Delay in FATCA Withholding

Treasury, IRS Delay FATCA Withholding, Provide Other Guidance

Notice 2013-43, TDNR JL-2012

Treasury and the IRS have provided revised timelines for implementing the Foreign Account Tax Compliance Act (FATCA). Withholding requirements scheduled to generally begin on withholdable payments made after December 31, 2013 are postponed to payments made after June 30, 2014. Additionally, the IRS provided guidance on due diligence on preexisting accounts, reporting and registration, the treatment of financial institutions located in jurisdictions that have signed intergovernmental agreements, and more.

CCH Take Away. "The IRS in effect said, If we really want this to be successful, the industry (banks, funds, insurance companies) needs more time," Laurie Hatten-Boyd, principal, International Corporate Services, KPMG LLP, Seattle, told CCH. "Considerations included: the proliferation of Model 1 intergovernmental agreements (IGAs), which need the foreign government to adopt implementing laws; the lack of final IRS forms and instructions in the W-8 series; and the need for harmonizing regulations involving current withholding requirements and the FATCA rules. Also, we have not seen the FFI (foreign financial institution) agreements, although we know the IRS is working on those and wants to get them out as soon as possible," Hatten-Boyd explained.

Comment

"Until the dust settles on jurisdictions that are considering IGAs, financial institutions in those jurisdictions are in a form of "FATCA purgatory." Those financial institutions are hesitant to take the steps on their own to comply with FATCA before knowing whether their jurisdiction of residence will enter into an IGA. Similarly, if major financial institutions from those jurisdictions register as participating FFIs, the jurisdictions may not have the same incentives to sign IGAs. This could inhibit the Treasury Department’s goal of creating an international standard for the exchange of tax information for all financial institutions," Daniel Gottfried, partner, Hinckley, Allen & Snyder, LLP, Hartford, Conn., told CCH.

Background

Under FATCA, foreign financial institutions (FFIs) generally must report information about financial accounts held by U.S. taxpayers as well as accounts held by foreign entities in which U.S. taxpayers hold a substantial ownership interest. Unless the FFI has entered into an agreement with the U.S. to report certain information with respect to U.S. accounts, FATCA requires withholding agents to withhold 30 percent of certain payments. Withholding also applies to certain payments made to some non-financial foreign entities.

The IRS issued final regs in early 2013 and described a phased implementation approach for FATCA beginning January 1, 2014 and continuing through 2017. Withholding agents, including participating FFIs, qualified intermediaries that assume withholding responsibilities and others, would be required to begin withholding with respect to withholdable payments made after December 31, 2013. Certain grandfathered obligations outstanding on January 1, 2014 would be excepted. Due diligence for documenting payees and account holders by U.S. withholding agents and participating FFIs would be phased in during 2014 and 2015.

Extension

In Notice 2013-43, the IRS described the six-month extension. Withholding agents generally will be required to begin withholding on withholdable payments made after June 30, 2014 instead of December 31, 2013. Taxpayers may rely on Notice 2013-43 pending revision of the final regs, the IRS explained. The IRS indicated it will revise the definition of grandfathered obligation to include obligations outstanding on July 1, 2014. Withholding on gross proceeds from sales of U.S. securities and passthru payment withholding are not covered by the extension, Treasury explained.

Comment

"The six-month extension seems to benefit all stakeholders. It gives Treasury more time to finalize its infrastructure for implementing FATCA while signing as many IGAs as possible; the extension gives jurisdictions that are considering IGAs a chance to complete their consideration and negotiation of IGAs; and importantly, it allows the FFIs to better understand the position of their jurisdiction of residence before taking steps to comply with FATCA," Gottfried told CCH.

Comment

"The IRS has not yet defined foreign passthru payments," Hatten-Boyd said. "However, because this withholding does not start until 2017; the IRS does not need to delay this date."

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