Preparing for FATCA: An in-depth discussion of the issues, timeline and action plan for funds
Table of Contents
- FATCA compliant: The concept and its impact on funds
- Methods for becoming FATCA compliant
- Evidencing FATCA status
- Types of foreign private equity entities that need to be FATCA compliant
- Types of payment subject to FATCA withholding
- FATCA timeline
- IRS registration process
- Action Plan: How to prepare now for FATCA
- Guide to key FATCA terminology
The Foreign Account Tax Compliance Act (FATCA) aims to combat tax evasion by preventing US persons using foreign entities to hide assets and income from the Internal Revenue Service (IRS). The primary challenge for the IRS is how to force foreign entities (outside the US and not subject to its legal jurisdiction) to disclose information that relates strictly to US persons. FATCA's answer is simple – impose a 30 percent withholding tax on US source investment income held by the foreign entity, including gross proceeds from the disposal of investments that could give rise to US source investment income (and other payments 'attributable to such payments'). A foreign entity will not however be subject to withholding tax if it voluntarily cooperates with the IRS to find US persons invested in foreign entities or becomes 'FATCA compliant'.
FATCA does not impose any new taxes. Instead, it uses the threat of a financial penalty to force foreign entities to be more transparent.
This chapter focuses on the impact FATCA has on private equity funds. It sets out what fund managers need to know and think about, provides a timeline and sets out an action plan for funds preparing for FATCA. With FATCA comes a number of new terms that all managers should be familiar with. Important terms are highlighted throughout the chapter with a brief explanation of such terminology and its relevance to funds available on at the end of this document.*
Finally, it is necessary to note that FATCA is rapidly evolving. This chapter therefore represents key aspects and issues that the author believes funds should consider in 2013 and the information presented here is correct as at June 3, 2013.
FATCA compliant: The concept and its impact on funds
Fund managers need to deal with the concept of being FATCA compliant on two levels:
- At the fund or investment entity level. Generally, foreign funds and investment entities must become FATCA compliant. US funds and investment entities on the other hand do not need to take formal steps to voluntarily cooperate with FATCA's policy objective. Rather, US law (i.e. FATCA) generally requires them to provide the IRS with the same degree of transparency as foreign funds with respect to US persons invested in them through foreign entities and to withhold on non-FATCA compliant investors.
- At the investors level. Foreign and US funds and investment entities must formally document their investors as being FATCA compliant, non-compliant, exempt or otherwise. This level, and the resulting reporting and withholding obligations that the fund incurs, is expected to be more complex, expensive and time-consuming than ensuring FATCA compliance at the fund level (see 'Evidencing FATCA status').
Methods for becoming FATCA compliant
A foreign fund will become FATCA compliant by either:
- entering into an FFI Agreement with the IRS; or
- complying with requirements under an Intergovernmental Agreement (IGA) that the country in which it is domiciled has signed with the IRS (and registered its status as such with the IRS).
Both of these are explained immediately below.
Recent developments suggest that most funds will become FATCA compliant by complying with an IGA, but this area is rapidly evolving and as such this remains uncertain.
A foreign fund entering into an FFI Agreement will become a Participating Foreign Financial Institution (PFFI)* and will agree to:
- Obtain information on each investor to determine whether it is US, recalcitrant or a Non-Participating Foreign Financial Institution (NPFFI)*.
- Adopt a compliance programme under the authority of a Responsible Officer (RO) who must certify periodically to the IRS that the foreign fund complies with the FFI Agreement. The IRS may request additional information to verify the fund's compliance if it identifies specific concerns.
- Annually report specified information on accounts held by US and recalcitrant investors1 and payments subject to FATCA reporting made to investors that are NPFFIs or recalcitrant.2
- Withhold 30 percent tax on payments subject to FATCA rules (see 'Withholdable Payments') made to investors that are NPFFIs or recalcitrant. If the foreign fund is organised (or treated for US tax purposes) as a partnership (and has not entered into an agreement with the IRS to become a Foreign Withholding Partnership – see 'Build on existing administrative framework'), then:
- withholdable payments allocated (but not necessarily distributed) to partners are treated as having been received by them for withholding purposes; and
- withholding on FDAP is done by the US withholding agent (e.g. a US portfolio company or US fund) from the fund partnership (or PFFI) based on the latter's documented instructions to the former with respect to amounts allocable to the fund partnership's NPFFI and recalcitrant investors.
- Comply with IRS requests for (i) additional information about US investors' accounts, particularly regarding information reported to the IRS or (ii) the account statements (presumably capital account activity) themselves.
- Obtain a valid and effective waiver for any US investor account in the event that any foreign law would prevent the investor from reporting to the IRS. If such a waiver is not received within a reasonable period of time then the investor's account may be required to be closed, which could be particularly problematic for a fund (see FFI Agreement v. Model 1 IGA).
The IRS plans to publish a Revenue Procedure by July 15, 2013 setting out the terms of the FFI Agreement.
Intergovernmental Agreement (IGA)
In many countries, funds are prevented by legislation from reporting information to the IRS about their US investors. To overcome this legal impediment, the IRS is collaborating with over 50 countries (so-called partner countries) to implement FATCA's policy objectives via IGAs. IGA signatories (i.e. partner countries) will be required to enact provisions for the implementation of FATCA into their domestic legislation and adopt implementing regulations.
- Model 1 IGA.3 A partner country signing this type of IGA agrees to adopt legislation requiring funds that are tax resident to comply with its registration requirements and to identify and report information to the partner country (not the US) about the accounts of any US investors under standards set out in the Model 1 Agreement (Annex I) due diligence rules. This information is automatically exchanged with the IRS.4 Generally, the quantity and quality of information that the IRS will receive from the partner country is expected to be similar to the information a foreign fund would provide under an FFI Agreement.
A foreign fund covered by Model 1 IGA that makes a FATCA Withholdable Payment (or acts as an intermediary with respect to such payment) to a NPFFI must (unless it is a Withholding Foreign Partnership) – provide the immediate payor (e.g. US portfolio company or US fund) with the information required for withholding and reporting to occur. If the foreign fund is a Withholding Foreign Partnership, then it withholds itself on these amounts. Either way, foreign entities that invest in the US through funds covered under Model 1 are penalised for failure to become FATCA compliant.5
The IRS has signed Model 1 IGAs with the UK, Denmark, Ireland, Mexico, Norway, Spain, Italy and Germany.6 The Cayman Islands recently announced its decision to pursue a Model 1 Agreement with the US.
- Model 2 IGA. The partner country agrees to direct and enable all locally domiciled funds to enter into an FFI Agreement with the IRS and to report information about US investors' accounts directly to the IRS. The partner country supplements this by providing the IRS with information about certain recalcitrant account holders.
