On December 30, 2016, the Treasury Department released a widely-anticipated set of final, temporary, and proposed regulations further implementing the Foreign Account Tax Compliance Act (FATCA). Originally enacted in 2010, and fully effective as of July 1, 2014, FATCA is a controversial anti-tax evasion law which requires foreign financial institutions (a broadly defined term that sweeps within its reach all manner of non-U.S. financial institutions including traditional banks, investment advisors, mutual funds, and the like) to annually disclose to the Internal Revenue Service identifying information regarding their U.S. customers. Since passage of FATCA, the Treasury Department has continually issued regulations as well as informal guidance to implement the FATCA statutes contained within Chapter 4 of the Internal Revenue Code as well as to coordinate FATCA’s new withholding provisions with existing withholding provisions contained in Chapters 3 and 61 of the Internal Revenue Code. As part of this package, the Internal Revenue Service also issued two revenue procedures addressing FATCA issues. These developments are summarized in the following paragraphs.
Final and Temporary Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities. This publication contains final and temporary regulations under Chapter 4 regarding information reporting by foreign financial institutions (FFIs) with respect to U.S. accounts and withholding on certain payments to FFIs and other foreign entities. This publication finalizes (with changes) certain proposed regulations under Chapter 4, and withdraws corresponding temporary regulations. This publication also includes temporary regulations providing additional rules under Chapter 4. These regulations are effective on January 6, 2017.
Final and Temporary Regulations Regarding Withholding of Tax on Certain U.S. Source Income Paid to Foreign Persons, Information Reporting and Backup Withholding on Payments Made to Certain U.S. Persons, and Portfolio Interest Treatment. This publication document contains final and temporary coordination regulations regarding withholding of tax on certain U.S. source income paid to foreign persons, information reporting and backup withholding with respect to payments made to certain U.S. persons, and portfolio interest paid to nonresident alien individuals and foreign corporations. This publication finalizes (with minor changes) certain proposed regulations under Chapters 3 and 61 and sections 871, 3406, and 6402 of the Internal Revenue Code, and withdraws corresponding temporary regulations. This publication also includes temporary regulations providing additional rules under Chapter 3. These regulations are effective on January 6, 2017.
Proposed Chapter 4 Regulations Relating to Verification and Certification Requirements for Certain Entities and Reporting by Foreign Financial Institutions. This publication contains proposed regulations under Chapter 4 describing the verification requirements (including certifications of compliance) and events of default for entities that agree to perform FATCA due diligence, withholding, and reporting requirements on behalf of certain foreign financial institutions or the FATCA due diligence and reporting obligations on behalf of certain non-financial foreign entities. These proposed regulations also describe the certification requirements and procedures for IRS review of certain trustees of trustee-documented trusts and the procedures for IRS review of periodic certifications provided by registered deemed-compliant FFIs. In addition, these proposed regulations describe the procedures for future modifications to the requirements for certifications of compliance for participating FFIs and also describe the requirements for certifications of compliance for participating FFIs that are members of consolidated compliance groups. Written or electronic comments and requests for a public hearing must be received by April 6, 2017.
Proposed Regulations Under Chapter 3 Regarding Withholding of Tax on Certain U.S. Source Income Paid to Foreign Persons. In this notice of proposed rulemaking, Treasury proposes temporary Chapter 3 coordination regulations regarding withholding of tax on certain U.S. source income paid to foreign persons and requirements for certain claims for refund or credit of income tax made by foreign persons. Written or electronic comments and requests for a public hearing must be received by April 6, 2017.
In addition, the IRS issued two revenue procedures that are relevant to the FATCA regime:
Revenue Procedure 2017-16, Updated FFI Agreement. This revenue procedure sets forth the updated agreement entered into by a foreign financial institution with the IRS to be treated as a participating FFI. This revenue procedure also provides guidance to FFIs and branches of FFIs treated as reporting financial institutions under an applicable Model 2 intergovernmental agreement (IGA) on complying with the terms of the FFI agreement, as modified by the Model 2 IGA. The FFI agreement provided in Revenue Procedure 2014-38 expired on December 31, 2016. The updated FFI agreement in this revenue procedure applies to FFIs with an FFI agreement effective on or after January 1, 2017.
Revenue Procedure 2017-15, Qualified Intermediary Agreement. This revenue procedure sets forth the final qualified intermediary withholding agreement (QI agreement). In general, the QI agreement allows foreign persons to enter into an agreement with the IRS to simplify their obligations as withholding agents under Chapters 3 and 4 and as payors under Chapter 61 and section 3406 for amounts paid to their account holders. The QI agreement also allows certain foreign persons to enter into an agreement with the IRS to act as qualified derivatives dealers and to assume primary withholding and reporting responsibilities on all dividend equivalent payments that they make.
In subsequent articles we will analyze these regulatory developments in more detail.