First Friday FATCA Update

Since our previous monthly FATCA update, we have addressed the following recent FATCA developments:

  • The Sixth Circuit issued an opinion on August 18, 2017 upholding the dismissal of a challenge to FATCA brought by Senator Rand Paul and several current and former U.S. citizens living abroad who hold foreign accounts (see prior coverage).
  • The IRS posted draft instructions to the Form 8966 (FATCA Report) dated August 9, 2017, with some changes pertaining to participating foreign financial institutions (PFFIs) and other changes reflecting the final and temporary Chapter 4 regulations released in January of this year (see prior coverage).

Additionally, an official with the IRS Office of Chief Counsel recently stated that the IRS will delay the date on which U.S. financial institutions must start treating an otherwise valid Form W‑8 as invalid merely because it does not include a foreign taxpayer identification number (FTIN) or a reasonable explanation for its absence, to avoid Chapter 3 withholding.  Specifically, a valid Form W-8 obtained before January 1, 2018, will not be treated as invalid on that date if the form simply lacks the FTIN or a reasonable explanation for its absence (e.g., the account holder’s country of residence does not provide TINs).  It is unclear what form the relief will take, but it is possible the IRS will continue to allow a U.S. financial institution to treat a Form W-8 as valid if the financial institution does not have actual knowledge that the beneficial owner has an FTIN for some period of time.

This informal relief from the new FTIN requirement (issued in final and temporary regulations in late 2016) is welcomed by banks and withholding agents that report income for foreign account holders.  The relief is still reflected in FAQs on the IRS website (see prior coverage).  But since Form W-8s expire on three-year cycles, banks and agents still have to update their withholding policies and annual re-solicitation processes to comply with the new FTIN requirements.  Additionally, banks and agents are still waiting for further guidance on how they can update Form W‑8s issued before 2018 with the newly‑required FTIN or reasonable explanation.  An IRS FAQ posted in April 2017 specifies that the information can be provided in a written statement, including an email, but it is unclear what other requirements might apply to such a statement.

Since our previous monthly FATCA update, the IRS has also released the Competent Authority Agreements (CAAs) implementing intergovernmental agreements (IGAs) between the United States and the following treaty partners:

  • Anguilla (Model 1B IGA signed on January 15, 2017);
  • Italy (Model 1A IGA signed on January 10, 2014).

Under FATCA, IGAs come in two forms: Model 1 or Model 2.  Under a Model 1 IGA, the foreign treaty partner agrees to collect information of U.S. accountholders in foreign financial institutions operating within its jurisdiction and transmit the information to the IRS.  Model 1 IGAs are drafted as either reciprocal (Model 1A) agreements or nonreciprocal (Model 1B) agreements.  By contrast, Model 2 IGAs are issued in only a nonreciprocal format and require FFIs to report information directly to the IRS.

A CAA is a bilateral agreement between the United States and the treaty partner to clarify or interpret treaty provisions.  A CAA implementing an IGA typically establishes and prescribes the rules and procedures necessary to implement certain provisions in the IGA and the Tax Information Exchange Agreement, if applicable.  Specific topics include registration of the treaty partner’s financial institutions, time and manner of exchange of information, remediation and enforcement, confidentiality and data safeguards, and cost allocation.  Generally, a CAA becomes operative on the later of (1) the date the IGA enters into force, or (2) the date the CAA is signed by the competent authorities of the United States and the treaty partner.

The Treasury Department website publishes IGAs, and the IRS publishes their implementing CAAs.

Sixth Circuit Upholds Dismissal of Sen. Rand Paul’s Challenge to FATCA

On August 18, the Sixth Circuit issued an opinion upholding the dismissal of a challenge to the Foreign Account Tax Compliance Act (FATCA) brought by Senator Rand Paul and several current and former U.S. citizens living abroad who hold foreign accounts.  In the case, Crawford v. United States Department of the Treasury, Senator Paul and his co-plaintiffs argued that FATCA’s withholding and reporting requirements imposed on individuals and foreign financial institutions (FFIs), certain intergovernmental agreements (IGAs) negotiated by the Treasury, and the requirement to file a foreign bank account report (FBAR) by U.S. persons with financial accounts that exceed $10,000 in a foreign country were unconstitutional.