The IRS has signed a Model 2 IGA with Switzerland.7
It would seem that most foreign funds and their investors should favour a Model 1 IGA (if available). There are a number of reasons for this:
- It affords a higher level of certainty that they are not breaching any local legal restrictions as a result of complying with an FFI Agreement.
- It is easier to identify and document any exemptions. This is because Annex II of a Model 1 IGA specifies 'Exempt Beneficial Owners' * and 'Exempt Products' already well known in the foreign country.8 FFI Agreements, on the other hand, follow IRS regulations which provide broad definitions for exempt beneficial owners worldwide and are therefore considerably harder to document as exempt.
- A fund treated for US tax purposes as a partnership (but not a Withholding Foreign Partnership) entering into an FFI Agreement must provide US withholding agents with Form W8-IMY to certify its status as a PFFI. The fund will also attach its investors' Form W-8 to its own Form W8-IMY to certify their respective FATCA statuses. In addition, the fund will attach a withholding statement setting out the amount (or percentage) of the FATCA Withholdable Payment that the US withholding agent should associate with each underlying FATCA documentation. The agent will review the validity of all the investors' underlying documentation and in some cases may reject them as being invalid.9 In practice, this can be highly burdensome to the fund and to the US withholding agent. However, so far, there has been no indication that any country entering into a Model 1 IGA will require its funds to pass this documentation to the US withholding agent. It is possible that the Model 1 partner country would allow the fund to simply provide withholding instructions to the agent in good faith. Nevertheless, it remains to be seen if it will be this simple under the various IGAs once implementing regulations are released.
- Local law is applied instead of US law when making certain determinations. Similarly, local reporting procedures are used. This means that foreign funds and investors do not have to interpret US reporting rules and procedures, which they may be unfamiliar with.
- No FFI Agreement or annual RO certification to the IRS is required under a Model 1 IGA. Instead the fund's RO must certify to the IRS every three years either individually or collectively for the Expanded Affiliated Group (EAG)*, that it has met all of the requirements for its status under Model 1 since the date of registration with the IRS or December 31, 2013, whichever is the later.
- Recalcitrant investors are not subject to withholding and their accounts with the fund do not have to be closed, provided the IRS receives the required information about such accounts from the partner country. In contrast, an FFI Agreement raises potential problems: Does the fund have the legal right to close the account of a recalcitrant investor? How would it do so in light of the likely illiquidity of the underlying assets?
- FATCA generally requires withholding in respect of NPFFIs and recalcitrant investors on gross proceeds from the sale of property that could give rise to Withholdable Payments (such as US equity and debt instruments) as well as on Foreign Passthru Payments (payments attributable to Withholdable Payments) – see also 'Types of payment subject to FATCA withholding'. This renders non-compliance with FATCA an unbearable financial burden to funds and their investors. Although the IRS has deferred such withholding to January 1, 2017 at the earliest, it remains part of the FATCA statute and (by reference) FFI Agreements. However, a Model 1 IGA does not provide for withholding with respect to such payments to NPFFIs. The US and partner country are nevertheless committed to developing a practical alternative that achieves the same policy objectives and that minimises burden.
- An FFI Agreement may be terminated by the IRS if it determines that the foreign fund is out of compliance with the agreement. While events of default will not result in automatic termination and the IRS will allow a PFFI to develop a plan to remediate, it is generally expected that it would be 'easier' to lose PFFI status under an FFI Agreement than under a Model 1 IGA. The process of losing registered deemed compliant status and becoming an NPFFI for significant non-compliance under a Model 1 IGA is as follows:
- when the IRS determines that a foreign fund or investor is in significant non-compliance, it will notify the partner country which will apply its domestic law (including penalties) to address the matter; and
- if such enforcement actions do not resolve non-compliance within 18 months, the US will treat the non-compliant foreign fund or investor as a NPFFI and make available a list of all FATCA partner country foreign funds and investors that are treated as NPFFIs in accordance with this procedure.
It is important for fund managers to understand that the administrative details and resulting burdens of each Model 1 IGA are yet to be determined by the FATCA partner country. Accordingly, it is not possible at the time of writing to make a complete and fair comparison between an FFI Agreement and a partner country Model 1 IGA.
At the heart of FATCA's administrative framework is the broad concept of labelling foreign entities and their investors as FATCA compliant, FATCA non-compliant or exempt. Those that are FATCA non-compliant are subject to 30 percent withholding on certain types of income. Those that are FATCA compliant are not. Individuals, whether US or foreign, are not subject to FATCA withholding unless they are recalcitrant.
There are detailed rules for how the payor of an amount subject to FATCA withholding (for example, a US fund, US portfolio company or PFFI) determines the FATCA status of the payee. The basic framework of these rules is set out here.10
In order to understand the rules for determining FATCA status, especially in the next few years, it is necessary to take a step back and look at the existing rules and IRS forms (W8-BEN, W8-IMY, W8-EXP, W-9) that US withholding agents use to document the status of payees in order to determine the rate of withholding on amounts subject to non-resident alien withholding tax.11 The IRS has chosen to update this existing basic framework to document the status of each payee for both non-resident alien withholding tax (Chapter 3) and FATCA status (Chapter 4). While these forms are not filed with the IRS, they must be made available to it during audits. Some basic points are noteworthy:
- Each fund/investor must be properly documented in accordance with IRS regulations. A withholding agent may not necessarily rely on its good faith belief (e.g. based on subscription documents) that, for example, an individual or entity is foreign or US, that an entity is FATCA compliant or that an investor is an exempt beneficial owner. Fund managers often struggle with the notion that they are not permitted to rely on what they 'know to be true' or 'is fairly evident'.
- IRS regulations permit alternate means (other than Forms W-8 and W-9) of establishing the Chapter 3 and Chapter 4 status of payees and investors, but it is usually more practical, and less susceptible to error of misclassification, to use forms specifically designed for this purpose than to pull together the required pieces of information required by these alternate means.
- Withholding agents, including funds, cannot simply accept these forms blindly because:
- IRS regulations detail instances in which a form's claim must be treated as unreliable or incorrect (such as claiming treaty benefits of one country, but the address on the form is in a different country);
- funds have to perform due diligence on these forms to ensure that they are accurate and can be relied on. For example, if a form claims that an individual is foreign (and therefore not subject to being reported under FATCA), the US withholding agent generally has to search its other (non-FATCA) records. If it finds US indicia,12 it cannot rely on the form unless remediated in accordance with the regulations;13
- forms are often incomplete or inaccurate because the person completing them may not be familiar with English and/or US terminology. Furthermore, the IRS now scrutinises these forms (upon audit) more closely than it has in the past and can invalidate them (and hold the withholding agent responsible for the tax it is required to withhold in the absence of proper documentation) for seemingly inconsequential errors or omissions. 14
- foreign funds and their foreign entity investors need to register with the IRS in order to become FATCA compliant and will receive a Global Intermediary Identification Number (GIIN), which must be verified by the withholding agent against a published list that is updated by the IRS every month (see 'IRS registration process'.)
