Alert October 30, 2012

IRS Announces Modification of Certain Timelines for Due Diligence and Other Requirements under FATCA

On October 24, 2012, the Internal Revenue Service (“IRS”) issued Announcement 2012-42 (the “Announcement”), which generally extends the timelines for withholding agents and foreign financial institutions (“FFI”) to carry out certain due diligence and other requirements under the Foreign Account Tax Compliance Act” (“FATCA”).  In addition, the Announcement extends the date for withholding on gross proceeds withholdable payments from January 1, 2015 to January 1, 2017, and broadens the rules covering grandfathered obligations to include certain additional categories of obligations.  The Announcement provides that these modifications will be incorporated into final regulations which are expected to be issued prior to the end of 2012.  It should be noted that these modifications do not change the January 1, 2014 effective date for FATCA withholding on U.S.-source interest, dividend and other fixed and determinable payments (“FDAP”) withholdable payments.  Furthermore, the Announcement makes clear that although these new timelines are intended to provide a reasonable period of time for withholding agents to review and document all preexisting accounts, once an account has been documented, withholding or reporting, as appropriate, must begin notwithstanding that the due diligence time period has not expired.


Under FATCA, the provisions of which are codified in sections 1471-1474 of the Internal Revenue Code of 1986 (the “Code”), withholding agents must withhold 30% of withholdable payments made to an FFI, unless the FFI  has entered into an agreement (an “FFI Agreement”) with the IRS to, among other things,  report certain information to the IRS with respect to accounts held by specified United States (“U.S.”) persons or by foreign entities in which specified U.S. persons own a substantial interest (“U.S. accounts”), or is treated as a “deemed compliant” FFI (and hence excepted from having to enter into an FFI Agreement).  For these purposes, a specified U.S person is generally any U.S. person as defined in Code section 7701(a)(30), other than certain excepted persons, such as U.S. corporations the stock of which is regularly traded on an established securities market and their affiliates, organizations exempt from tax under Code section 501(c)(3), and individual retirement plans as defined in Code section 7701(a)(37).  Deemed-compliant FFIs are divided into three categories:  registered deemed-compliant FFIs, which must meet certain requirements for registering with the IRS as well as other requirements for qualifying for deemed-compliant status, certified deemed-compliant FFIs, which are not required to register with the IRS, and certain owner-documented FFIs, which can qualify for deemed-compliant status only with respect to withholdable payments made by certain designated withholding agents. 

In addition, in July 2012, the U.S. Treasury Department and IRS issued a model intergovernmental agreement (“IGA”) under which an FFI would report information about its U.S. accounts to its government, and that information would be subject to a government-to-government automatic information exchange.  To date, one such IGA has been signed with the United Kingdom, and the Treasury Department and IRS have announced their intention to conclude other bilateral agreements based on the model IGA.

In February 2012, the Treasury Department and IRS issued proposed regulations under FATCA (the “Proposed Regulations”).  The Proposed Regulations contain detailed rules regarding the due diligence obligations of withholding agents, participating FFIs and registered deemed-compliant FFIs in order to identify the status of their account holders for FATCA purposes, and that generally are more heightened with respect to new accounts than preexisting obligations.  The IRS indicated that a major purpose of the modified timelines in the Announcement is to align the due diligence timelines for U.S. withholding agents, FFIs in countries with an IGA and FFIs in countries that do not have an IGA.

Changes Made to Due Diligence Timelines by the Announcement

New Account Opening Procedures.  The Announcement generally extends the timelines for implementing the new account opening procedures by changing the definition of preexisting obligations from accounts opened prior to January 1, 2013 to accounts opened prior to January 1, 2014.  In the case of a participating FFI, a preexisting obligation will mean any account maintained or executed by the participating FFI prior to the later of January 1, 2014 or the date the FFI enters into an FFI Agreement.  (The Announcement states that any FFI Agreement entered into prior to January 1, 2014, will have an effective date of January 1, 2014.)  In the case of a registered deemed-compliant FFI, a preexisting obligation will mean any account maintained or executed prior to the date on which the FFI implements its required account opening procedures, which must occur by the later of January 1, 2014 or the date on which it registers as a deemed-compliant FFI.

Withholding and Documentation for Preexisting Obligations of Prima Facie FFIs.  In addition, the Announcement addresses certain transition rules with respect to preexisting obligations.  In particular, under the Proposed Regulations, a withholding agent must treat a “prima facie” FFI as a nonparticipating FFI, until it obtains documentation establishing that the payee has a different status for FATCA withholding purposes.  (A prima facie FFI is generally an entity which is shown on a withholding agent’s searchable information to be a “qualified intermediary” or a “nonqualified intermediary” (as those terms are defined in Treasury Regulations issued under the withholding provisions of Code sections 1441and 1442), or to be a foreign entity that is associated with certain industry codes that are deemed indicative of financial institution status.)  The Announcement provides that withholding on withholdable payments made to a prima facie FFI with respect to preexisting obligations will apply to payments made after June 30, 2014, instead of January 1, 2014 as currently provided in the Proposed Regulations.  Similarly, with respect to a preexisting obligation, a participating FFI will be required to determine whether a prima facie FFI is a participating FFI, deemed-compliant FFI or a nonparticipating FFI within six months of the effective date of its FFI Agreement (that is, by June 30, 2014 for any participating FFI that enters into an FFI Agreement on or before December 31, 2013).

Withholding and Documentation for Other Preexisting Obligations. 

  • Other Preexisting Entity Obligations - The Announcement states that with respect to preexisting obligations, withholding agents, other than participating FFIs, will be required to document payees, other than prima facie FFIs, by December 31, 2015.  Accordingly, beginning on January 1, 2016 (instead of January 1, 2015 as under the Proposed Regulations) any undocumented entity that is treated as a foreign entity but is not a prima facie FFI must be treated as a nonparticipating FFI until the withholding agent obtains sufficient documentation to establish a different status for FATCA purposes of the payee.  Similarly, the Announcement states that a participating FFI will be required to perform the requisite identification procedures to determine whether an entity other than a prima facie FFI is itself a participating FFI by the later of December 31, 2015 or the date that is two years after the effective date of its FFI Agreement, and will not be required to apply certain presumption rules as to the accounts of such payees until such time.
  • Participating FFIs and Preexisting Individual Accounts - In general, the Announcement extends the dates in the Proposed Regulations for a participating FFI to perform the required identification procedures and obtain appropriate documentation about preexisting individual accounts.  If the account is a “high value” account (i.e., the account had a balance or value that exceeds $1,000,000 at the end of the calendar year preceding the effective date of a participating FFI’s FFI Agreement, or the end of any subsequent calendar year), the participating FFI must perform the requisite identification procedures and obtain the appropriate documentation by December 31, 2014, and by December 31, 2015 if the account is other than a high value account; if it fails to do so, it must treat the account holder as a “recalcitrant” account holder.

Due Date for First Report by a Participating FFI with respect to U.S. Accounts.  The Announcement provides that a participating FFI will be required to file the information reports for the 2013 and 2014 calendar years with respect to accounts that must be treated as U.S. accounts or as held by recalcitrant account holders not later than March 31, 2015.

Gross Proceeds Withholding

The Announcement extends the date for withholding to commence on “gross proceeds” type withholdable payments (i.e., gross proceeds from any sale of disposition of any property of a type that can produce U.S. source interest or dividends) from January 1, 2015 to January 1, 2017.

Expansion of Grandfathered Obligations

Under the Proposed Regulations, FACTA withholding does not apply to any payments made on an obligation (which, for this purpose, includes only debt and similar instruments) that is outstanding on January 1, 2013.  The Announcement provides that a grandfathered obligation will include any obligation that produces or could produce a foreign pass-through payment and that cannot produce a withholdable payment, provided the obligation is outstanding as of the date that is six months after the date on which final regulations are issued.  In addition, the Announcement provides that a grandfathered obligation will include (i) any instrument that gives rise to a withholdable payment solely because the instrument is treated as giving rise to a dividend equivalent under Code section 871(m), and (ii) any obligation to make a payment with respect to, or to repay, collateral posted to secure obligations under a notional principal contract that is a grandfathered obligation.