In 2016, the district court dismissed the case on standing grounds (earlier coverage here).  The court evaluated the requirements necessary for Article III standing and concluded that no named plaintiff alleged actual or imminent injury from the FATCA withholding tax, and none of the named plaintiffs were FFIs subject to the requirements imposed on such entities.  Instead of asserting concrete particularized injuries, such as penalties brought for failure to comply with FATCA or FBAR requirements, the plaintiffs argued general “discomfort” with the disclosure requirements, which the court deemed too abstract and thus insufficient to confer Article III standing.

The Sixth Circuit panel upheld the dismissal on standing grounds, explaining that the injuries suffered by the account holders resulted from the independent and voluntary actions of foreign financial institutions, not the Treasury.  The court explained that no plaintiff has alleged “any actual enforcement of FATCA” or FBAR, such as a demand for individual reporting or the imposition of a penalty for noncompliance, and no plaintiff holds sufficient foreign assets to bring a pre-enforcement challenge to FATCA or has alleged an intent to violate FBAR, a prerequisite for standing to bring a pre-enforcement FBAR challenge.  The court also rejected Senator Paul’s IGA-specific claim that  he was stripped of his constitutional right to vote against the IGAs, explaining that Senator Paul can still seek repeal of or amendment to FATCA itself.  The court denied the plaintiffs leave to amend their complaint, reasoning that amendment would be futile because the facts simply do not provide them standing to bring the alleged claims.

Draft Instructions for Form 8966 (FATCA Report)

The IRS recently posted draft instructions to the Form 8966 (FATCA Report) dated August 9, 2017, with some changes pertaining to participating foreign financial institutions (PFFIs) and others reflecting the final and temporary Chapter 4 regulations released in January of this year.  The Form 8966 reports information with respect to certain U.S. accounts, substantial U.S. owners of passive non-financial foreign entities (NFFEs), specified U.S. persons that own certain debt or equity interests in owner-documented FFIs, and certain other accounts as applicable based on the filer’s status under Chapter 4 of the Internal Revenue Code.  A Model 1 FFI files the Form 8966 (or its equivalent) with its host country’s tax authority which, pursuant to the Model 1 IGA, shares the information with the IRS.  A Model 2 FFI directly files a Form 8966 with the IRS pursuant to its FFI agreement (see prior coverage regarding deadline for renewal of FFI agreement).

The changes reflected in the draft instructions are summarized below.  The draft instructions are before the official release.

  • Reporting on accounts held by nonparticipating FFIs. For 2017, a PFFI (including a Reporting Model 2 FFI) does not need to report on accounts held by nonparticipating FFIs in Parts II and V of the Form 8966.  Specifically, PFFIs should not check the box for “nonparticipating FFI” on line 5 of Part II, should not check the pooled reporting type “nonparticipating FFI” on line 1 of Part V, and should not complete line 3 of Part V.  This reporting obligation only applied for 2015 and 2016.
  • Limited FFIs and limited branches. The statuses for limited FFIs and limited branches expired on December 31, 2016.  Accordingly, the references to limited FFI and limited branch statuses are removed for the 2017 Form 8966.
  • Reporting Model 2 FFI related entities or branches. The instructions for limited FFIs and limited branches are revised to apply to Reporting Model 2 FFIs with related entities and branches that are required by the applicable Model 2 IGA to report U.S. accounts to the IRS to the extent permitted.  Thus, a related entity or branch of a Reporting Model 2 FFI filing Form 8966 should select the filer category code for limited branch or limited FFI (code 03) on line 1b of Part I.
  • Reporting Model 2 FFIs reporting on non-consenting U.S. accounts. For a preexisting account that is a non-consenting U.S. account, the Reporting Model 2 FFI should use the pooled reporting category for either recalcitrant account holders that are U.S. persons or recalcitrant account holders that have U.S. indicia.  For a new individual account that has a change in circumstances that causes the Reporting Model 2 FFI to know or have reason to know that the original self-certification is incorrect or unreliable, and the Reporting Model 2 FFI is unable to obtain a valid self-certification establishing whether the account holder is a U.S. citizen or resident, the Reporting Model 2 FFI should use the pooled reporting category for recalcitrant account holders with U.S. indicia.
  • U.S. branches. The draft instructions under Special Rules for Certain Form 8966 Filers reflect the updated reporting requirements for U.S. branches in the final Chapter 4 regulations published in January 2017.  On line 1b of Part I, all U.S. branches of a FFI not treated as U.S. persons should select the filer category code for PFFIs (code 01), and U.S. branches that are treated as U.S. persons should select the code for withholding agents (code 10).
  • PFFIs (including Reporting Model 2 FFIs) that are partnerships. The draft instructions for line 4d of Part IV for PFFIs (including Reporting Model 2 FFIs) are updated to conform to temporary Chapter 4 regulations published in January 2017 with respect to the amounts required to be reported by a partnership-PFFI reporting a partner’s interest in the partnership.
  • Mergers and bulk acquisitions of accounts.  New instructions under Special Rules for Certain Form 8966 Filers are added for combined reporting after a merger or bulk acquisition of accounts.

