IRS Extends Implementation Deadline for Certain Limited Aspects of FATCA
The IRS released Notice 2015-66 providing extensions of time for certain limited aspects of FATCA implementation. Below we highlight and comment upon a few of the provisions which are relevant to investment funds.
In order to comply with FATCA’s information reporting objectives and avoid 30% withholding, investment funds and other foreign financial institutions (“FFIs”) must
- Enter into an FFI Agreement with the IRS to become a participating foreign financial institution (“PFFI”), whether pursuant to a Model 2 IGA or otherwise, or
- Comply with the reporting and registration requirements of the Model 1 IGA that has been signed or is treated as if it is in effect with their country of residence (or organization) (there are currently 112 such countries).
Gross Proceeds and Foreign Passthru Withholding
Background: FATCA withholding for U.S.-source FDAP (interest, dividends, etc., but not capital gains) is already generally applicable for investors whose status as FATCA compliant is not properly documented (unless a transitional rule applies – e.g., preexisting investors that are not prima facie FFIs, etc.). In addition, FATCA withholding will also (eventually) apply to (a) gross proceeds from the sale or disposition of property (e.g., a security) that can produce interest or dividends that are U.S. source FDAP, and (b) a “foreign passthru payment” to recalcitrant investors and nonparticipating FFIs (“NPFFIs”) – while this term is undefined as of yet, it is intended to include payments by PFFIs that are ‘attributable’ to US source FDAP. IRS regulations provide that withholding is not required in respect of these payments before 1/1/17.
Change: IRS regulations will be amended to provide that withholding is not required in respect of gross proceeds and foreign passthru payments prior to 1/1/19 (an extension of 2 years).
EisnerAmper observation: Model 1 IGAs explicitly provide that there is generally to be no withholding in respect of these types of payments (though they provide that a commitment exists to work together to develop a practical and effective alternative approach). Furthermore, U.S. funds are not required to apply this type of FATCA withholding either. Accordingly, this development would appear to be relevant only to the relatively minor population of funds that are PFFIs.
It is instructive to recall that the gross proceeds and foreign passthru withholding provisions were part of the original trail-blazing 2010 FATCA legislation enacted by Congress with the purpose of inducing FFIs to report information on their U.S. account holders. FATCA has since evolved and matured with most countries signing (or indicating their intention to sign) IGAs to achieve FATCA’s policy objectives by other means than Congress originally envisaged. As FATCA is implemented and Treasury monitors the progress of the policy objectives of collecting information without gross proceeds and foreign passthru withholding, it may become clear that there is little need to resort to implementing this part of the legislation. Hence, this particular extension of time could be viewed more in this light than as providing FFIs more time to implement FATCA (which has been the general purpose of most other FATCA extensions we have seen).
Sponsored Entity GIINs
Background: In response to industry comments, IRS regulations provide that if certain conditions are met, a sponsoring entity can agree to perform on behalf of one or more eligible sponsored entities all due diligence, withholding, reporting, and other requirements that such sponsored entities would have been required to perform it they were PFFIs. As a transitional procedural matter, sponsoring entities are required to register as such to obtain their own GIIN in such capacity, but the IRS is yet to develop a procedure for sponsoring entities to separately register their sponsored entities and receive separate GIINs for each. IRS regulations provide that for payments made prior to 1/1/16, a U.S. withholding agent making a payment to a sponsored entity may rely on a withholding certificate (e.g., Form W-8BEN-E) that includes only the GIIN of the sponsoring entity. Model 1 IGAs contain similar provisions requiring a sponsoring entity that identifies a U.S. account to register the sponsored entity with the IRS by the later of (a) 12/31/15, or (b) 90 days after such U.S. account is identified.
Change: In consideration of the IRS anticipation that the registration process for sponsored entities will first be available in the coming months, IRS regulations will be amended to provide that:
- Sponsoring entities must register their sponsored entities by 1/1/17 (an extension of one year);
- For payments made prior to 1/1/17, U.S. withholding agents making payments to a sponsored entity may continue to rely on withholding certificates (e.g., Form W-8BEN-E) containing only its sponsoring entity’s GIIN; and
- For payments made on or after 1/1/17, U.S. withholding agents will be required to obtain the GIIN of a sponsored entity to whom it makes a payment by obtaining either
- A withholding certificate from the sponsored entity that includes its own GIIN, or
- If the withholding agent already has a withholding certificate on file that includes the GIIN of the sponsoring entity, oral or written confirmation of the payee-sponsored entity’s GIIN. The GIIN that it so obtains will be required to be maintained as part of the withholding certification on file.
EisnerAmper observation: This change will likely affect more investment funds than the first one in two ways:
- First and most obvious, it will provide an extra year for fund groups who chose to register in this manner, registering one sponsoring entity with the intention of sponsoring one or more other entities. In particular, private equity fund managers may have identified many foreign entities that were required to register, but were expected to be disposed or liquidated during 2014/2015. By availing themselves of this option, they were to avoid registration altogether (because by the time they were to be able and required to register the entities would no longer exist), thereby reducing their overall compliance burden. These funds will now have an additional year to dispose or liquidate entities before having to register them, and
- All withholding agents – U.S. and foreign – will need to familiarize themselves with this new guidance that essentially provides that they have one additional year to obtain and verify a sponsored entity’s GIIN and that if they have an otherwise valid Form W-8BEN-E on file for the sponsored entity it need not obtain a newly executed form as long as it receives (and verifies) the sponsored entity’s GIIN.
Timing of Exchange of 2014 Information Under a Model 1 IGA
Background: Model 1 IGAs require FFIs to report their U.S. accounts to their local country which will then forward the information to the IRS in respect of the 2014 calendar year by 9/30/15. Many countries have not formally signed a Model 1 IGA with Treasury to bring such IGAs into force, notwithstanding their having demonstrated their intention to do so. Some countries that have signed an IGA are still in the process of enacting legislation to implement it without which they are unable to exchange information with the U.S. Other countries are still in the process of developing systems needed for the automatic exchange of information and may not have them in place by 9/30/15. Prior IRS guidance has provided that FFIs of such countries are to be treated in the same manner as if they had signed a Model 1 IGA.
Change: Treasury intends to continue to treat FFIs covered by the IGAs of these countries as complying with FATCA and not being subject to withholding so long as the countries continue to demonstrate resolve to bring the IGA into force and any information that would have been reportable under the IGA by 9/30/15 is exchanged by 9/30/16, together with any information reportable by 9/30/16 (in respect of 2015). This does not affect the timing of when FFIs should report information to their local country, which remains governed by local law.
EisnerAmper observation: This appears to be a technical legal matter that Treasury had to address in order to allow the progress and coordination with IGA countries to proceed, if only with a delay of one year, providing continuing stability to the concept of FATCA compliance by reporting to local countries instead of entering into FFI Agreements to become PFFIs. Investment funds and investors need not act upon this per se, but should continue to monitor their respective requirements under local law as it develops and make sure to comply on that level.