- Foreign funds organised as partnerships (or treated as such for US tax purposes) fall into two categories:
- Withholding Foreign Partnerships. A foreign partnership that has entered into an agreement with the IRS to withhold tax on its partners, instead of providing its partners' documentation upstream to a US withholding agent (not to be confused with an FFI Agreement to become a PFFI). These funds simply furnish their US withholding agent Form W8-IMY to indicate their status as a Withholding Foreign Partnership. A fund that wishes to continue to be a Withholding Foreign Partnership after December 31, 2013 (after which all previously signed agreements expire) will be able to do so as part of the registration process (see 'IRS registration process'.) A fund that has not yet obtained the status of Withholding Foreign Partnership, but wishes to do so by July 15, 2013 (when the online FATCA registration process will be available and this agreement can be extended beyond December 31, 2013), must have separately submitted its paper application to the IRS by May 3, 2013.
- Non-withholding Foreign Partnership. A foreign partnership that has not entered into a withholding agreement with the IRS must attach its investors' forms (W-8BEN-E, W-8BEN, W-8EXP, and W-9, as appropriate for each investor) to its own Form W8-IMY. It must also present a withholding statement indicating how the payment is to be allocated among its partners. This enables the US withholding agent to determine the proper withholding. This methodology will generally continue under FATCA.
Revised Forms W-8 for FATCA compliance
Prior to FATCA, Form W-8BEN was used for both individuals and entities. In order to enhance clarity and minimize the chances that these forms (which must now address FATCA as well) will be completed incorrectly, the IRS has created new Form W8-BEN-E which will be used strictly by entities, the second draft of which was released by the IRS without instructions on May 22, 2012. Here are a few key aspects of the draft form of interest to private equity funds and their investors:
- Part I, line 4- the foreign entity's status for nonresident alien withholding tax15 is indicated, and if treaty benefits are claimed Part III must be completed.
- Part I, line 5- the foreign entity's FATCA (Chapter 4) status is indicated.16
- Part I, line 9- The foreign entity's GIIN is listed.
- If the FATCA status checked on line 5 is NPFFI, PFFI, Reporting Model 1 FFI, PFFI Model 2, or Registered deemed compliant (other), then there is no special additional part (specific to the particular FATCA status claimed) of the form that needs to be completed. Each other FATCA status claimed requires another part of the form to be completed.
- Part XXVI Certification needs to be signed and dated. This certification lists various representations that are made under penalties of perjury and by signing the person agrees to submit a new form within 30 days if any certification on the forms becomes incorrect and that he or she has the capacity to sign for the entity identified on the form.
The final version is expected to be released in the near future.
A foreign fund entering into an FFI Agreement with the IRS must provide all its US withholding agents with its own documentation evidencing its status as FATCA compliant. If organised as a partnership, the fund must also submit its investors' documentation showing their respective FATCA statuses. A US fund must provide all its US withholding agents with Form W-917 evidencing its status as a US person not subject to FATCA withholding.
Both US and foreign funds must document the FATCA status of all their investors and perform due diligence procedures on the documentation collected.
The practical implications of this is that a foreign fund organised as a partnership will hardly have begun, much less completed, its obligations under FATCA by taking the initial step of registering and receiving its own GIIN. In addition, the fund has to collect all necessary documents to establish the FATCA status of each of its investors, review and submit them to its US withholding agents.
As US withholding agents are responsible for any FATCA withholding that the IRS ultimately determines should have been done, it is likely that they will be very strict.18 Funds are well advised to take the extra step of confirming with the agent that the submitted documentation is acceptable (see Step 4 in the 'FATCA action plan').
IRS registration will first be available in July 2013. Even if a fund registers at that point it will likely be 'chasing' investors for FATCA documentation for some time afterwards as the fund investors deliberate and decide on the course of action to take (FFI Agreement, IGA or noncompliance), then register (if they do) and provide the required FATCA documentation. This may delay the fund in furnishing its investors' FATCA documentation (in conjunction with its own) to the underlying US withholding agent.
Limited reliance on Pre-FATCA W-8 forms
In response to industry concerns that withholding agents will have to solicit the new forms discussed above within a compressed time frame, IRS regulations temporarily allow continued reliance, under certain circumstances, on pre-FATCA Forms W-8 supplemented with additional information about FATCA status (see table below). Six months after the IRS releases the new Forms W-8, a withholding agent cannot rely on a newly furnished version of a pre-FATCA Form W-8. The discussion here, however, is about situations where the fund already has a valid (pre-FATCA) Form W-8 on file.
Table 1: Circumstances where IRS will allow documentation other than new post-FATCA
See Guide to key FATCA terminology*
To establish investor status as:
Evidence a fund or US withholding agent may rely on:
Foreign individual, foreign government or international organisation
Valid pre-FATCA Form W-8
PFFI or RDCFFI investor admitted to the fund prior to January 1, 2014 (i.e. a 'pre-existing obligation')
Model 1 FFI*, for payments prior to January 1, 2015 and where the investor was admitted to the fund prior to January 1, 2014 (i.e. a pre-existing obligation)
(GIIN is not required).**
Model 1 FFI for payments prior to January 1, 2015 and regardless of when the investor was admitted
Valid post-FATCA Form W-8, indicating it is a Model 1 FFI, even if there is no GIIN indicated on the form.**
An entity other than a PFFI or DCFFI
**Provided that the fund or US withholding agent has a permanent residence address for the FFI in the relevant country that has in effect a Model 1 IGA.
The final regulations also allow foreign funds, in lieu of obtaining post-FATCA Forms W-8, to document the FATCA status of investors that purchased their interests in the fund outside the US either from a fund or another entity located outside the US (i.e., an offshore obligation) as follows:
To establish payee status as:
Evidence the fund or US withholding agent may rely on:
PFFI or RDCFFI (e.g. Model 1 or 2 FFI)
Form W-8 is not required.
Model 1 FFI, for payments made prior to January 1, 2015 and where the investor is admitted to the fund prior to January 1, 2014 (i.e., a pre-existing obligation)
GIIN is not required
Types of foreign private equity entities that need to be FATCA compliant
Many private equity funds establish elaborate structures with multiple foreign entities for various purposes in each deal. A private equity firm should first determine which foreign entities will have to become FATCA compliant (that is, enter into an FFI Agreement or be covered by an IGA). The following key questions should be considered:
- Is the foreign entity treated as an FFI * under FATCA, which is subject to 30 percent withholding?
