The Internal Revenue Service (IRS) recently announced in Notice 2014-33 that 2014 and 2015 will be transitional years from an administrative and enforcement perspective regarding the implementation of the Foreign Account Tax Compliance Act of 2010 (FATCA). During this period, foreign financial institutions (FFIs), withholding agents, and certain others subject to Chapter 4 of FATCA will not have to be in full compliance, as long as they are making good-faith compliance efforts. Entities that do not do so will not be given any relief from IRS enforcement.

FATCA added Chapter 4 to Subtitle A of the Internal Revenue Code (Code). Chapter 4 requires withholding at a 30 percent rate on certain payments to an FFI unless the FFI has entered into an agreement (FFI agreement) to obtain status as a participating FFI and, among other things, to report certain information regarding U.S. accounts. Chapter 4 also imposes on withholding agents certain withholding, documentation, and reporting requirements concerning certain payments made to certain non-financial foreign entities (NFFEs).

Final FATCA regulations were initially issued on January 17, 2013. On February 20, 2014, temporary clarifying regulations were issued that modified certain provisions of the final Chapter 4 regulations, including incorporating the revised timeline for the implementation of FATCA set forth in IRS Notice 2013-43. The temporary regulations required that withholding agents (including participating FFIs, among others) begin withholding for withholdable payments made on or after July 1, 2014, unless the withholding agent could reliably associate the payment with reliable documentation to treat the payment as exempt from Chapter 4 withholding.

In addition to extending the July 1 deadline, Notice 2014-33 touches on several topics:

  • A withholding agent or FFI may treat an obligation (which includes an account) held by an entity that is opened, executed, or issued on or after July 1, 2014, and before January 1, 2015, as a preexisting obligation (for purposes of the due diligence and withholding requirements applicable to preexisting obligations under the regulations). This relief does not extend to obligations held by individuals because the IRS considers the procedures for documenting individual accounts to be less complex and therefore easier to implement.

  • The IRS provides additional guidance concerning the requirements for an FFI (or a branch of an FFI, including a disregarded entity owned by an FFI) that is a member of an expanded affiliated group of FFIs to be treated as a limited FFI or limited branch. This includes the requirement for a limited FFI to register on the IRS’s FATCA registration website.

  • Under the temporary regulations, if there is reason to know that documentation establishing the foreign status of a direct account holder is unreliable or incorrect (i.e., if the withholding agent has a current telephone number for the account holder in the United States and no telephone number for the account holder outside the United States, or has a U.S. place of birth for the account holder), reliance on a claim of foreign status is inappropriate. A withholding agent that has documented a direct account holder before July 1, 2014, is not required to apply the new “reason to know” standards relating to a U.S. telephone number or U.S. place of birth until the withholding agent is notified of a change in circumstances concerning the account holder’s foreign status or reviews documentation for the account holder that contains a U.S. place of birth. Notice 2014-33 clarifies that such reliance remains applicable regardless of whether the withholding agent is required to obtain renewal documentation on or after July 1, 2014, to avoid expiration of pre-July 1 documentation.

  • The definition of a reasonable explanation of foreign status in the final FATCA regulations conflicted with the temporary coordination regulations issued under Chapter 3 of Subtitle A of the Code. Treasury intends to amend the former to adopt the provisions of the latter.

Before this announcement, full compliance was expected as of July 1, 2014. Various entities, including not only FFIs themselves but also various trade associations (including the American Bankers Association, the Institute for International Banks, The Clearing House, and the Securities Industry and Financial Markets Association), have sought to persuade the Treasury Department to delay the implementation of the regime and the associated compliance requirements.

Ballard Spahr’s Bank Regulation and Supervision Group regularly advises banking clients on a variety of issues affecting foreign banking organizations, and the firm’s Tax Group provides general U.S. tax advice to individuals and institutions participating in cross-border transactions. Please contact Keith R. Fisher at 202.661.2284 or fisherk@ballardspahr.com in the Bank Regulation and Supervision Group, or Wayne R. Strasbaugh  at 215.864.8328 or strasbaugh@ballardspahr.com in the Tax Group for additional information and assistance.


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