IRS Extends Deadline for FFI Agreement Renewal

Following the July 31, 2017, deadline for renewing an FFI agreement (prior coverage), the IRS announced in a new FAQ that a participating FFI (including a reporting model 2 FFI) that renews its FFI agreement by October 24, 2017, will continue to be treated as a participating FFI.  Rev. Proc. 2017-16, which includes the current FFI agreement, provides that a participating FFI that fails to renew its FFI agreement by July 31, 2017, will be treated as having terminated its FFI agreement as of January 1, 2017, and will be treated as a nonparticipating FFI and removed from the IRS FFI list.  Registration FAQ #10, added only a few weeks ago, reiterated that result (prior coverage).

On August 1, the IRS added Registration FAQ #12 providing that a participating FFI that has otherwise complied with the terms of its FFI agreement (including the current FFI agreement since January 1, 2017), will not be removed from the IRS FFI list provided that it renews its FFI agreement by October 24, 2017.  Participating FFIs that fail to renew their FFI agreements by October 24, 2017, will be removed from the IRS FFI list in November.  The reprieve will be welcome news for participating FFIs that were unable to renew their FFI agreement before the July 31 deadline.  Those participating FFIs that still need to renew their FFI agreements should ensure they are complying with the new FFI agreement (prior coverage) and take steps to renew their agreements sooner rather than later to avoid inadvertently missing the extended deadline.

Updated FAQs on FFI Agreement Renewal

Recently, the IRS updated its FATCA frequently asked questions to include four new FAQs addressing the renewal of foreign financial institution (FFI) agreements.  The new FAQs address the requirement that financial institutions (FIs) must renew their FFI agreements by July 31, 2017, pursuant to Revenue Procedure 2017-16, to be treated as having in effect an FFI agreement as of January 1, 2017.

FAQ#8 clarifies that, generally, FATCA requires the following types of FIs to renew their FFI agreements: participating FFIs not covered by an intergovernmental agreement (IGA); reporting Model 2 FFIs; reporting Model 1 FFIs operating branches outside of Model 1 jurisdictions (other than branches treated as nonparticipating FFIs under Article 4(5) of the Model 1 IGA).  By contrast, renewal is not required for the following types of entities: reporting Model 1 FFIs that are not operating branches outside of Model 1 jurisdictions; registered deemed-compliant FFIs (regardless of location); sponsoring entities; direct reporting non-financial foreign entities (NFFEs); and trustees of trustee-documented trust.

FAQ#9 provides that entities that do not need to renew their FFI agreements do not need to take any action—and do not even need to select “No” on the “Renew FFI Agreement” link—to remain on the FFI list and retain their Global Intermediary Identification Number (GIIN).

FAQ#10 clarifies that an entity that, before January 1, 2017, entered into the FFI agreement under Rev. Proc. 2014-38 (which terminated on December 31, 2016), and that failed to renew its FFI agreement by July 31, 2017, will be considered a nonparticipating FFI as of January 1, 2017, and will be removed from the FFI List.

If an entity that is required to renew its FFI agreement incorrectly selected “No” when asked if renewal is required, FAQ#11 provides that the entity can simply return to the FATCA FFI Registration system home page, click on the “Renew FFI Agreement” link, and select “Yes” to complete the renewal application before the deadline on July 31, 2017.

IRS FATCA Portal Now Accepting FFI Agreement Renewals

Today, the IRS announced that it has updated the FATCA registration system to allow foreign financial institutions (FFIs) to renew their FFI agreements.  A new link, “Renew FFI Agreement” appears on the registration portal’s home page allowing a financial institution (FI) to determine whether it must renew its FFI agreement (see prior coverage).  The FI can review and edit its registration form and information, and renew its FFI agreement.

