated. FFIs in a jurisdiction that ceases to be treated as if it has an IGA in effect will no longer be able to rely on the IGA to be treated as complying with, and exempt from withholding under, FATCA. Unless they qualify for an exemption under the FATCA regs, such FFIs generally will have to enter into FFI Agreements in order to comply with their FATCA obligations, including reporting information to IRS and withholding pursuant to the terms of the FFI Agreement.

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.