- Is the foreign entity expected to generate the type of income that would be subject to 30 percent FATCA withholding (see 'Types of payment subject to FATCA withholding').
- Is the foreign entity a member of an Expanded Affiliated Group (EAG)*? If so, then a foreign entity in a private equity holding structure might have to become FATCA compliant not for itself but in order to enable another member of the EAG to become FATCA compliant.
This section discusses these key questions with respect to the entities that are most commonly used by funds and managers.
Foreign private equity funds
Generally, these are treated as FFIs. The key consideration is whether the fund is expected to have any US source income that would be subject to FATCA withholding.
If a fund invests exclusively outside the US then why would it rush to assume the burden of becoming FATCA compliant? While it is rumored that some financial institutions, as a matter of policy, will not want to deal with entities that are not FATCA compliant, this should be verified and if true weighed against the burden of becoming FATCA compliant. In addition, some foreign portfolio company groups might have US subsidiaries that make payments to their foreign parent of a nature that would be subject to FATCA withholding. It is possible that from January 1, 2017, payments made by the foreign parent that are attributable to amounts received from US subsidiaries (foreign passthru payments) would be subject to FATCA withholding. If this is the only concern there seems to be little to be lost by deferring the burden of becoming FATCA compliant to January 1, 2017 and reassessing status again only at that time.
Foreign General Partner entities
As these entities primarily invest in private equity funds and other collective investment vehicles, the evaluation process regarding whether they should become FATCA compliant should be similar to that for foreign private equity funds.
Foreign Management Companies
Most of these entities will technically be treated as FFIs pursuant to IRS regulations since they primarily conduct business by investing funds or financial assets on behalf of other persons (funds and their investors).19
Careful consideration should be given, however, to the nature of the revenue that the foreign management company receives. If, as is typical, a separate GP entity is established to invest and receive carry from the fund, the management company receives only management fees. If these management fees are earned in the US, they probably constitute 'effectively connected income' (ECI) and are not subject to FATCA withholding. If the fees are earned outside the US, they are probably not US source and not subject to FATCA withholding either.
If the foreign management company is not earning interest from a US bank, then it may well not ever receive a payment that is subject to FATCA withholding, in which case consideration should be given to why it should assume the burden of becoming FATCA compliant. This is not to advise that such management companies should not become FATCA compliant, only to consider the matter carefully based on the most recent developments.
Furthermore, equity interests in management companies generally are not treated as 'financial accounts' subject to FATCA due diligence and reporting.
One final word of caution. Usually management companies are not members of the same expanded affiliated group as the fund and other entities that may be required to be FATCA compliant because they are not controlled (more than 50 percent) by a common parent. In the event that they are controlled, they would need to become FATCA compliant to enable the other members in the group to comply.
FATCA regulations specifically treat a holding company formed in connection with, or availed of by, a private equity fund as an FFI. Additional consideration should be given to whether the holding company is expected to receive payments subject to FATCA withholding. If yes, if the holding company is a member of a PFFI group and does not maintain financial accounts, hold accounts, or receive or make payments outside its expanded affiliated group, then it might qualify as an 'excepted inter-affiliate FFI', which is not subject to FATCA.
This leads to consideration of the following important issue. If a fund is organised as a partnership (or treated as such for US tax purposes), can it be the parent in an EAG?20 If yes, a fund that had to become FATCA compliant because it had just one investment expected to generate a payment subject to FATCA withholding would effectively 'taint' all of the entities in the holding structures of investments not expected to generate payments subject to FATCA. This would force numerous foreign holding companies to become FATCA compliant when they otherwise would not have to.
If, on the other hand, a fund organised as a partnership cannot be the parent in an EAG, then such holding companies would not have to become FATCA compliant on account of the fund. But the fund partnership's exclusion from the EAG would also mean that payment made to it by a holding company would be considered to be a payment outside the EAG and the holding company would not therefore be deemed to be an excepted inter-affiliate FFI and would have to become FATCA compliant.
John Sweeney, Branch 8 chief, IRS Office of Associate Chief Counsel (International), has been quoted as saying that "although a partnership may be part of an expanded affiliated group, which is required to have more than 50 percent common ownership, it probably could not be the parent member. However, the final regulations contain an anti-abuse rule to address changes in ownership made to pass or fail the common ownership test".21
If a fund is organised (or treated for US tax purposes) as a corporation, then it will be the parent of an EAG (if it has more than 50% ownership of the foreign entities in the structure) and if the fund needs to become FATCA compliant on account of just one investment that is expected to generate Withholdable Payments under FATCA all foreign holding companies will be part of the EAG as well. However, the holding companies may qualify for excepted inter-affiliate FFI status.
Generally, a special purpose vehicle (SPV) formed by funds and/or co-investors will be an FFI that must become FATCA compliant to avoid 30 percent withholding on FATCA withholdable payments. It is important to emphasise that co-investors in SPVs may be required to coordinate their respective FATCA compliance programmes with each other even though they are generally unrelated. This is because the co-investor may be deemed to be the corporate parent in the EAG which includes the SPV, even though tax compliance and other administrative responsibilities of the SPV may reside with a sponsor that holds a minority stake.
Foreign Disregarded Entities
Such entities do not have to become FATCA compliant. However, their tax owners might have to become FATCA compliant.
Subject to exclusions of Grandfathered Obligations, this includes:
1. Any payment of interest (whether or not eligible for the portfolio interest exception), dividends, rents, compensations, and other 'fixed or determinable annual or periodic' (FDAP) gains, profits, and income, if such payment is from sources within the US. This is essentially the same type of income subject to income tax withholding on non-resident aliens and corporations.22 Income that is effectively connected with a US trade or business (ECI) is not subject to withholding. FATCA withholding on this type of income will generally be effective from January 1, 2014.
2. Any gross proceeds (without regard to profit) from the sale of property which could produce FDAP including: sales of securities; redemptions of stock; retirements and redemptions of indebtedness; entering into short sales and a closing transaction in a forward contract, option or other instrument that is otherwise a sale; and a distribution from a corporation to the extent it is a return of capital or a capital gain to the beneficial owner. Gross proceeds from the sale of stock issued by a US corporation is subject to FATCA withholding if a dividend from that corporation would be US source regardless of whether the stock pays dividends at regular intervals or whether the issuer plans to pay (or has ever paid) dividends on the stock. FATCA withholding on this type of payment will become effective not before January 1, 2017.
A foreign fund or investor covered under a Model 1 IGA and organised or treated as a partnership for US tax purposes must provide information up the chain to the US withholding agent. This enables the agent to withhold on the portion of the payment that is allocable to non-FATCA compliant investors. This applies only to FDAP payments. At the time of writing it does not apply to gross proceeds. Therefore non-FATCA compliant investors are not subject to FATCA withholding on gross proceeds if they are invested through an entity covered under a Model 1 IGA.
