Irs fatca regulations


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Irs fatca regulations

  1. 1. NEW YORK WASHINGTON PARIS LONDON MILAN ROME FRANKFURT BRUSSELS in alliance with Dickson Minto W.S., London and Edinburgh CLIENT MEMORANDUM IRS RELEASES PROPOSED FATCA REGULATIONS On February 8, 2012, the Internal Revenue Service released proposed regulations to implement the Foreign Account Tax Compliance Act (“FATCA”), which targets income tax noncompliance by U.S. taxpayers holding certain financial accounts in foreign countries by imposing disclosure and withholding obligations on foreign entities. With notable exceptions, the proposed regulations generally incorporate and expand upon the guidance outlined in previous IRS Notices1 implementing FATCA (the “FATCA Notices”). Further, the proposed regulations provide the most detailed guidance to date as to how foreign entities classified as “foreign financial institutions” (“FFIs”) can qualify as “participating FFIs” and thus avoid the withholding tax regime imposed under FATCA. While the proposed regulations are voluminous, this memorandum highlights the significant issues they address. This memorandum also addresses a joint statement released on February 8, 2012 by the Treasury Department and five European nations discussing a potential framework for international cooperation in the implementation of FATCA. Highlights of the Proposed Regulations, and the FATCA Notices and Code Language The proposed regulations relax a number of important obligations placed upon FFIs by FATCA and the FATCA Notices, and expand the transition period for FATCA compliance in a number of respects. Expanded Scope of “Grandfathered Obligations” The grandfathering date for payments relating to outstanding obligations has been proposed to be extended from March 18, 2012 to January 1, 2013. The proposed regulations provide that payments made under, or any gross proceeds from the disposition of, “grandfathered obligations,” which are obligations that are outstanding on the grandfathering date, will generally not be subject to FATCA. Transitional Rule for “Expanded Affiliated Groups” The proposed regulations provide a two-year transition period, effective until January 1, 2016, for the full implementation of the rules outlined in the FATCA Notices, which require that each FFI that is a member of an “expanded affiliated group” satisfy either the FATCA disclosure requirements for “participating FFIs” or the disclosure requirements for “deemed-compliant FFIs” in order for any FFI in that group to qualify as a “participating FFI.” During the transitional period, an affiliate member of a group of FFIs that is resident in a jurisdiction prohibiting reporting or withholding as required by FATCA will not prevent the other FFIs 1 IRS Notices 2010-60, 2011-34, and 2011-53.
  2. 2. - 2 - within the same group from qualifying as participating FFIs, as long as the FFI legally prevented from complying with FATCA satisfies a number of requirements, including (1) agreeing to perform due diligence to identify its U.S. accounts, (2) retaining account holder documentation pertaining to its identification of U.S. accounts for six years, and (3) reporting with respect to its U.S. accounts to the extent permitted under the laws of the FFI’s jurisdiction of residence. Expanded List of Deemed-Compliant FFIs The proposed regulations would expand the category of deemed-compliant FFIs not subject to the general FATCA requirements. Under the proposed regulations, “qualified collective investment vehicles,” or FFIs regulated as investment funds under the laws of their countries of organization, would be classified as deemed-compliant FFIs as long as each distributor of the relevant investment fund’s interests is: (1) a participating FFI, (2) a deemed-compliant FFI registered with the IRS, (3) a local bank, or (4) a “restricted distributor” defined to be generally a local investment advisor with at least 30 clients but less than $175 million in assets under management, along with other requirements. Deemed-compliant FFIs will also include certain banks and other entities conducting business only with local clients. Due Diligence Requirements for Reviewing Client Accounts The due diligence requirements for participating FFIs were relaxed from the protocols outlined in the FATCA Notices and now generally allow electronic review of U.S. accounts in existence when FATCA is effective. The proposed regulations also state that a participating FFI will not be held strictly liable for the failure to identify a U.S. account as long as the participating FFI fulfills the verification procedures set forth in its FFI agreement with the IRS. Refinement of Definition of “Financial Account” The primary purpose of FATCA is to cause disclosure of “U.S. accounts” of FFIs. The definition of a “U.S. account” under FATCA is limited to those accounts meeting the definitional requirements of a “financial account.” The proposed regulations refine the definition of “financial account” to generally focus on traditional bank, brokerage, and money market accounts, and interests in investment vehicles. The definition in the proposed regulations excludes most debt and equity securities issued by banks, insurance companies, and brokerage firms, subject to an anti-abuse rule. The proposed regulations also clarify that insurance contracts that provide “pure insurance protection,” such as term life, disability, health, and property and casualty insurance contracts, will not be classified as “financial accounts” for purposes of FATCA. However, insurance contracts with an investment component (such as cash value insurance contracts and annuity contracts) will be “financial accounts” for purposes of FATCA. Delay of Withholding Requirements for Passthru Payments from Participating FFIs to Nonparticipating FFIs and Recalcitrant Account Holders The proposed regulations do not include a definition for “foreign passthru payments” and would delay withholding requirements with respect to such payments until January 1, 2017. The FATCA Notices outlined the “foreign passthru payment” as a passthru payment other than a
