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Practitioners discuss FATCA compliance issues amidst speculation about further delay

February 10, 2014

At a recent panel discussion on Foreign Account Tax Compliance Act (FATCA) developments sponsored by the New York State Society of CPAs in Manhattan, practitioners weighed in on a number of topics including compliance issues, rumors of a further delayed implementation, and the implications of FATCA for various entities.

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” (the final version of which was released late in 2013, see Weekly Alert ¶  1  01/02/2014) 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, provide 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).

Rumored delay. There have been reports that FATCA is going to be further postponed for another six months. Additionally, the Republican National Committee recently adopted a resolution to repeal FATCA in its entirety. However, despite this ongoing speculation, practitioners at the panel discussion predicted that there will likely be no further delay.

FATCA implications for FFIs. According to Jon Larkitz, a managing director at PwC, one of the first steps in FATCA compliance is accurately determining whether an organization is considered an FFI. He emphasized the need for proper FFI determination because “this is where the highest risk of tax evasion is.” Most FFIs must sign a special agreement with IRS and are subject to 30% withholding if they are deemed non-compliant.

Of the five types of FFIs that must follow this guideline, three are relatively well-known, including: a depository institution such as a bank; a custodial institution; and a specified insurance company. According to Larkitz, the two lesser-known types of FFIs, which can pose the most unexpected liabilities, are: investments entities and certain holding companies and treasury centers.

Investment vehicles can include those which trade in certain financial products, manage individual portfolios, or invest financial assets on behalf of others. Certain holding companies are defined as part of an expanded affiliate group (EAG) which includes other financial institutions or is formed in affiliation with investment vehicles like private equity funds, mutual funds, and hedge funds.

Kara Friedenberg, a partner at PwC, added that beyond FFIs themselves, individuals who have invested in these entities or have bank accounts in these entities should also take note of potential FATCA compliance measures. “It is important to understand what those entities [classified as FFIs] are going through from a compliance perspective because these individuals will be asked for a lot more information now,” she said. “These entities will do more due diligence on these investors.”

Deemed-compliant FFIs. Two categories of entities are exempt from signing an FFI agreement with IRS, but must fulfill other obligations instead. These include registered deemed-compliant FFIs and certified deemed-compliant FFIs.

The registration route requires FFIs to meet certain deemed-compliant criteria as well as complete a compliance certification every three years, noted Lakritz. Qualifying entities could include local FFI, a non-reporting member of a Participating FFI (PFFI) group, restricted fund, or sponsored investment entities and controlled foreign operations (CFCs).

Alternatively, certain FFIs can be deemed compliant without registering (so called “certified deemed-complaint” entities) by meeting certain prescribed conditions and certifying their status on a Form W-8 to a withholding agent, according to Lakritz. These can include non-registering local banks, FFIs with only low-value accounts, limited life debt investment vehicles, and qualified credit card issuers. In addition, there are special conditions for retirement funds and non-profit organizations.

FACTA implications for NFFEs. Foreign entities not deemed as FFIs must also disclose certain information in order to remain compliant. Although non-financial foreign entities (NFFEs) “do not have to sign an FFI agreement with the IRS, they have to disclose whether they have any substantial U.S. owners on a new type of W-8,” Lakritz said. “This is generally 10% or more. This is a common sense requirement.”

Certain NFFEs are automatically exempt from many of these requirements. These may include publicly traded corporations, entities organized under the laws of a possession of the U.S., foreign governments or any political subdivisions or wholly owned agencies thereof, foreign central banks, and other classes of persons considered to have a low risk of tax evasion.

FATCA implications for MNCs. If deemed to be FFIs, some multinational corporations (MNCs) and vehicles in non-financial groups could be subject to FATCA provisions.

“You can quickly see a regular run-of-the-mill business go out and get financing, or they may manage their worldwide affairs in FFIs,” said Candace Ewell, a principal at PwC. “You can find where you’ve made a U.S.-source interest payment to an FFI and suddenly these FATCA rules stand up. Suddenly, you have to understand more about your counterparty than you did in the current rules.”

If MNCs do not identify themselves as FFIs in a timely fashion, FATCA presumption rules kick in. “The rules presume that you are a non-participating FFI, which would then trigger withholding on the payment that you are receiving and make you an undesirable account holder for a financial institution that is trying to be compliant,” Ewell added.

Overall, entities which receive certain types of payments (such as information on interest, certain swap payments, dividends or dividend equivalents, and certain foreign exchange transaction) after July 1, 2014 may be required to provide additional documentation to financial institutions or counter-parties—or face 30% withholding.

Pensions. MNCs may find themselves facing FATCA provisions if they have entities that are investment vehicles, like pension funds, continued Lakritz. “Pension plans carry very little risk of tax evasion, but surprisingly, they are still impacted by FATCA this way,” he said. “The government has recognized that and has created all these special classes to get exempt status or compliant status.”

Revised W-8s continue to burden taxpayers. Ewell said that the W-8BEN has historically been a challenging form to fill out because it is directed at non-U.S. persons. The form is often not filled out accurately because it is difficult to have non-U.S. persons complete something in English with technical tax terms that they may not be familiar with. She estimated that the current form in its one page format is accurately completed about 40% of the time.

The revised W-8BEN comes in two different forms: a W-8BEN for individuals and a W-8BEN-E for entities. While the revised W-8BEN remains similar to the current form, the W-8BEN-E has been significantly expanded to eight pages and contains numerous entity classifications and corresponding certifications required under FATCA.

Ewell said that the W-8BEN forms will be used for both Chapter 3 and Chapter 4 purposes. An open question is if the form is completed correctly for Chapter 3 but not Chapter 4 purposes, would it at least be acceptable for Chapter 3 purposes (or vice-versa)?

“I am hoping they will answer that soon,” Ewell said.

When the new W-8BEN’s are released in final form, Ewell said that withholding agents technically have an additional six-months before they have to start using them. Furthermore, the FATCA regulations provide the use of a pre-FATCA W-8 until 2017 or until it expires. (This is different from the new W-9s that came out this summer and needed to be started right away.)

IGAs. Friedenberg said that many of the countries that were initially opposed to FATCA were now coming around to signing IGAs with the U.S. Additionally, many countries are now starting their own version of FATCA.

Although many jurisdictions have concluded IGAs, not all of them have enacted legislation. The IGA changes some of the terms but it does not dramatically reduce the compliance.