Foreign Passthru Payment
These payments are not themselves 'Withholdable Payments' but are 'deemed to be attributable' to withholdable payments. If FATCA withholding only applied to withholdable payments then non-FATCA compliant foreign entities would be able to use FATCA compliant entities as effective FATCA blockers because payments by foreign corporations are generally not US source.
Just how to determine the portion of a payment 'attributable to' a withholdable payment that an investor receives from a foreign entity earning income from both US and foreign sources is the subject of much controversy. Accordingly, the IRS has not defined a Foreign Passthru Payment and has indicated that it will not be subject to withholding prior to either January 1, 2017 or the date of publication of the final regulations that define the term, whichever is later.
A US fund does not have to withhold on a Foreign Passthru Payment.
Payments on 'Grandfathered Obligations' and gross proceeds from the disposition of such obligations are not subject to FATCA withholding. The most common example relevant to private equity funds is a debt instrument (including a bond, term deposit, or guaranteed investment certificate) or a legally binding agreement to extend credit for a fixed term (provided the material terms including the maturity date are fixed and outstanding as at January 1, 2014).
Regarding Foreign Passthru Payments, the aforementioned date of January 1, 2014 is extended to six months after the date on which regulations defining the term are published.
The significance of grandfathered obligations for a private equity fund is twofold:
- A US fund, or foreign fund which is a PFFI, that makes a payment in respect of a Grandfathered Obligation does not withhold on NPFFIs or recalcitrant investors on these amounts. Similarly, a foreign fund that is a partnership and is covered under a Model 1 IGA would not instruct the US withholding agent to withhold on the portion of the grandfathered payment allocable to its investors that were not FATCA compliant.
- A private equity fund sometimes forms a foreign entity strictly to hold the debt of a US obligor. If this debt is in place as of January 1, 2014, careful consideration should be given to whether this entity needs to become FATCA compliant (as the US source interest it will receive will not be subject to FATCA withholding). On the other hand, foreign funds and other entities that expect to receive withholdable payments, as well as payments in respect of Grandfathered Obligations which are not subject to FATCA withholding, will still have to become FATCA compliant to protect the withholdable payments.
The legislative effective date of FATCA is 2013. However, IRS regulations have delayed its implementation and therefore provide for a phase-in of withholding obligations and related requirements. This phase-in recognises the fact that funds (among other FFIs) need time to document the FATCA status of their investors. Those investors, in turn, might also require time to implement their own FATCA programmes if they are themselves FFIs.
In short, the regulations inherently recognise that there are aspects of documenting an investor's FATCA status that must first be addressed. In particular, is the investor an FFI, which must become FATCA compliant, or not? Second, if the investor is an FFI that is not exempt from FATCA, did it actually become compliant and how?
The timeline for implementing FATCA generally makes a broad distinction between investors admitted before January 1, 2014 (pre-existing accounts) and those admitted after that date. Key dates are summarised in the 'FATCA: Key dates' box below.
FATCA: Key dates
What is the deadline for funds to document the FATCA status of their investors?
- For investors admitted to the fund on or after January 1, 2014, their FATCA status must be documented by the fund on the date of admission.
- For investors admitted before January 1, 2014, the IRS allows additional time. Furthermore, a distinction is made between 'Prima Facie FFIs'*and all other undocumented pre-existing investors:
- Prima facie FFIs must be documented by July 1, 2014;
- All other pre-existing investors must be documented by January 1, 2016.
With regard to the above, the IRS expects US and foreign funds to implement new account opening procedures that conform to FATCA documentation requirements by January 1, 2014, but in the case of a foreign fund entering into an FFI Agreement it is the effective date of the agreement. An FFI Agreement entered into before 2014 will have an effective date of December 31, 2013.
The same timelines apply to funds. Therefore if a foreign fund has an existing account with a US withholding agent before January 1, 2014 then the agent must document FATCA status by the following dates:
- July 1, 2014, if the fund is a Prima Facie FFI.
- January 1, 2016 for all other funds.
If the foreign fund opens the account on or after January 1, 2014, the agent must document the fund's FATCA status on the date the account is opened.
When does FATCA withholding begin for non-FATCA compliant funds and investors?
- Withholding on US source FDAP (for example, interest and dividends):
- For investors admitted on or after January 1, 2014, withholding begins on the date of admission.
- For prima facie FFI investors admitted before January 1, 2014 and whose FATCA compliant status is undocumented, withholding begins on July 1, 2014.
- For other foreign entities admitted before January 1, 2014 and whose FATCA compliant status is undocumented, withholding begins on January 1, 2016.
If the FATCA status of a fund or investor has been documented as non-compliant(for example, by providing a Form W-8BEN-E to the withholding agent indicating that it is a non-participating FFI) then withholding begins on the date such status is documented, even if earlier than the dates noted above.
- Withholding on gross sales proceeds:
- FATCA withholding will begin not before January 1, 2017.
- The exception to the above are foreign entity investors that are non-compliant with FATCA and invested in foreign funds covered under a Model 1 IGA. At the time of writing, these investors are not subject to withholding on gross sales proceeds.
Prima Facie FFIs*
Many, if not most, funds and foreign entity investment vehicles and investors might not meet the definition of prima facie FFI. Consequently, if not documented as an FFI that is not FATCA compliant, they should generally not be subject to FATCA withholding before January 1 , 2016 (assuming that they were invested as of January 1, 2014).
This raises an important question however. What if the US withholding agent 'just knows' or 'has reason to strongly suspect' that an undocumented investor is an FFI? Common examples include:
- A US portfolio company that is owned in substantial part by a foreign fund (and the persons who are responsible for the US portfolio company's FATCA withholding actually work for the fund manager).
- A fund that knows its investor is a foreign fund of funds or other foreign investment vehicle that meets the definition of an FFI.
While there are rules that do not permit a US withholding agent to rely on documentation when it knows, or has reason to know, that it is incorrect or unreliable, this situation is the opposite because there is no formal documentation claiming any status. Notwithstanding the letter of the law and lack of published guidance to date in this situation, it would nevertheless appear that the prudent course of action would be to treat these funds and investors as Prima Facie FFIs subject to withholding beginning on July 1, 2014 unless properly documented as FATCA compliant by that time.
How and when to register
The IRS FATCA Registration Portal will be accessible online no later than July 15, 2013 for the following purposes:
- To give foreign funds the opportunity to enter into an FFI Agreement (the IRS and Treasury Department will publish a FATCA revenue procedure containing all terms and conditions before July 15, 2013).
- To give foreign funds the opportunity to register as FATCA compliant under an IGA.