  3. 3. - 3 - withholdable payment upon which withholding would be required to the extent of the percentage of the FFI’s U.S. assets, and delayed withholding on such payments until January 1, 2015. The preamble to the proposed regulations indicates that the IRS is still considering ways to ease compliance with passthru payment withholding, implement certain withholding procedures for FFIs that are flow-through entities, and prevent the use of FFIs as “blockers” to avoid withholding by U.S. withholding agents. Insurance Companies as Financial Institutions Subject to FATCA The proposed regulations state that insurance companies that issue, or are obligated to make payments with respect to, cash value insurance policies or annuity contracts are “financial institutions” subject to FATCA. The proposed regulations further define an “insurance company” as a company more than half of the business of which during the calendar year consists of issuing, or being obligated to make payments with respect to, insurance or annuity contracts or the reinsuring of such contracts. Significant Obligations of FFIs The proposed regulations significantly clarify the requirements FFIs must satisfy in order to be classified as “participating FFIs.” The proposed regulations outline the withholding, due diligence, reporting, verification, and other requirements that must be included in the agreement between an FFI and the IRS (the “FFI agreement”) in order for the FFI to qualify as a “participating FFI.” The FFI agreement will require a participating FFI to adopt written policies and procedures to comply with its responsibilities under the FFI agreement, conduct periodic internal reviews of its compliance, and periodically provide certification and certain other information to the IRS. The FFI agreement will also contain procedures for circumstances in which a participating FFI fails to fulfill its requirements under the FFI agreement. The preamble to the proposed regulations states that the IRS intends to publish a draft model FFI agreement in early 2012, and a final model FFI agreement in the fall of 2012. The proposed regulations provide detailed requirements for a participating FFI to satisfactorily complete due diligence in order to identify its U.S. account holders. The diligence standards establish different levels of required diligence based upon (1) whether an account is held by an individual or an entity, (2) whether the account is a new or a preexisting account at the time the FFI enters into a verification agreement with the IRS, and (3) the monetary value of the account. The diligence requirements are as follows: A. Preexisting Individual Accounts • Accounts of $50,000 or less are exempt from any diligence requirement. • Certain cash value insurance and annuity contracts of $250,000 or less are also exempt from review. • General accounts exceeding $50,000 but not exceeding $1,000,000 are subject only to review of electronically searchable data for indicia of U.S. status (“U.S. indicia”), such as U.S. contact information or a notice to wire funds to a bank
  4. 4. - 4 - account in the United States. No further review is necessary if no U.S. indicia are uncovered in the electronic search. • Accounts exceeding $1,000,000 are subject to a review of both electronic and nonelectronic files for U.S. indicia, and there must be an inquiry into the actual knowledge of any of the FFI’s employees or officers who assist the account holder under examination. However, non-electronic documents are required to be searched only in cases where the status of the account holder is ambiguous. B. New Individual Accounts • Generally, the information provided at the opening of the account, including identification and any documentation collected under the “Anti-Money Laundering” or “Know Your Customer” rules (the “AML/KYC rules”) must be reviewed for any U.S. indicia. If U.S. indicia are found, the FFI must request either a Form W-9 or a Form W-8BEN with a non-U.S. passport or other government-issued ID evidencing citizenship in a country other than the United States. • The IRS preamble to the proposed regulations highlights that these requirements generally will not necessitate significant changes to information collection during the opening of an account, except to the extent that U.S. indicia are identified. C. Preexisting Entity Accounts • Accounts with $250,000 or less are exempt from review. • Otherwise, participating FFIs may rely upon the records collected for purposes of the AML/KYC rules. For accounts exceeding $1,000,000, however, the FFI must collect certification from the entity that it does not have substantial U.S. owners, or in lieu of such certification, obtain information regarding all substantial U.S. owners. D. New Entity Accounts • The proposed regulations exempt from review the substantial U.S. owners of (1) accounts of other FFIs unless an agreement requires the FFI to do reporting on behalf of that FFI, and (2) accounts of entities engaged in an active nonfinancial trade or business. • The proposed regulations will require the determination of the substantial U.S. owners of any other entities, but it is generally expected that such a determination will be made by obtaining a certification from the entity regarding its ownership makeup. Reporting Obligations of Participating FFIs The proposed regulations require a participating FFI to satisfy yearly reporting obligations regarding each U.S. account holder and any account holder that refuses to provide the
