IRS Grants FATCA Transition Period

The United States Internal Revenue Service is to regard calendar years 2014 and 2015 as an enforcement and administration transitional period with respect to the implementation and enforcement of the Foreign Account Tax Compliance Act.

FATCA, enacted by the US Congress in 2010, is intended to ensure that the US obtains information on accounts held at foreign financial institutions (FFIs) by US persons. Failure by an FFI to disclose information on their US clients will result in a requirement to withhold 30 percent tax on payments of US-sourced income.

It is still intended that FATCA will go into operation on July 1 this year, but, with regard to its reporting, due diligence and withholding provisions, and so as to “facilitate an orderly transition,” the IRS will refrain from rigorously enforcing many of its requirements this year and next, as long as FFIs are making a good-faith effort to achieve compliance.

With respect to this transition period, the IRS confirmed that it “will take into account the extent to which a participating or deemed-compliant FFI, … or withholding agent, has made good faith efforts to comply with the requirements” of the FATCA regulations.

For example, it added, “the IRS will take into account whether a withholding agent has made reasonable efforts during the transition period to modify its account opening practices and procedures to document the status of payees,” and the IRS “will consider the good faith efforts of a participating FFI, registered deemed-compliant FFI, or limited FFI to identify and facilitate the registration of each other member of its expanded affiliated group, as required for purposes of satisfying the expanded affiliated group requirement.”

However, it was also noted that “an entity that has not made good faith efforts to comply with the new requirements will not be given any relief from IRS enforcement during the transition period. Further, the IRS will not regard calendar years 2014 and 2015 as a transition period with respect to … its enforcement regarding a withholding agent’s determinations of the character and source of payments for withholding and reporting purposes.”

In a statement, Kenneth Bentsen, President and CEO of the Securities Industry and Financial Markets Association (SIFMA), welcomed the introduction of the transition period as allowing FFIs “to comply more effectively while minimizing unnecessary cost burdens and reducing potential harm to the US economy in the long-run.”

SIFMA had “repeatedly called for targeted relief from FATCA’s fast-approaching deadlines, and (the IRS’s) announcement recognizes the good faith effort of SIFMA members to comply with FATCA,” he added. “This new guidance will also allow extra time for more economies to sign intergovernmental agreements, to make the official transition to FATCA in 2015 more comprehensive and with fewer penalties.”

The announcement, contained in Notice 2014-33, will be published in Internal Revenue Bulletin 2014-21 on May 19, 2014. However, in the period before that date, it was indicated that taxpayers may rely on its provisions regarding all of the proposed changes.