All FIs whose prior FFI agreement expired on December 31, 2016, and that wish to retain their Global Intermediary Identification Number (GIIN) must do so by July 31, 2017, to be treated as having in effect an FFI agreement as of January 1, 2017.  FFIs that are required to update their FFI agreement and that do not do so by July 31, 2017, will be treated as having terminated their FFI agreement as of January 1, 2017, and may be removed from the IRS’s FFI list, potentially subjecting them to withholding under FATCA.

IRS Releases Final Qualified Intermediary and Foreign Financial Institution Agreements

With the end of the year upon them, the IRS has kicked into high gear with a flurry of new administrative guidance. On the heels of yesterday’s release of final reporting rules on slot machine, bingo, and keno winnings, proposed rules on horse track, dog track, and jai lai winnings, and a revenue procedure on Certified Professional Employer Organizations, the IRS released final agreements for foreign financial institutions (FFIs) and qualified intermediaries (QIs) to enter with the IRS, set forth in Revenue Procedure 2017-16 and Revenue Procedure 2017-15, respectively.

FFI Agreement

FFIs enter into an FFI agreement with the IRS to become participating FFIs for purposes of Foreign Account Tax Compliance Act (FATCA) withholding and reporting obligations. The final FFI agreement set forth in Revenue Procedure 2017-16, which was previously published in Revenue Procedure 2014-38, applies to FFIs seeking to become participating FFIs under FATCA, as well as FFIs and branches of FFIs treated as reporting financial institutions under a Model 2 intergovernmental agreement (IGA).  The update was necessary because Revenue Procedure 2014-38 was set to expire on December 31, 2016.  Accordingly, the FFI agreement contained in Revenue Procedure 2017-16 applies to FFIs with an FFI agreement effective beginning January 1, 2017.

Changes were made to the FFI agreement generally to align with subsequent changes to IRS regulations, such as the withholding and reporting rules applicable to U.S. branches that are not U.S. persons. Additionally, several changes reflect the expiration of certain transitional rules provided in the 2014 FATCA regulations including those related to limited branches and limited FFIs.  (For additional information on the expiration of the transition relief for limited branches and limited FFIs, please see our prior post).  The FFI agreement also clarifies the presumption rules applicable to Model 2 FFIs, and the ability of Model 2 FFIs to rely on certain documentation for purposes of the due diligence requirements.

The FFI agreement also contains new certification requirements applicable to FFIs attempting to terminate an FFI agreement and clarifies that the obligations imposed with respect to the period the agreement was in force survive the termination of the agreement.

QI Agreement

A QI serves as an intermediary for payments of U.S. source income made to non-U.S. persons, and it must collect a taxpayer identification number from the payee, or else it must withhold 30% on the payment. When an intermediary acts as a QI, it may agree to assume the primary withholding and reporting obligations with respect to payments made through it for purposes of Chapter 3, Chapter 4, and/or Chapter 61 and backup withholding under Section 3406 of the Code.  When a QI assumes such responsibility, it is not required to provide a withholding statement to the withholding agent/payor making payment to it.  FFIs, foreign clearing organizations, and foreign branches of U.S. financial institutions and clearing organizations are eligible to enter into QI agreements by completing Form 8957 through the IRS website, as well as Form 14345.

Notice 2016-42 set forth a proposed QI agreement (prior coverage), which made revisions to the previous final QI agreement published in Revenue Procedure 2014-39.  The proposed QI agreement created a new regime that allowed certain entities to act as qualified derivatives dealers and act as the primary withholding agent on all dividend equivalent payments they make.  Several changes in the final QI agreement were made in response to comments on the rules applicable to qualified derivatives dealers (QDDs), including provisions that reflect changes to the treatment of dividend equivalents from U.S. sources and provisions clarifying that entities acting as QIs and QDDs must file separate Forms 1042-S when acting in each distinct capacity.  Some of the changes in the final QI agreement were previously announced in Notice 2016-76 (prior coverage).  However, the final QI agreement makes further changes based on anticipated revisions to the regulations under Section 871(m), which are expected to be published in January.