  5. 5. - 5 - information necessary to determine whether its account is a U.S. account (“recalcitrant account holder”). The proposed regulations contain rules allowing for the coordination and simplification of reporting by participating FFIs that are already subject to U.S. tax reporting requirements under other U.S. tax requirements. With regard to U.S. account holders and foreign nonfinancial entities having one or more ten- percent U.S. owners, the proposed regulations would require a participating FFI to provide information identifying the U.S. account holder, the value of its account, and the amount of any payments made with respect to the account. Reports regarding the value of these accounts and any payments made to holders of these accounts may use the currency in which the accounts are maintained. With regard to recalcitrant account holders, the proposed regulations would require a participating FFI to report the following each year: (1) the number and value of accounts, in aggregate, held by recalcitrant account holders that have U.S. indicia; (2) the number and value of accounts, in aggregate, held by recalcitrant account holders that do not have U.S. indicia; and (3) the number and value of dormant or inactive accounts, in aggregate, held by recalcitrant account holders. Further, the IRS has expressed its intention to extend to communications with participating FFIs the “B” notice process currently used for notification of a name/TIN mismatch on a Form 1099. The preamble to the proposed regulations states that the IRS may require participating FFIs to use the IRS online TIN matching program to uncover name/TIN discrepancies before reporting to the IRS, but promises not to implement such a requirement until January 1, 2015 or later. Phase-in of Reporting Obligations The proposed regulations will require reporting with respect to U.S. accounts and recalcitrant account holders with respect to calendar year 2013 and beyond. The reporting obligations of participating FFIs are proposed to be implemented incrementally, using the following timeline: • For reporting with respect to calendar years 2013 and 2014, participating FFIs must report only the name, address, TIN, account number, and account balance with respect to each U.S. account. • For reporting with respect to calendar year 2016 and beyond, income associated with each U.S. account also must be reported. • For reporting with respect to calendar year 2017 and beyond, full reporting under FATCA (including information on the gross proceeds from broker transactions) will be required. Phase-in of Withholding Obligations The proposed regulations generally require participating FFIs to begin FATCA withholding on January 1, 2014 with respect to U.S.-sourced payments such as dividends and interest and on January 1, 2015 with respect to payments of proceeds from the sale of U.S. securities.
  6. 6. - 6 - Anticipated Effective Date of Proposed Regulations Written or electronic comments regarding the proposed regulations must be provided to the IRS by April 30, 2012. The IRS will hold a public hearing regarding the proposed regulations on May 15, 2012, and anybody wishing to speak at the hearing must submit a request by May 1, 2012 (as long as that person also provided written or electronic comments by the April 30th deadline). The preamble to the proposed regulations states that the proposed regulations are intended to apply on the date that they are adopted as final regulations. Joint Statement Regarding International Cooperation in Implementing FATCA Also on February 8, 2012, the Treasury Department issued a joint statement with the governments of France, Germany, Italy, Spain, and the United Kingdom expressing an agreement between the United States and these governments to “explore a common approach to FATCA implementation through domestic reporting and reciprocal automatic exchange and based on existing bilateral tax treaties.” The joint statement described a possible framework for the arrangement between the United States and each of the other countries (each a “FATCA partner”) in which the FATCA partner would collect the information from the FFIs in its jurisdiction and provide such information to the United States. In exchange the United States would not require FFIs in such jurisdictions to enter into agreements with the IRS, would eliminate the withholding requirement on payments to FFIs in FATCA partner jurisdictions, and would provide information to the FATCA partner about the U.S. accounts held by residents of the FATCA partner. * * * * * * * * * * * * * * * If you have any questions regarding this memorandum, please contact Joseph A. Riley (212-728- 8715, or the Willkie attorney with whom you regularly work. Willkie Farr & Gallagher LLP is headquartered at 787 Seventh Avenue, New York, NY 10019- 6099. Our telephone number is (212) 728-8000 and our facsimile number is (212) 728-8111. Our website is located at February 15, 2012 IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Copyright © 2012 by Willkie Farr & Gallagher LLP. All Rights Reserved. This memorandum may not be reproduced or disseminated in any form without the express permission of Willkie Farr & Gallagher LLP. This memorandum is provided for news and information purposes only and does not constitute legal advice or an invitation to an attorney-client relationship. While every effort has been made to ensure the accuracy of the information contained herein, Willkie Farr & Gallagher LLP does not guarantee such accuracy and cannot be held liable for any errors in or any reliance upon this information. Under New York’s Code of Professional Responsibility, this material may constitute attorney advertising. Prior results do not guarantee a similar outcome.