Last week the Internal Revenue Service (IRS) released long-awaited final regulations on the Foreign Account Tax Compliance Act (FATCA).
FATCA effectively requires foreign financial institutions (FFIs), which include non-US private equity firms, to enter into a reporting relationship with US tax authorities or face a hefty 30 percent withholding tax on certain payments travelling outside the US.
The most significant feature of the final FATCA regulations is their say on the emerging prominence of intergovernmental agreements (IGAs).
Over the past 6 months the US Internal Revenue Service (IRS) has been conducting negotiations with more than 50 countries which were interested in pursuing IGAs – an alternative framework to achieve FATCA's policy objectives. These IGAs allow non-US funds to report to their own local tax authority which would then exchange the information with the IRS on an automatic basis. A foreign fund or investor which is covered by an IGA is subject to similar requirements as those entering into direct FFI agreements with the IRS, yet there were some differences in the details and respective timelines, which the final regulations now synchronize.
The final regulations also respond to the numerous comments received from stakeholders expressing concerns regarding FATCA costs and burdens by adopting a “risk-based approach”, which more closely aligns with anti-money laundering/know your customer rules and allows more time for funds and their investors to implement FATCA compliance.
Key provisions and timelines for FATCA withholding under the final regulations:
• Extension of timelines for funds to implement procedures for collecting FATCA documentation from new investors (generally investors that come on or after 1 January 2014) and existing investors as of 1 January 2014 (1 July 2014 or 1 January 2016, depending on whether or not the investor is a “Prima Facie FFI”, as defined by the regulations)
• Extension of timeline for FATCA withholding on US source “FDAP” (e.g., interest, dividends, rents, etc.) to commence with respect to existing fund investors (as of 1 January 2014) whose status as FATCA compliant has not been documented (generally 1 July 2014 for “Prima Facie” FFIs; 1 January 2016 for other entities)
• Extension of timeline for withholding on gross proceeds in respect of investors who are not FATCA compliant to commence (not prior to 1 January 2017)
• Expansion of grandfathered obligations (not subject to FATCA withholding) by one year (1 January 2014)
• IRS to issue new Forms W-8 (to document FATCA status) shortly. Ability to rely on pre-FATCA Forms W-8, in conjunction with supplementary FATCA status information, in lieu of obtaining an updated version in certain circumstances
Key provisions and timelines for IRS FATCA registration:
• IRS FATCA Registration Portal to be accessible online no later than 15 July 2013.
• Foreign funds will be able to enter into an FFI Agreement; IRS to publish a FATCA revenue procedure containing all terms and conditions prior to 15 July 2013
• Foreign funds will be able to register as FATCA compliant pursuant to their respective countries' IGAs.
• IRS intends to issue a Global Intermediary Identification Number (GIIN) to foreign entities whose registration is approved no later than 15 October 2013. A foreign fund or investor will use its GIIN for satisfying its reporting obligations and to identify its status as FATCA compliant to withholding agents who will be required to verify it by reference to the published IRS FFI list .
• The IRS will electronically post the first list of FATCA compliant entities on 2 December 2013 and intends to update this list monthly. A foreign fund or investor must register with the IRS by 25 October 2013 in order to be included on the December 2013 list.
Jay Bakst is a partner with accounting, tax and advisory firm EisnerAmper.