In response to continuing concerns raised by foreign financial institutions, the IRS has issued new guidance further delaying a number of the FATCA implementation deadlines in the form of Announcement 2012-42 (the "Announcement"), offering FFIs much needed additional time to prepare.
The Announcement extends a number of important due-diligence, withholding, and reporting deadlines originally laid out in the Proposed Regulations, and these extended deadlines are expected to be incorporated in the final regulations when issued.
Extended Deadlines under the IGAs
The previously announced Model Intergovernmental Agreements ("IGAs") broadly mirrored the deadlines contained in the Proposed Regulations, but relaxed certain requirements. For example, under these models, FFIs covered by an IGA would not be required to report information regarding accounts maintained in the 2013 calendar year until September 30, 2015. In addition, procedures to collect certain information such as the US or FATCA Partner TIN of accountholders will not be required until January of 2017, under the IGAs. Finally, the IGAs also extended the date by which an account may be opened and still qualify as a "preexisting" account until December 31, 2013.
The Announcement does not supersede the deadlines for FATCA compliance under the IGAs, but will similarly extend a number of deadlines for FFIs not covered by such agreements.
Key Provisions of the Announcement
FFI agreements entered into prior to January 1, 2014 will have an effective date of January 1, 2014, and FFIs must now have account opening procedures for new accounts in place by this date (or, for FFIs that sign an FFI agreement after January 1, 2014, by the effective date of the agreement).
Expanded Transition Rule for "Preexisting Obligations"
The category of "preexisting obligations" not subject to FATCA withholding has been expanded to include accounts, instruments, and contracts maintained or executed by a US withholding agent prior to January 1, 2014 (a one year extension from the previous January 1, 2013 deadline in the Proposed Regulations). Participating FFIs will also be entitled to treat accounts maintained prior to January 1, 2014 as preexisting.
Extension of Withholding Deadlines
Under the Proposed Regulations, withholding agents other than participating FFIs would have been required to withhold on certain payments to undocumented payees that are prima facie FFIs (i.e., recipients for which the FFI does not have documentation establishing their FATCA status) beginning on January 1, 2014. Withholding on such payments will now not be required until July 1, 2014. Payments to recipients other than prima facie FFIs would have been required beginning on January 1, 2015, but will now not be required until January 1, 2016 (either a six month or one year extension of the deadline, depending on the status of the recipient). Similar rules will apply to withholding by participating FFIs (taking into account the effective date of their FFI agreements).
Under the Proposed Regulations, withholding on gross payments would have been required starting on January 1, 2015. The Announcement extends this deadline by two years, requiring withholding on gross proceeds starting on January 1, 2017.
Extension of Due Diligence Deadlines
Withholding agents and Participating FFIs will similarly benefit from an extension of the deadlines to obtain documentation of FATCA status from payees and accountholders that are entities corresponding to the extension of withholding deadlines discussed above.
The Proposed Regulations also required Participating FFIs to treat as recalcitrant individual accountholders of existing high value accounts if not documented one year after the effective date of their FFI agreement, and individual accountholders of other accounts if not documented within two years of this effective date. The Announcement now provides that Participating FFIs must perform the required due diligence and obtain documentation with respect to individual high value accounts by the later of December 31, 2014, or one year after the effective date of their FFI agreement, and with respect to other accounts held by individuals by the later of December 31, 2015 or two years after the FFI agreement's effective date.
Extension of Reporting Phase-In for 2013 Calendar Year
Under the Proposed Regulations, Participating FFIs are generally required to file information reports with the IRS on March 31 of the year following the calendar year end to which the report relates (which remains the general rule); however, under a transition rule, information for the 2013 calendar year would have been required to be reported by September 30, 2014. The Announcement extends the reporting deadline for both the 2013 and 2014 calendar years to March 31, 2015 (a six month extension from the previous deadline in the Proposed regulations, although still six months less than the reporting extension granted under the model IGAs). Although the deadline to report accounts opened in 2013 has now been extended, and FFIs will be able to treat such accounts as "preexisting," and therefore potentially subject to reduced due diligence requirements, both FFIs and their customers should bear in mind that these accounts will eventually need to be reported to the IRS and should plan accordingly to avoid US compliance issues for their accountholders.
Expanded Categories of "Grandfathered Obligations"
Finally, the Notice adds three new additional categories of grandfathered obligations: (i) obligations that could produce a foreign passthru payment and that cannot produce a withholdable payment, provided the obligation is outstanding as of the date six months after final regulations defining the term "foreign passthru payment" are issued; (ii) instruments giving rise to certain "dividend equivalent payments" provided they are outstanding six months after the date on which such instruments become subject to Section 871(m) and the regulations promulgated thereunder; and (iii) obligations to make payments with respect to, or to repay, collateral securing obligations under a Notional Principal Contract ("NPC") that is itself a grandfathered obligation.
Conclusion
Although the Announcement's extension of a number of significant due diligence, reporting, and withholding deadlines will come as welcome relief to many FFIs, it is unlikely that there will be any further extensions or delays in these FATCA deadlines. Therefore, US withholding agents and FFIs that have not already prepared for FATCA compliance should ensure that appropriate policies and procedures are implemented as soon as possible, and should not count on any further last-minute reprieve.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
