At a recent conference in New York, IRS officials discussed various issues and focuses of particular interest to U.S. financial institutions (USFIs) and Foreign Financial Institutions (FFIs) in relation to FATCA and the QI regime. A summary of comments follows.
Comments from IRS officials regarding FATCA
Steven Musher, associate chief counsel (International), Internal Revenue Service, discussed the status of FATCA regulations and activities his group is managing, notably:
- Comment letters from affected parties (over 200 to date)
- Comments presented at May 15 public hearing
Despite the obvious challenges for his regulation-writing team, Musher stated two themes throughout his remarks: 1) Keep talking to the IRS, and 2) Make best efforts to comply. He acknowledged the enormous effort required to comply with the eventual issuance of final regulations balanced by the short time line available to develop programs to comply. He acknowledged that the IRS has received comments concluding that moving ahead too quickly may have disastrous results and commented that IRS officials are committed to avoiding a "train wreck."
While solutions were not provided, conference attendees presented a number of significant immediate challenges and open issues, including:
- Time line/Effective Dates: Until final regulations are issued, USFIs and FFIs are reluctant to overhaul account opening procedures or enhance systems. With 2013 looming, consistent outcry was for further transition relief.
- Documentation and Due Diligence: Significant concerns were raised regarding different information required for FATCA versus existing AML/KYC requirements (place of birth, U.S. telephone numbers, and expiration of KYC).
- Treatment of Passive Investment Vehicles: The Category 3 definition of FFI causes passive investment vehicles, such as family trusts and personal investment companies, to be classified as FFIs. The owner-documented FFI classification could be a solution, provided the upstream withholding agent agrees to take on the additional risks and burdens associated with the status (similar to NQI processing under the current regime).
- Deemed Compliant FFIs: Conferees noted this lesser category of FFI is welcome; however, the criteria for the various sub-classifications are restrictive and convoluted.
- Withholding on Delivery versus Payment Transactions: The proposed FATCA rule requires FIs to document counterparties and withhold if necessary, instead of only documenting the underlying payee that sells the security, causing each broker that pays gross proceeds to be a withholding agent with potential FATCA withholding and reporting obligations.
- Vague Requirements for the Insurance Industry: The proposed regulations were silent on many issues specific to the insurance industry, such as: deemed compliant status, treatment of small cash value balances, and exempt accounts.
- Conflicts with Local Law: While several avenues appear to exist to avoid conflicts with local law, none appear to offer a perfect solution. The most intriguing solution was the alternative approach to FATCA with Intergovernmental Agreements. Unfortunately, Treasury officials were not present and the IRS stated they were unable to provide a progress report on the status of these agreements.
Comments from IRS officials regarding the Qualified Intermediary (QI) program
The IRS QI team noted a window of opportunity to enhance and automate the QI program as developments are underway for FATCA. Harmonization of the two regimes is a key goal, with certain highlights provided:
- All QIs, WPs, and WTs must become PFFIs. However, all PFFIs do not (and often cannot) become QIs.
- A QI will use its QI-EIN in lieu of an FFI-EIN.
- An open issue was acknowledged for PAIs and their status under FATCA.
All QI, WP, and WT Agreements that expire on December 31, 2012 will be automatically extended until December 31, 2013. QI Agreement renewal forms have been removed from the IRS web site because the renewal process will be automated and become part of the FATCA registration process (see below).
QI audit waivers
Waiver request forms are available on the IRS web site and are current for the 2011 audit year. A QI must submit a waiver request on or before June 30, 2012, to be considered for an audit waiver. If a waiver is granted, notification will be provided via fax or standard mail (not via courier as was done in the past). If the waiver is not granted, the QI will be notified to arrange for an external audit and its due date will be extended.
The HIRE Act included a requirement that all information returns be submitted electronically. To avoid electronic filing, an FI must request a waiver on Form 8508.
FATCA administration – the registration portal
It is envisioned that foreign financial institutions will register for FFI status through an online registration system and enter an agreement to complete the registration. Within the system, certain persons will be identified:
- Responsible Officer (RO): Individual officer of the FFI in a position to register and sign the FFI agreement. Each FFI must select a FATCA RO and identify this person in the FATCA registration system. There will be an affirmative statement in the registration process that the person signing has the authority to act for the FFI. Positive identity verification will be required for the single individual who will sign the agreement/certification on behalf of the FFI (see below).
- Point of Contact (POC): Individuals selected by the RO (or Authorized Third Party (ATP), if applicable) help complete registration (this person cannot sign the FFI Agreement). This person will be authorized to receive the FFI's otherwise confidential tax information to assist in carrying out any necessary or appropriate actions (aside from signing agreement/certification), or in responding to any IRS communication, relating to the FFI's compliance with FATCA. There must be one in-house POC, and the RO can designate certain qualified local or U.S third parties as POCs as well.
- ATP: Only certain in-house individuals and certain types of U.S.-licensed tax professionals will be eligible to be designated by the RO to perform all registration duties, including signing the FFI agreement/certification. This designation and its standards are still under development at the IRS.
Positive identity verification will be required for the individual who will sign the FFI agreement/certification. The process of identity verification is anticipated to be accomplished electronically or in paper form:
- Electronic: The RO may provide his/her U.S. social security number (SSN) or individual tax identification number (ITIN) in the registration system.
- Paper: The RO may provide Form 8956 and appropriate documentation.
- The verification process is still being developed for ATPs.
A FATCA Individual Identification Number (FIIN) will be issued to the RO or ATP once his/her identity is verified. The FIIN is then used by the individual who will sign the FFI agreement/certification. This is NOT the PFFI EIN.
After the agreement/certification is signed and submitted, the FFI receives approval.
- For a single FFI, after signing the agreement/certification, the FFI will be notified when it is approved by the IRS and will receive an FFI EIN (*Except for a limited FFI, that will not receive an FFI EIN even if part of an affiliated group).
- For an Expanded Affiliated Group (the lead and affiliates), each registering FFI in the group must sign an agreement/certification. After each FFI in the group has signed its agreement/certification, the group will be approved and each FFI that is not a Limited FFI will receive an FFI EIN.
All PFFIs and Registered-Deemed Compliant FFIs will be placed on a publicly available FFI list for future verification.
Additional information regarding IRS FATCA registration portal, can be obtained by clicking here.
For further information, please do not hesitate to contact us.
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