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.

IRS Clarifies Notice 2016-8 to Reduce Reporting Burden on FFIs

The IRS recently corrected Notice 2016-8, previously released on January 19, 2016.  The notice announced that the IRS intended to modify several portions of the FATCA regulations to ease burdens on foreign financial institutions (FFIs), largely in response to practitioner comments and provided that taxpayers may rely on the notice until the regulations are amended.  The Notice was amended to clarify that the time allowed for a participating FFI or reporting Model 2 FFI to provide the preexisting account certification also requires a certification that the FFI did not maintain practices and procedures to assist account holders in the avoidance of Chapter 4 of the Code.  Second, the Notice was amended to remove a requirement in the regulations that obligated registered deemed-compliant FFIs that manage accounts of nonparticipating FFIs to provide transitional reporting to the IRS of all “foreign reportable amounts” paid to or with respect to the account.  The changes made to the FATCA regulations in Notice 2016-8 can now be summarized as follows:

1. Certain financial institutions will have more time to certify accounts, as the timing requirements are eased for certain reporting of participating FFIs, reporting Model 2 FFIs, and local FFIs or restricted funds.  Under current rules, participating FFIs and reporting Model 2 FFIs must certify that they did not have practices and procedures to assist account holders in the avoidance of Chapter 4 (“preexisting account certification”).  The preexisting account certification must be made no later than 60 days following the date that is two years after the effective date of the FFI agreement.  Additionally, financial institutions are required to periodically certify to the IRS that they have complied with the terms of the FFI agreement.  Notice 2016-8 delays the date by which such FFIs must furnish the preexisting account certification, stating that they need not furnish it until the date on which the first periodic certification is due.  Notice 2016-8 also delays the date on which the first periodic certification is due, making it due on or before the July 1 of the calendar year following the certification period.  These same changes are made with respect to reporting for registered deemed-compliant FFIs that are local FFIs or restricted funds, but the certification period date is also delayed to the later of the date the FFI registered as a certified deemed-compliant FFI or June 30, 2014.

2. Reporting of accounts of nonparticipating FFIs maintained by participating FFIs has been delayed, with the IRS stating that it did not intend for the regulations to require such reporting prior to the date by which participating FFIs are required to report financial information of U.S. accounts.  Accordingly, Notice 2016-8 eliminates 2015 reporting of “foreign reportable amounts” with respect to nonparticipating FFI accounts maintained by a participating FFI.  Such reporting is now not needed until 2016.

3. Withholding agents will be able to rely on electronic Forms W-8 and W-9 collected by intermediaries and flow-through entities.  In general, electronic Forms W-8 and W-9 must be collected through an electronic system that meets certain requirements, including that the form be signed electronically under penalties of perjury by the person whose name appears on the form. Withholding agents have been reluctant to accept electronic Forms W-8 and W-9 collected by nonqualified intermediaries, nonwithholding partnerships, and nonwithholding trusts because they could not confirm the electronic signature.  Notice 2016-8 makes clear that withholding agents may rely on electronic Forms W-8 and W-9 provided by NQIs, NWPs and NWTs collected through an electronic system provided that the NQI, NWP or NWP provides a written statement verifying that the system meets the requirements of Treas. Reg. § 1.1441-1(e)(4)(iv), § 1.1471-3(c)(6)(iv), or Announcement 98-27, as applicable, and the withholding agent does not have actual knowledge that the statement is false.