Additionally, the final QI agreement provides greater detail on the internal compliance measures that are to replace the external audit procedures previously applicable to QIs. The final QI agreement also eliminates the ability of limited FFIs to enter into QI agreements, as limited FFI status will no longer be available beginning January 1, 2017.  Additionally, QIs seeking to use documentary evidence to document an entity claiming reduced withholding under a treaty must collect certain information regarding the applicable limitation on benefits provision, though the IRS has enabled a two-year transition period for QIs to gather this information.  The final agreement also eliminates the ability of an NFFE seeking to become an intermediary with respect to its shareholders to enter into a QI agreement.  The QI agreement also contains a modified standard of knowledge to align with the reason-to-know standard adopted in regulations, and modified documentation requirements and presumption rules to align with IGA requirements.  Finally, the term of validity for a QI agreement is six calendar years, extended from the three years provided in the proposed agreement.  The updated final QI agreement is effective beginning January 1, 2017.

Court Dismisses Sen. Rand Paul’s Challenge to FATCA

The U.S. District Court for the Southern District of Ohio dismissed a challenge to the Foreign Account Tax Compliance Act (FATCA) brought by Senator Rand Paul and several current and former U.S. citizens living abroad on standing grounds (Crawford v. United States Department of the Treasury).  The plaintiffs had argued that FATCA’s withholding and reporting requirements imposed on individuals and foreign financial institutions (FFIs), certain intergovernmental agreements (IGAs) negotiated by the Treasury, and the requirement to file a foreign bank account report (FBAR) by U.S. persons with financial accounts that exceed $10,000 in a foreign country were unconstitutional.

The court evaluated the requirements necessary for Article III standing and concluded that none of the individuals named in the suit had suffered or was about to suffer injury under the FATCA withholding tax, and, since all were individuals, none of the named plaintiffs could be FFIs subject to the requirements imposed on such entities.  Instead of asserting concrete particularized injuries, such as penalties brought for failure to comply with FATCA or FBAR requirements, the plaintiffs argued general “discomfort” with the disclosure requirements (Senator Paul also asserted a loss of political power), which the court deemed too abstract and thus insufficient to confer Article III standing.

New Zealand Releases Guidance Explaining Application of FATCA to Trusts

March 10, 2016 by  
Filed under FATCA, Information Reporting

The New Zealand Inland Revenue issued guidance notes explaining the application of FATCA to New Zealand trusts that maintain or hold financial accounts.  The nearly 40-page document explains cases where trusts should be treated as financial institutions, as well as the due diligence and reporting obligations of Reporting New Zealand Financial Institution “investment entity” trusts.  The guidance notes address four different types of trusts: unit trusts, family trusts, trading trusts, and charitable trusts.  Solicitors’ trust accounts will be addressed separately in upcoming guidance.  If the trust is deemed a Reporting New Zealand Financial Institution, then it must register with the IRS and will have FATCA reporting and due diligence obligations.

United States and Switzerland Amend FATCA Competent Authority Agreement to Exempt Certain Accounts Maintained by Lawyers and Notaries

March 3, 2016 by  
Filed under FATCA

The Swiss competent authority released an announcement on March 1, 2016, that a new clause was added to the U.S.-Switzerland FATCA international governmental agreement (IGA) to exclude certain accounts maintained by lawyers and notaries licensed in Switzerland for their clients from FATCA coverage. Only accounts that are held in connection with certain activities protected by law under professional confidentiality fall under the exception (generally custodial and depository accounts), as the purpose of the new clause is to ensure that Swiss law protects the confidentiality of lawyers and notaries and their clients. The accounts will also only be protected if the underlying assets are directly related to a legal matter; a list of such items is set forth in the addition to the U.S.-Switzerland FATCA agreement. If the lawyer or notary certifies in writing to the bank maintaining the account that it falls within the exception, the bank is not required to identify the clients involved with the account. This addition is permitted under Annex II of the FATCA IGA, which allows additional accounts, entities, or products to be added pursuant to an agreement between the competent authorities of each country.

The announcement also reaffirmed that negotiations on a new FATCA IGA are ongoing, as required by a Swiss federal government mandate issued October 8, 2014. The new agreement will be a Model 1 IGA, which comes with reciprocal automatic information exchange obligations between the United States and Switzerland, unlike the current Model 2 IGA. Under the new IGA, Swiss financial institutions will report to Swiss authorities on U.S. account holders rather than reporting directly to the IRS.

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