- US Treasury Department Releases Latest Round of FATCA Guidance
- November 6, 2013
- Law Firm: Dentons Canada LLP - Toronto Office
Notice 2013-69, released on October 29, 2013, is the latest effort by the US Treasury Department to provide guidance to US and foreign entities that will be subject to the new reporting and withholding rules imposed by the so-called Foreign Account Tax Compliance Act, or "FATCA." For information on previous guidance issued by the US Treasury Department and background on FATCA, please see our previous alerts titled US Government Announces 6-Month Delay in Certain FATCA Rules and US Issues Final FATCA Regulations.
Notice 2013-69 basically does three things:
publishes the draft Foreign Financial Institution ("FFI") agreement with which participating FFIs and Model 2 FFIs must comply,
provides updated information about the responsibilities of participating FFIs and Reporting Model 2 FFIs and the FATCA registration process, and
announces the intent to make limited changes to the recently issued FATCA regulations and to other reporting regulations to coordinate with FATCA reporting.
Draft FFI Agreement
The bulk of the Notice consists of the draft FFI agreement. FFIs that are not covered by an Intergovernmental Agreement ("IGA") must enter into (and comply with) an FFI agreement to avoid being subject to withholding under FATCA on withholdable payments they receive. There is a narrow window of opportunity for FFIs to comment on what the final FFI agreement should or should not say. Once finalized, FFIs are not expected to be able to modify the FFI agreement's terms.
The Notice provides guidance regarding the interaction of IGAs and the final FATCA regulations issued in January 2013 (the "FATCA regulations"). For example, an FFI in a Model 1 IGA jurisdiction (where an FFI reports directly to its home country tax authorities rather than to the IRS and currently including the United Kingdom, Denmark, Mexico, Ireland, Norway, Spain, and Germany) generally does not sign an FFI agreement and become a participating FFI. Rather, its reporting obligations are covered by the IGA. When such an FFI has a branch that is not located in an IGA jurisdiction, however, the branch will become subject to FATCA withholding unless it is treated as a participating FFI. The Notice clarifies that an FFI in a Model 1 IGA jurisdiction may enter into an FFI agreement with respect to the branch in order for the branch to be treated as a participating FFI. Similarly, the Notice clarifies that if an FFI in a Model 1 IGA jurisdiction has a branch in a Model 2 IGA jurisdiction (where an FFI reports directly to the IRS, subject to special rules, and currently including Switzerland and Japan) that is treated as a reporting Model 2 FFI, the FFI agreement applies to the operations of that branch.
Changes to Existing Regulations
The Notice states that the US Treasury Department will issue regulations that make the following changes:
Create special rules for non-financial foreign entities ("NFFEs") that qualify as "direct reporting NFFEs" and "sponsored direct reporting NFFEs." A direct reporting NFFE is an NFFE that elects to report FATCA information directly to the IRS instead of providing such information to withholding agents or participating FFIs. Direct reporting NFFEs will be required to obtain a Global Intermediary Identification Number ("GIIN") and to agree to comply with certain information reporting about their substantial US owners, as instructed by the FATCA registration website. Direct reporting NFFEs will be treated as excepted NFFEs, rather than participating FFIs, and will not enter into FFI agreements. A sponsored direct reporting NFFE is an entity that sponsors one or more direct reporting NFFEs and which reports directly to the IRS (on the sponsored direct reporting NFFE's behalf) information about each sponsored direct reporting NFFE's direct or indirect substantial US owners.
Limit the scope of the reporting requirements that apply in 2015 and 2016 with respect to payments of foreign reportable amounts made to nonparticipating FFIs. Instead of requiring a participating FFI to report the aggregate amount of foreign reportable amounts paid to each payee that is a nonparticipating FFI, regardless of whether the payment is associated with a financial account, new regulations will require a participating FFI to report only foreign reportable amounts paid with respect to a financial account that it maintains for a nonparticipating FFI. The Notice also permits such participating FFIs to report all payments made to the account (rather than just foreign reportable amounts) if they prefer and provides some relief in reporting for participating FFIs that are prohibited under domestic law from reporting on a specific payee basis without consent.
Narrow the definition of "passive NFFE." NFFEs that act as qualified intermediaries ("QIs") or that are withholding foreign partnerships or withholding foreign trusts would be excluded from the definition of "passive NFFE.". Instead, NFFEs that act as a QI or that are withholding foreign partnerships or withholding foreign trusts and receive a withholdable payment on behalf of a passive NFFE will be required to report directly to the IRS information about the passive NFFE and its substantial US owners.
Modify the definition of "US person" to cover foreign insurance companies that are not specified insurance companies and that have elected to be taxed as though they were a US insurance company.
Reduce duplicative reporting. FFIs that are subject to both FATCA reporting and other (i.e., Form 1099) US tax reporting may satisfy their Form 1099 reporting obligations with respect to US payees if they report on such account holders pursuant to their FFI agreements or applicable Model 1 IGA. This combined reporting rule does not apply if the payment is subject to backup withholding, in which case the FFI is required to report the payment on Form 1099.
Address backup withholding. 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 FATCA. Alternatively, a participating FFI can satisfy FATCA withholding obligations with respect to recalcitrant account holders that are known US persons by complying with backup withholding rules.
Notice 2013-69 provides helpful guidance but not a lot of clarity. Some of the lack of clarity may be attributable to imprecise language in the Notice. More generally, however, much of the uncertainty is an unintended consequence of the US Treasury Department's attempts both to accommodate requests for "final" guidance and to respond to valid criticisms of those "final" rules. The result is layers of FATCA guidance that makes it difficult to find answers in a single document. For example, the text of a signed IGA does not necessarily reflect the agreement's actual terms because older IGAs have been modified by later IGAs as a result of the "most favored nation" provision in the IGA and statements in Notice 2013-43 and Notice 2013-69. Similarly, the FATCA regulations have to be read in light of notices that announce changes to their provisions. Although one appreciates that the US Treasury Department is responding to concerns and complaints and improving the final product, the result is that one often must go through multiple sets of guidance and seek to reconcile the more detailed rules of the FATCA regulations or an IGA with the more general wording of a later notice.
Notice 2013-69 also reflects the ripple effects of FATCA. The Notice states that QI agreements and agreements for withholding foreign partnerships and withholding foreign trusts are being updated to reflect the (evolving) FATCA requirements and, as applicable, the terms of FFI agreements. Once the US Treasury Department finishes providing guidance directly on FATCA, taxpayers should expect more such guidance dealing with the secondary effects of FATCA.