- The IRS intends to issue a Global Intermediary Identification Number (GIIN) to foreign entities whose registration is approved no later than October 25, 2013. A foreign fund or (foreign entity) investor will use its GIIN to satisfy reporting obligations and to identify its FATCA compliant status to withholding agents.
- The IRS will electronically post the first list of FATCA compliant entities on December 2, 2013 and intends to update this monthly. To be included in this first list, a foreign fund or investor must register with the IRS by October 25, 2013.
Accessing the FATCA registration portal
To access the portal, the FFI (and its members) needs to take three basic steps:
- Enter irs.gov/FATCA, create an access code and provide general entity information. First open the online registration form and initiate the registration process by clicking 'Create Account' in the portal. Next the FFI needs to classify itself as either a 'Single', 'Lead Member of an EAG' or 'Sponsoring Entity'. An access code for future logins then needs to be created. Once the account is successfully created, the registration system will issue a FATCAID, which is required to relogin to the site.
- Complete IRS Form 8957. The form is straightforward and contains only 15 questions (see box, 'Guidance for completing IRS Form 8957'). It can be completed and mailed in paper, but the IRS strongly recommends that applicants register online as paper forms will first start to be processed in October 2013 and issuance of the FFIs GIIN may be delayed.
- Obtain a Global Intermediary Identification Number (GIIN). Once registration is approved, the FFI will receive a GIIN and will be placed on the IRS FFI List, which is available to the public via irs.gov/FATCA to download and search. In April 2013, the IRS released sample files of the FFI List which shows the GIIN, the FFI's legal name and the country of residence for tax purposes.
Guidelines for completing IRS Form 8957
The questions most relevant to private equity funds and foreign entities are:
The FFI must provide its legal name and declare whether it is categorised as a 'Single entity' 'Lead' or 'Member of an EAG' or a Sponsoring Entity'. If registering as a member of an EAG, the lead EAG's FATCA ID must be provided. This means that a lead EAG must first establish its own account in order to obtain its ID and then provide it to each member of its EAG. The lead of an EAG must provide information concerning each EAG member on Question 12 of the form (see below).
A sponsoring entity does not have to provide details on the entities that it is sponsoring. It is anticipated that such entities will be able to provide sponsored FFI information and obtain GIINs for each sponsored FFI no later than October 15, 2013. If a sponsoring entity has to register as a PFFI or as being covered under Model 1 IGA in order to become FATCA compliant for accounts which it itself maintains, it will be required to do so (and obtain its own GIIN to evidence its FATCA compliant status) separately from its registration as a sponsoring entity.
The FFI should indicate its country of residence for tax purposes and select its FATCA classification in that country. Although four classifications are available, the following are likely to be most relevant to private equity funds and their investors:
- Entering into an FFI Agreement to become a PFFI (worded on the form as 'Participating Financial Institution not covered by an IGA' or a 'Reporting Financial Institution under a Model 2 IGA').
- Covered under a Model 1 IGA (worded on the form as 'Registered Deemed-Compliant Financial Institution' including a Reporting Financial Institution under a Model 1 IGA). This choice encompasses other types of FFIs (those not covered by Model 1 IGA), but a Model 1 IGA is expected to be the type of Registered-Deemed Compliant FFI (RDCFFI)* most relevant to private equity funds and their investors.
There are many types of categories of deemed compliant FFIs, but the draft Form 8957 does not require the FFI to describe why it is deemed compliant or to provide any supporting evidence of such status.
Supply mailing address.
Designation of the FATCA responsible officer (RO). There are two choices on the form:
- RO is the only point of contact for the FFI; or
- RO designates up to five points of contact per FFI to complete Form 8957, take other FATCA-related actions and to obtain access to the FFIs tax information.
Once the electronic form is completed the FFI will receive confirmation that its registration has been submitted, that it is not effective until processed and a note advising it to monitor emails and the message board (found on the FATCA portal tailored homepage) for updates on the account status.
Comments on the proposed FATCA regulations (issued in February 2012) noted that in many cases it may be preferable for a fund manager to perform the due diligence and reporting for all the FFIs it manages on a consolidated basis. In response to these comments, final IRS regulations (issued in January 2013) create a new category of registered deemed-compliant FFI (RDCFFI) – the so-called Sponsored Entity. To be a Sponsoring Entity, the entity must, among other things:
- Be authorised to manage the FFI and enter into contracts on behalf of the FFI (such as a fund manager or general partner).
- Register with the IRS as a Sponsoring Entity.
- Register the FFI it is sponsoring with the IRS.
- Agree to perform, on behalf of the FFI, all due diligence, withholding, reporting, and other requirements that the FFI would have been required to perform if it were a PFFI.
For the following two reasons, it is unclear how relevant or practical this option is for private equity firms:
- IGAs are signed with various partner countries therefore it appears increasingly likely that most foreign funds and entity investors will not enter into FFI Agreements but will become FATCA compliant under their respective local country IGAs making this option irrelevant due to the fact their compliance will be with their local governments, not the IRS.23
- Even if a fund or entity investor opts to enter into FFI Agreements for its various entities that have to become FATCA compliant, not enough is yet known about the administrative details of this compliance in order to properly evaluate what is effectively being 'saved or gained' by having a sponsoring entity do everything that each sponsored FFI would otherwise need to do to become a PFFI.
During a period of transition in which most IGAs have yet to be signed, new W-8 forms (revised for FATCA) have not yet been released in final form, investors have not necessarily decided whether and how they will become FATCA compliant and the IRS FATCA portal is not yet available for registration for another few months, it could be challenging for private equity funds to formulate a concrete FATCA action plan.
However, here are some key steps for foreign and US funds to consider, all of which can be modified as FATCA evolves and more clarity is attainable. Not all of the steps below will be appropriate for every situation (some will have to wait for future events beyond the manager's control). Accordingly, none of this should be construed as advice or recommendation.
» Step 1. Decide whether to become FATCA compliant
- Consider all entities and evaluate potential sources and magnitude of expected US Withholdable Payments under FATCA .
- Consider which entities are members of an EAG and are impacted accordingly. Communicate with members of the EAG that may be controlled by other private equity firms or co-investors.
- Obtain information and monitor developments regarding IGA (if any) of the country of tax residence of each entity. Even if an entity is not expected to receive Withholdable Payments and might therefore consider avoiding the burden of becoming FATCA compliant, local law in its country of tax residence may require it pursuant to its IGA. For this reason it is also important to understand the penalties under local law for non-compliance.
- If the country of tax residence has entered into, or is expected to enter into, a Model 1 IGA, consider whether to be covered under the Model 1 IGA or enter into an FFI Agreement with the IRS.
