The Internal Revenue Service has delayed the timelines for withholding agents and foreign banks to complete the due diligence requirements of the Foreign Account Tax Compliance Act.
FATCA, which was included as part of the HIRE Act of 2010, requires foreign financial institutions, including hedge funds, to report on the holdings of U.S. taxpayers to the IRS or face stiff penalties. The law has attracted considerable controversy and criticism from foreign banks, dual citizens living abroad and expatriates. The IRS and the Treasury Department have needed to postpone some of the requirements and modify its proposed regulations in the past (see FATCA Requirements a Work in Progress for IRS).
The IRS said Wednesday that institutions will have until Jan. 1, 2017 to start withholding taxes from U.S. taxpayers’ investment gains and until Jan. 1, 2014, to put in place the reporting requirements mandated by FATCA.
Announcement 2012-42 outlines certain timelines for withholding agents and foreign financial institutions to complete due diligence and other requirements, along with additional guidance concerning gross proceeds withholding and the status of certain instruments as grandfathered obligations under Sections 1471 through 1474 of the Tax Code. The Treasury Department and the IRS intend to incorporate the rules described in this announcement in final regulations.
On March 18, 2010, the Hiring Incentives to Restore Employment Act of 2010, or HIRE Act, added sections 1471 through 1474 (chapter 4) to Subtitle A of the Tax Code. These provisions are commonly referred to as the Foreign Account Tax Compliance Act, or FATCA. Chapter 4 requires withholding agents to withhold 30 percent of certain payments to an FFI unless the FFI has entered into an agreement with the IRS to, among other things, report certain information with respect to U.S. accounts. Chapter 4 also imposes on withholding agents certain withholding, documentation, and reporting requirements with respect to certain payments made to certain other foreign entities.
In February, the Treasury Department and the IRS published proposed regulations under chapter 4 in the Federal Register. In May, the IRS held a public hearing on the proposed regulations. On July 26, 2012, the Treasury Department released a model for bilateral agreements with other jurisdictions (in both reciprocal and nonreciprocal versions) under which FFIs would satisfy their chapter 4 requirements by reporting information about U.S. accounts to their respective tax authorities, followed by the automatic exchange of that information on a government-to-government basis with the United States. The model agreement outlines time frames for FFIs in partner jurisdictions to complete the necessary due diligence to identify U.S. accounts. On June 21, 2012, the Treasury Department announced its intent to develop a second model agreement, under which financial institutions in the partner jurisdiction would report specified information directly to the IRS in a manner consistent with the FATCA regulations, supplemented by government-to-government exchange of information on request. The Treasury Department intends to conclude bilateral agreements based on the model agreements.
The Treasury Department and the IRS have received comments identifying certain practical issues in implementing the chapter 4 rules within the time frames prescribed in the proposed regulations. In particular, comments have noted that the chapter 4 status of entity account holders may change during 2013 as FFIs enter into FFI agreements with the IRS, with the result that withholding agents that put in place new account opening procedures by Jan. 1, 2013, could be required to undertake duplicative efforts to verify an FFI’s status as a participating, deemed-compliant, or nonparticipating FFI. Furthermore, comments have indicated that global financial institutions intend to implement uniform due diligence procedures for all affiliates. Accordingly, these comments have suggested aligning the timelines for due diligence for U.S. withholding agents, FFIs in countries with Intergovernmental Agreements, and FFIs in countries without Intergovernmental Agreements in order to significantly reduce administrative burden.
In addition, the Treasury Department and the IRS said they have received comments requesting that obligations that may give rise to foreign pass-through payments, but not to withholdable payments, be treated as grandfathered obligations if such obligations are executed prior to the issuance of final regulations that define foreign pass-through payments. Comments also have requested that an obligation to make payments with respect to collateral posted in connection with a grandfathered derivative transaction be treated as a grandfathered obligation.
Finally, comments have expressed concern over the treatment of existing financial transactions that may begin to give rise to withholdable payments for purposes of chapter 4 due to the promulgation of regulations under Section 871(m) treating certain payments on notional principal contracts and certain other financial instruments as U.S. source dividends.
In consideration of these comments, the Treasury Department and the IRS said they intend to issue regulations that modify the rules set forth in the proposed regulations. Withholding agents, including participating FFIs and registered-deemed compliant FFIs, generally will be required to implement new account opening procedures by Jan. 1, 2014.