- Timelines for withholding agents and foreign financial institutions (FFIs) to complete due diligence and other requirements
- Additional guidance concerning gross proceeds withholding and the status of certain instruments as grandfathered obligations under sections 1471 through 1474
Today’s announcement states that the IRS and Treasury Department intend to incorporate these rules in final regulations under sections 1471 through 1474.
Text of the announcement: Announcement 2012-42 [PDF 45 KB]
Announcement 2012-42 also includes a table summarizing the dates by which withholding agents and financial institutions must fully implement new account opening procedures to identify account holders and the dates by which withholding agents and financial institutions must complete the review and documentation of all preexisting accounts for purposes of applying the relevant regulations.
Reason for today’s announcement
Proposed regulations were issued in February 2012 to implement the FATCA* provisions, followed by a public hearing in May 2012 on the proposed regulations. Treasury then issued a model for bilateral agreements (July 2012) under which FFIs could satisfy their FATCA requirements by reporting information about U.S. accounts to their respective tax authorities, followed by an automatic exchange of that information on a government-by-government basis.
*FATCA or Foreign Account Tax Compliance Act, added as sections 1471-1474 (chapter 4), by the Hiring Incentives to Restore Employment Act of 2010.
Announcement 2012-42 notes that the IRS and Treasury received comments about “practical issues” that FFIs could encounter in implementing the FATCA rules within the time frames prescribed in the proposed regulations, including:
- That the FATCA status of entity account holders may change during 2013 as FFIs enter into FFI agreements with the IRS—with the result that withholding agents that implement new account opening procedures by January 1, 2013, could be required to undertake duplicative efforts to verify an FFI’s status as a participating, deemed-compliant, or nonparticipating FFI
- That global financial institutions intend to implement uniform due diligence procedures for all affiliates
- That obligations that may give rise to foreign passthru payments—but not to withholdable payments—are to be treated as “grandfathered obligations” if executed prior to the issuance of final regulations that define foreign passthru payments
- That an obligation to make payments with respect to collateral posted in connection with a grandfathered derivative transaction is to be treated as a grandfathered obligation
- That the treatment of existing financial transactions may give rise to withholdable payments for FATCA purposes due to the promulgation of regulations under section 871(m) (treating certain payments on notional principal contracts and certain other financial instruments as U.S. source dividends)
Due diligence timelines
Announcement 2012-42 sets forth a timeline for implementing new account opening procedures and the definition of preexisting obligations. The timeline provides that withholding agents—including participating FFIs and registered- deemed compliant FFIs—generally will be required to implement new account opening procedures by January 1, 2014.
The definition of the term “preexisting obligation” under the proposed regulations will be modified in the final regulations to include:
- With respect to a withholding agent other than a participating FFI or a registered deemed-compliant FFI—Any account, instrument, or contract maintained or executed by the withholding agent prior to January 1, 2014
- With respect to a participating FFI—Any account, instrument, or contract maintained or executed by the participating FFI prior to the later of January 1, 2014, or the date that the participating FFI’s FFI agreement becomes effective (the final regulations will provide that an FFI agreement entered into prior to January 1, 2014, will have an effective date of January 1, 2014)
- With respect to a registered deemed-compliant FFI—Any account, instrument, or contract maintained or executed by the FFI prior to the date on which the FFI implements its required account opening procedures. A registered deemed-compliant FFI must implement any required account opening procedures by the later of January 1, 2014, or the date on which the FFI registers as a deemed-compliant FFI.
Announcement 2012-42 also provides transition rules for completing due diligence on preexisting obligations. The transition rules contain separate provisions for: (1) withholding and documentation for prima facie FFIs; (2) withholding and documentation for other preexisting entity obligations for withholding agents other than participating FFIs; (3) withholding and documentation requirements of participating FFIs for preexisting individual accounts; (4) preexisting high-value accounts; and (5) preexisting accounts other than high value accounts.
Announcement 2012-42 indicates that the final regulations will modify the rules as proposed to provide that:
- A participating FFI will be required to file the information reports with respect to the 2013 and 2014 calendar years not later than March 31, 2015.
- The term “withholdable payment” includes gross proceeds from any sale or other disposition occurring after December 31, 2016, of any property of a type that can produce interest or dividends that are U.S. source FDAP income.
- The grandfathered obligation rules will apply to additional categories of obligations that produce 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 final regulations defining the term “foreign passthru payment” are filed with the Federal Register.
- The term “grandfathered obligation” will include 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) (and regulations), 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.
- The term “grandfathered obligation” will include 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.
For more information about the FATCA proposed regulations, contact a tax professional with KPMG: