United States: Certain FATCA Deadlines Are Postponed For Entity Accounts Opened Prior To January 1, 2015

Background

The Foreign Account Tax Compliance Act, commonly known as FATCA, was signed into law on March 18, 2010. FATCA generally requires U.S. withholding agents to withhold tax at a 30 percent rate on certain U.S. payments to a foreign financial institution (“FFI”) unless the FFI has entered into an agreement to obtain status as a participating FFI or resides in a country with which the United States has entered into an intergovernmental agreement regarding FATCA (“IGA”). Whether as a participating FFI or as an FFI subject to an IGA, in most cases an FFI is required to perform due diligence on its accounts (as defined by FATCA) and to report certain information with respect to U.S. accounts either to the IRS or to its own tax authorities.

While final regulations implementing FATCA were issued in January 2013, the U.S. Treasury Department (“Treasury”) and the U.S. Internal Revenue Service (“IRS”) have published notices and temporary regulations since then that have served to better coordinate FATCA requirements with other provisions of the U.S. tax rules, as well as push deadlines back and otherwise delay or modify various aspects of the FATCA requirements. For example, in March 2014, temporary regulations were issued to better coordinate existing withholding and reporting requirements under U.S. tax rules with the new requirements under FATCA. These temporary coordination rules were made generally effective for payments made on or after July 1, 2014. Following those temporary rules, in May 2014, Notice 2014-33 was issued clarifying Treasury’s intent to amend the FATCA final regulations to allow a withholding agent or FFI to treat an entity account (within the meaning of FATCA) that is issued, opened, or executed on or after July 1, 2014 and before January 1, 2015, as a pre-existing entity account for FATCA purposes, thereby allowing such accounts to be subject to the due diligence procedures for pre-existing entity accounts, as opposed to the procedures for new entity accounts, for such purposes. Notice 2014-33 also announced that 2014 and 2015 would be treated as a transition period for purposes of IRS enforcement and administration regarding the implementation of FATCA by withholding agents and FFIs.

Notice 2014-59

On October 10, 2014, the IRS issued an advance copy of Notice 2014-59 (the “Notice”) announcing forthcoming amendments to the temporary coordination rules designed to allow for more effective implementation of the transitional relief afforded by Notice 2014-33 for entity accounts opened prior to January 1, 2015. Specifically, the Notice modifies the application of (i) certain standards of knowledge when a withholding agent or FFI evaluates a withholding certificate or other documentary evidence of a payee’s FATCA status; and (ii) the rules under which a withholding agent or FFI can rely on documentary evidence instead of a withholding certificate to document the foreign status of the payee for purposes of various non-FATCA withholding and reporting requirements under U.S. tax rules. Consequently, the Notice applies to withholding agents, FFIs and payors that have U.S. withholding and information reporting requirements not only under FATCA, but also under existing withholding and reporting requirements of the U.S. tax code. The modified application specifically targets entity accounts opened or entered into prior to January 1, 2015. The relief provided by the Notice can be used for all accounts within its scope, or it can be used separately for any such account or clearly identified group of accounts (for example, by line of business).

Modified Application Date With Respect to the Standards of Knowledge for Entities

The temporary coordination rules had included additional U.S. indicia under which a withholding agent obtaining a withholding certificate or other documentary evidence has reason to know that a claim of foreign status by a direct account holder is unreliable or incorrect. However, the temporary coordination rules did not require a withholding agent to take into account these additional U.S. indicia for pre-existing accounts so long as the foreign status of the direct account holder was documented with the withholding agent prior to July 1, 2014, unless a change of circumstances was notified to the withholding agent. Many noted that this framework creates confusion because different knowledge standards and change in circumstances provisions would apply for FATCA versus for non-FATCA withholding and reporting regimes for entity accounts opened after July 1, 2014 and before January 1, 2015. Consequently, the Notice clarifies that entity accounts opened or obligations held by an entity prior to January 1, 2015 are not subject to these additional U.S. indicia and standards of knowledge for both FATCA and non-FATCA withholding and reporting purposes.

Allowance to Apply Prior Rules Regarding Documentary Evidence for Certain Offshore Payments

Current U.S. tax rules provide guidance on a withholding agent’s use of documentary evidence for the purpose of establishing a payee’s foreign status with respect to an offshore obligation for payments directed outside the United States. The temporary coordination rules had provided additional guidance in this regard, in particular setting out the types of documentary evidence permitted and the requirements for maintaining such documentation. To allow withholding agents additional time to modify their systems to implement the revised documentary evidence standards, the Notice clarifies that these provisions will not apply to accounts opened on or after July 1, 2014 and before January 1, 2015.