Tara N. Ferris, an attorney from the IRS Office of Associate Chief Counsel (International, Branch 2) recently acknowleged the challenges of registration decisions during a time when it is unknown which IGAs will be signed and said that the IRS is considering issuing guidance to address the uncertainty.24
» Step 2. Prepare for IRS registration
- Determine the target date for registration. Register by October 25, 2013 to ensure the fund will be on the first GIIN list, which the IRS will publish on December 2, 2013.
- Determine if the Sponsoring Entity will register independently (with follow-up registration for Sponsored Entities in October 2013).
- Identify who will act in the capacity of RO and point of contact (if any) for each entity and educate them on their role and responsibilities.
- If entering into an FFI Agreement, review the terms of the agreement once the IRS Revenue Procedure is published.
» Step 3. Document investor FATCA status
- Formulate new investor admittance (account opening) procedures to conform with FATCA rules. The deadline for implementation is January 1, 2014. When Forms W-8, revised for FATCA, are released by IRS in final form, it is important to:
i. become familiar with them (including instructions),
ii. understand how various types of investors should be completing them, and
iii. seek guidance from advisors.
In addition, establish a system for performing due diligence as required in accordance with the new FATCA rules
- The fund manager should do the following with respect to the documentation already on file from pre-existing investors (currently in the fund or to be admitted before January 1, 2014):
i. review existing Forms W-8 and W-9 on file and evaluate pre-FATCA validity. If not valid, then new Forms W-8 and W-9 will probably need to be obtained once released. See the previous point if new forms need to be obtained.
ii. if forms are valid, evaluate whether to supplement with other information for FATCA or whether to solicit new forms from all. The latter might be most efficient but it may accelerate withholding on those not yet FATCA compliant (such as prima facie FFIs that are not subject to withholding until July 1, 2014 and other undocumented foreign entity investors that are not subject to withholding until January 1, 2016).
- Communicate with investors in order to:
i. establish a timeline and framework to receive documentation of investor FATCA status, in accordance with the fund's decided course of action (see previous bullet point),
ii. establish a timeline and framework to receive other investor documentation or information to supplement (such as a foreign law waiver, GIIN without new form),
iii. share the fund's overall FATCA plan with investors. Assure them that the fund is vigilant about compliance and has employed the necessary resources.
» Step 4. Communicate with US withholding agents
- Confirm that foreign funds and other investment entities that your fund invests in are taking steps to become FATCA compliant so that your fund does not indirectly bear FATCA withholding.
- Identify US withholding agents to whom the fund (and investors) will need to provide new FATCA documentation.
- Establish a timeline and framework to supply new FATCA documentation and to receive affirmative confirmation that the agent will withhold in accordance with fund (and investors') expectations.
If the withholding agent withholds FATCA tax on your fund's income because (in its opinion) proper documentation was not provided, you will have little recourse, even if the withholding agent's review and determination of insufficient documentation demonstrating FATCA compliance is questionable.
» Step 5. Consult with fund advisors to assist with any of the above and with respect to drafting or amending fund documents (such as the private placement memorandum PPM and investor side letters).
US funds will not have to register with the IRS. Furthermore, if a US fund does not have foreign investors (especially foreign entity investors), its FATCA action plan will generally be limited to collecting W-9s from its investors, performing due diligence on those W-9s to ensure that they can be relied on to treat their investors as US and furnish its US withholding agents with its own Form W-9.
Unlike a fund organised as a foreign partnership, a US fund will not provide investor forms to their US withholding agents for review and reliance. Rather it is the US fund itself that is responsible for FATCA withholding and that will bear any consequences for failure to withhold if its investor documentation does not conform with IRS regulations.
A US fund that does have foreign investors should consider Step 3 above for foreign funds.
If FATCA's policy objective is simple, its administrative framework is inversely complex. It places a very significant burden on private equity fund managers, effectively making them 'FATCA police' for the IRS. One can only wonder if the additional revenues it will bring to the US Treasury's coffers will exceed the costs of implementation, which will largely be borne by these FATCA police and, indirectly, by investors and other account holders.
To its credit, the IRS has been looking for ways to mitigate the burden and in its final regulations adopted 'a risk-based approach that effectively addresses policy considerations, eliminates unnecessary burdens and, to the extent possible, builds on existing practices and obligations'. More significantly, the emerging prominence of IGAs is a highly welcome development about which funds and their investors should be cautiously optimistic in terms of mitigating the burden.
Nevertheless, the reality on the horizon remains that FATCA will impose a significant burden to fund managers and their investors, especially those with limited resources. And one thing is clear – FATCA is here to stay. All funds and investors would be well-advised to proactively formulate action plans to effectively and efficiently deal with it.
Foreign Financial Institution (FFI)- a foreign venture capital fund, leveraged buyout fund, fund of funds, or other entity that functions or holds itself out as a collective investment vehicle established with a strategy or investing, reinvesting, or trading financial assets, is generally treated as an FFI.
Participating Foreign Financial Institution (PFFI) – a foreign fund (or foreign entity investor) that has agreed to comply with the terms of an FFI Agreement. It is a type of FATCA compliant foreign entity.
Registered Deemed-Compliant Foreign Financial Institution (RDCFFI) – examples include a foreign fund (or foreign entity investor) that is covered under a Model 1 IGA (i.e., a Model 1 FFI) and has registered as such with the IRS and a sponsored entity. Such funds are also categorised a FATCA- compliant foreign entities.
Exempt Beneficial Owner(EBO) – a foreign entity or organisation that either the FATCA statute or the IRS has identified as not subject to FATCA withholding and reporting because it poses a low risk of being used by a US person for tax evasion.
Non-participating Foreign Financial Institution (NPFFI) – a foreign fund (or foreign entity investor) that is not a PFFI, RDCFFI, or EBO. Such funds are categorised as not FATCA compliant.
Recalcitrant Account Holder – an investor (not itself a foreign fund, or presumed to be a foreign fund) in a foreign fund categorised as a PFFI that fails to comply with reasonable requests for certain information required by the PFFI fund to comply with its FFI Agreement or fails to provide any necessary waiver from foreign disclosure laws to enable the PFFI fund to comply with FATCA. This investor or entity is also considered to be non-compliant with FATCA and is subject to FATCA withholding.
- Any payee if the withholding agent has available as a part of its electronically searchable information a designation for the payee as a 'qualified intermediary' (QI)
or 'non-qualified intermediary' (NQI). An intermediary is any person that acts as a custodian, broker, nominee, or otherwise as an agent for another person (as distinguished from a partnership, which acts in its own capacity). The distinction between a QI and NQI in this context appears academic, as any foreign person who is an "intermediary" is a prima facie FFI, or
- For an account 'maintained in the US', any payee (fund or investor) if the withholding agent has recorded as part of its electronically searchable information one of the North American Industry Classification System or Standard Industrial Classification codes indicating that the payee is a financial institution25.
Expanded Affiliated Group (EAG) – one or more chains of entities affiliated with a common parent that owns, either directly or indirectly, more than 50 percent (vote and value) of each entity in the group. A partnership is treated as a member of an EAG if it is controlled (more than 50 percent) by members of the group. In order for each member of an EAG to be individually FATCA compliant all members have to be FATCA compliant (PFFI or Model 1 FFI).
Jay Bakst is a leading expert on FATCA and is frequently quoted and consulted on its impact on private equity and other investment funds. Jay's unique perspective, examining the less immediately evident nuances of the evolving area and its application to funds, is reflected in his articles and speaking engagements. He remains a valued source of information as the intersection of FATCA and intergovernmental agreements are explored. With more than 20 years of experience, Jay is a respected advisor on international taxation, compliance for onshore and offshore investors and investments, international mergers, acquisitions and dispositions, and the US taxation of international transactions. As a Tax Partner with one of the premier accounting, tax and advisory firms, EisnerAmper LLP, Jay provides services to hedge funds, private equity funds and other investment vehicles.
"Preparing for FATCA: An in-depth discussion of the issues, timeline and action plan for funds" was first published in PEI's The Private Equity CFO & COO Digest 2013.
1 Form 8966, FATCA Report. back to top
2 Form 1042-S. The draft 2014 form was released in April 2013. back to top
3 There are actually 3 versions of a Model 1 IGA: (1) Reciprocal Model 1A, Pre-exisiting TIEA or DTC, (2) Nonreciprocal Model 1B Agreement, Preexisting TIEA or DTC, and (3) Nonreciprocal Model 1B Agreement, No TIEA or DTC. The differences between them primarily relate to whether or not the IRS will report to the partner country information on the latter's residents reported to the IRS by US funds and entities. They are all referred to as Model 1 IGAs herein, as the distinctions are not significant to how most fund managers will deal with FATCA. back to top
4 In the case of a Reciprocal Model 1A Agreement. back to top
5 This applies to payments of FDAP (interest, dividends, etc.), but not gross proceeds which are not currently subject to withholding under a Model 1 IGA. back to top
6 Complete list of countries as at June 3, 2013 back to top
7 This is the only country to sign a Model 2 IGA as at June 3, 2013 back to top
8 Annex II of the Model 1 IGA (revised May 9, 2013) consists of a 'summary' of IRS regulations concerning exempt beneficial owners and exempt accounts, suggesting that perhaps going forward the types of entities in each country will not be separately negotiated with the partner country. back to top
9 The reasons for rejection may be classified as strong or seemingly weak or over cautious, with a lot in between. back to top
10 A more comprehensive discussion of these rules is beyond the scope of this chapter. back to top
11 Chapter 3 of the Internal Revenue Code and the regulations thereunder. back to top
12 Meaning the fund has classified the investor as a US person in its customer files, has a current residence or mailing address for the investor in the US, or has a current telephone number for the person in the US and does not have a telephone number for the person outside the US. back to top
13 The regulations provide detailed rules for how to overcome or refute these US indicia so that the form can be relied upon. The details of these are beyond the scope of this chapter. back to top
14 One particular item the IRS and withholding agents have recently been questioning is if the person signing the form and listing their capacity has the authority to do so. Part of the problem is due to the fact that foreign organisations often use titles for key employees that differ from those referred to in US tax law. In an apparent attempt to address this issue, the draft version of Form W-8BEN-E (released by the IRS without instructions on May 22, 2012) eliminates the requirement to list the capacity of the person signing the form and instead provides a box to check "I certify that I have the capacity to sign for the entity identified on line 1 of this form". back to top
15 Under Chapter 3 of the Internal Revenue Code. back to top
16 While there are more than 25 FATCA classifications, the ones which appear to be particularly relevant to private equity funds are Nonparticipating FFI, Participating FFI, Reporting Model 1 FFI, Participating FFI in a Model 2 jurisdiction, Registered deemed-compliant(other), Nonreportng IGA FFI, Foreign government, Exempt retirement funds, Entity wholly owned by exempt beneficial owners, and 501(c) organization. A Nonreporting IGA FFI is one which is identified in Annex II of a Model 1 IGA as exempt from FATCA. A Reporting Model 1 FFI is one which is not exempt from FATCA and is subject to the compliance requirements under a Model 1 IGA. back to top
17 On May 17, 2013, the IRS released a draft of Form W-9, revised for FATCA, with instructions. back to top
18 Indeed, as a practical matter withholding agents may adopt internal procedures and policies that are arguably more strict than the rules require. back to top
19 However, under Annex II of the Model I IGA (5/9/13), Section IV D, a foreign management company whose sole activity is to render investment advice to, and act on behalf of, a fund that is FATCA compliant may be treated as a deemed compliant FFI. back to top
20 It should be noted that this is strictly an issue of technical interpretation of the statute and regulations. back to top
21 Tax Analysts, Tax Notes Today, March 28, 2013 (2013, TNT 60-3). back to top
22 Under Chapter 3 of the Internal Revenue Code. back to top
23 It is worth noting that the Model 1 IGA contains a provision that allows a partner country to allow a third-party service provider to fulfill the FFIs FATCA obligations under local law. In addition, Annex II of the Model I IGA (5/9/13), Section IV B provides that sponsored entities will be treated as deemed compliant under FATCA pursuant to a framework that is substantially similar to that of IRS regulations described above. back to top
24 Tax Analysts, May 3, 2013. back to top
25 (i) Commercial Banking (NAICS 522110), (ii) Savings Institutions (NAICS 522120). (iii) Credit Unions (NAICS 522130) (iv)Other Depositary Credit Intermediation (NAICS 522190). (v) Investment Banking and Securities Dealing (NAICS 523110). (vi) Securities Brokerage (NAICS 523120). (vii) Commodity Contracts Dealing (NAICS 523130). (viii) Commodity Contracts Brokerage (NAICS 523140). (ix) Miscellaneous Financial Investment Activities (NAICS 523999). (x) Open-End Investment Funds (NAICS 525910). xi) Commercial Banks, NEC (SIC 6029). (xii) Branches and Agencies of Foreign Banks (branches) (SIC 6081). (xiii) Foreign Trade and International Banking Institutions (SIC 6082). (xiv) Asset-Backed Securities (SIC 6189). (xv) Security & Commodity Brokers, (Dealers, Exchanges & Services (SIC 6200). (xvi) Security Brokers, Dealers & Flotation Companies (SIC 6211). (xvii) Commodity Contracts Brokers & Dealers (SIC 6221). (xviii) Unit Investment Trusts, Face-Amount Certificate Offices, and Closed-End Management Investment Offices (SIC 6726). back to top