Worldwide: FATCA Update: Treasury Department Extends Due Diligence Deadlines And Announces It Is Engaging With More Than 50 Countries To Crack Down On Offshore Tax Evasion

Business Tax / White Collar

In Announcement 2012-42, the U.S. Treasury Department announced that due diligence deadlines under the Foreign Account Tax Compliance Act (FATCA) are being extended in light of voluminous comments received in response to proposed regulations issued in February 2012. This announcement provides much-needed relief for foreign financial institutions as well as withholding agents that will be impacted by the due diligence requirements of FATCA. In related news, the Treasury Department announced that it is actively engaging with more than 50 countries and jurisdictions around the world to improve international tax compliance and to implement the requirements of FATCA and, to that end, released a second model intergovernment agreement for public consideration.

Revised Due Diligence Deadlines

FATCA was originally enacted by Congress in March 2010 as part of the Hiring Incentives to Restore Employment Act of 2010. Under FATCA, foreign financial institutions will be required to enter into information sharing agreements with the United States or face a stringent withholding regime on certain payments. On February 15, 2012, the Treasury Department published proposed FATCA regulations.¹ In response, Treasury received numerous comments concerning the proposed timeline for implementation of FATCA. In response to such comments, Treasury recently published Announcement 2012-42 which states that the final regulations will include a revised timeline for FATCA implementation.

Set forth below are the revised FATCA deadlines as modified by Announcement 2012-42:

January 1, 2013

• Treasury will begin accepting applications for FFI Agreements.

January 1, 2014

• The effective date for all FFI Agreements entered into prior to January 1, 2014.
• All withholding agents, participating FFIs, and registered-deemed compliant FFIs must have fully implemented new account opening procedures to identify and document the status of new accounts.
• Accounts, instruments, or contracts maintained or executed prior to January 1, 2014, will be considered "pre-existing obligations," subject to certain exceptions for participating FFIs and registered deemed-compliant FFIs.

June 30, 2014

• Participating FFIs that have entered into an FFI Agreement on or before December 31, 2013, are required to perform the requisite identification procedures and obtain appropriate documentation to determine the status of a prima facie FFI payee.
• With respect to preexisting obligations, withholding agents, other than participating FFIs, will be required to document payees that are prima facie FFIs.

July 1, 2014

• Withholding agents, other than participating FFIs, will be required to treat a payee that is a prima facie FFI as a nonparticipating FFI until the withholding agent obtains documentation sufficient to establish a different status of the payee.

December 31, 2014

• A participating FFI must perform the requisite identification procedures and obtain the appropriate documentation to identify preexisting individual accounts that are high-value accounts.

January 1, 2015

• A participating FFI must treat any preexisting account that is a high-value account as held by a recalcitrant account holder unless the participating FFI has performed the requisite identification procedures and obtained the appropriate documentation with respect to such holder.

March 31, 2015

• Participating FFI's are required to file their first information report with respect to U.S. accounts for the 2013 and 2014 calendar years.

December 31, 2015

• A participating FFI will be required to perform the requisite identification procedures and obtain the appropriate documentation to determine whether an entity, other than a prima facie FFI, is itself a participating FFI. A participating FFI will not be required to apply the presumption rules to the accounts of an entity, other than a prima facie FFI, until December 31, 2015.
• A participating FFI must perform the requisite identification procedures and obtain the appropriate documentation to identify preexisting individual accounts, other than high-value accounts.
• Withholding agents, other than participating FFIs, will be required to document payees that are entities other than prima facie FFIs.

January 1, 2016

• A participating FFI must treat any preexisting individual account, other than a high-value account, as held by a recalcitrant account holder unless the participating FFI has performed the requisite identification procedures and obtained the appropriate documentation.
• With respect to preexisting obligations, a withholding agent, other than a participating FFI, will be required to treat any undocumented payee that is treated as a foreign entity but that is not a prima facie FFI as a nonparticipating FFI until the date the withholding agent obtains documentation sufficient to establish a different status of the payee.

January 1, 2017

• Withholdable payments will include gross proceeds from any sale or other disposition of any property of a type that can produce interest or dividends that are U.S. source FDAP income.

Announcement 2012-42 further provides that the final regulations will amend the definition of the term "grandfathered obligation." In general, a payment that is defined as a grandfathered obligation is not considered a withholdable payment or a passthru payment. As originally proposed, for an instrument or obligation to be considered a grandfathered obligation, it must have been outstanding prior to January 1, 2013. The final regulations will amend the definition of the term "grandfathered obligation" to include the following:

• Any obligation that produces or could produce a foreign passthru payment and that cannot produce a withholdable payment, provided that the obligation is outstanding as of the date that is six months after the date on which the final regulations defining the term "foreign passthru payment" are filed with the Federal Register;
• Any instrument that gives rise to a withholdable payment solely because the instrument is treated as giving rise to a dividend equivalent pursuant to section 871(m) (treating certain payments on notional principal contracts and certain other financial instruments as U.S. source dividends) provided that the instrument is outstanding on the date that is six months after the date on which instruments of its type first become subject to such treatment, and
• Any obligation to make a payment with respect to, or to repay, collateral posted to secure obligations under a notional principal contract that is a grandfathered obligation.

Treasury's Continuing Efforts to Conclude Bilateral Agreements

In the meantime, the U.S. is continuing its efforts to negotiate bilateral FATCA agreements with countries around the world. In September, the U.S. and the United Kingdom announced that they had signed the first intergovernmental agreement implementing FATCA. On November 8, Treasury announced that it is engaging with more than 50 countries and jurisdictions in order to implement FATCA and improve international tax compliance. Treasury previously released model reciprocal and nonreciprocal intergovernmental agreements pursuant to which foreign financial institutions would report account information to their national governments for delivery to the U.S. On November 14, Treasury published a second model agreement pursuant to which foreign financial institutions would report information directly to Treasury.

In its November 8 press release, Treasury stated that it is currently negotiating intergovernmental agreements with France, Germany, Italy, Spain, Japan, Switzerland, Canada, Denmark, Finland, Guernsey, Ireland, the Isle of Man, Jersey, Mexico, the Netherlands, and Norway. Treasury anticipates concluding

The U.S. is also engaged in a dialogue aimed at concluding intergovernmental agreements with the following countries: Argentina, Australia, Belgium, the Cayman Islands, Cyprus, Estonia, Hungary, Israel, Korea, Liechtenstein, Malaysia, Malta, New Zealand, the Slovak Republic, Singapore, and Sweden. Finally, Treasury announced that it is exploring options for intergovernmental engagement with Bermuda, Brazil, the British Virgin Islands, Chile, the Czech Republic, Gibraltar, India, Lebanon, Luxembourg, Romania, Russia, Seychelles, Saint Maarten, Slovenia, and South Africa.

Footnote

1. The Proposed Regulations can be accessed here.

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