FATCA: Next Steps for Foreign Financial Institutions
Enacted in March 2010, the Foreign Account Tax Compliance Act (FATCA) is designed to ensure the collection of tax revenues for U.S. persons holding offshore accounts with foreign financial institutions (FFIs). Broadly, this law imposes a new withholding and reporting regime upon all FFIs that invest directly or as an intermediary in U.S. assets.
When fully effective, FATCA will require an FFI to conclude an FFI agreement directly with the U.S. tax authority, the IRS, to identify its U.S. accountholders and to annually report information about their accounts. In addition, an FFI will be required to withhold tax on passthru payments made to so-called “recalcitrant” accountholders (accountholders who are unresponsive to information requests by an FFI undertaking account identification procedures) and to FFIs that are not compliant with FATCA. Finally, if local privacy laws would prevent the FFI from reporting information about a U.S. accountholder, the FFI would be required to request the accountholder to waive the privacy law or to close that account if a waiver is not provided.
An FFI that fails to comply with FATCA will be subject to a 30 percent withholding tax on withholdable payments—i.e., certain U.S.-sourced payments including bank deposit and other interest, dividends and gross proceeds on the disposition of U.S. debt or equity securities.
"This year, FFIs intending to comply with the final regulations under FATCA—including participating FFIs (PFFIs) and certain deemed-compliant FFIs—will need to complete key tasks."
Final regulations—The statutory provisions of FATCA grant the IRS and the U.S. Treasury Department broad regulatory authority to prescribe rules relating to FATCA’s implementation. Final regulations published on January 28, 2013, provide these rules for FATCA’s due diligence, reporting and withholding obligations. Importantly, whereas the statute specifies that its provisions became effective on January 1 of this year, the final regulations implement the rules under a phased approach and delay the initial implementation date to January 1, 2014.
Intergovernmental agreements—In some countries, local restrictions may prevent an FFI from complying with FATCA, thus exposing the FFI to withholding. To overcome legal impediments to FATCA compliance, the U.S. government has collaborated with other governments (called ‘partner jurisdictions’) to develop two alternative model intergovernmental agreements to implement FATCA in a manner that alleviates legal restrictions to FFI compliance.
Under the first model intergovernmental agreement (Model 1 IGA), published July 26, 2012, the partner jurisdiction agrees to enact laws that require FFIs (that are not otherwise excepted or exempted) in that country to identify U.S. accounts and report specified information about the U.S. accounts to the partner jurisdiction. The partner jurisdiction then exchanges this information with the IRS on an automatic basis. FFIs that are compliant with these local laws are deemed to be in compliance with FATCA and, accordingly, are not subject to FATCA withholding. In certain cases, an FFI resident in a partner jurisdiction may elect to apply the final regulations instead of the Model 1 IGA.
Under a second model intergovernmental agreement (Model 2 IGA), published on November 14, 2012, a partner jurisdiction agrees to direct and enable all FFIs that are not otherwise excepted or exempted in that jurisdiction to report specified information about U.S. accounts directly to the IRS. FFIs covered by a Model 2 IGA will generally be required to implement FATCA in the manner prescribed by the final regulations.
Highlights of 2013 and 2014 requirements for FFIs
This year, FFIs intending to comply with the final regulations under FATCA— including participating FFIs (PFFIs) and certain deemed-compliant FFIs—will need to complete key tasks, including but not limited to:
- Registration with the IRS as a PFFI or deemed-compliant FFI by October 25
- Updating account opening policies and procedures to be compliant with FATCA by December 31
In 2014, key tasks for PFFIs include but are not limited to:
- Completing initial phases of account due diligence for accounts opened prior to 2014
- Electronically tracking 2014 data that will have to be reported to the IRS in 2015
- Commencing FATCA withholding on accounts opened after 2013 and to a limited extent on accounts opened prior to 2014
FFI registration—FFIs will register with the IRS through the FATCA Registration Portal, an online web portal expected to be accessible by July 15, 2013. FFIs will use the portal to register their status under FATCA (e.g., as a participating FFI) and to manage their registration information. In addition, the portal will facilitate communication between the IRS and FFIs and will also be used by registering FFIs that are qualified intermediaries (QIs) to renew their QI status.
Upon approval of the FFI’s registration, the IRS will issue to the FFI a global intermediary identification number (GIIN). An FFI will use its GIIN to establish its status under FATCA for withholding purposes and to identify the institution for reporting under the final regulations. The IRS will begin assigning GIINs no later than October 15, 2013, and will publish its first list of GIINs on December 2 to be updated monthly thereafter. FFIs will have until October 25 to complete registration on the portal in order to be included in the first GIIN list. For PFFIs that receive a GIIN prior to January 1, 2014, the effective date of their FFI agreement with the IRS will be December 31, 2013.
Updated account opening policies and procedures—A PFFI will be required to adopt written policies and procedures governing its due diligence procedures for identifying and documenting accountholders (as well as its withholding and reporting requirements) under the FFI agreement. Such policies and procedures should be fully implemented by December 31, 2013, in order to comply with an FFI agreement that has the same effective date.
Account due diligence—The final regulations require PFFIs to obtain such information for each holder of its accounts to determine whether each account is held by a U.S. person, a recalcitrant accountholder or a nonparticipating FFI, and lay out detailed rules to perform the due diligence.
The account due diligence must be completed by June 30, 2014, for preexisting accounts (i.e., an account opened on or before December 31, 2013) that are held by prima facie FFIs. A prima facie FFI is an entity that is a QI or NQI (non-qualified intermediary) or a foreign entity that has a North American Industry Classification System or Standard Industrial Classification code that indicates that it is a financial institution.
The due diligence must be completed by December 31, 2014, for preexisting accounts that are held by individuals and that have a balance or value that exceeds US$1,000,000.
Responsible officer certifications and establishment of an internal compliance program—A responsible officer of the PFFI will be required to certify that, to the best of his/her knowledge after conducting a reasonable inquiry, the PFFI does not have any formal or informal practices or procedures in place to assist accountholders in avoiding FATCA’s provisions. Examples of such policies include: advising accountholders to split up their accounts to avoid reporting as high-value accounts; advising that accountholders of U.S. accounts close, transfer or withdraw from their account to avoid reporting; intentional failures to disclose a known U.S. account; or advising that an accountholder remove U.S. indicia from its account information. A reasonable inquiry includes an email requiring responses from relevant personnel as to whether they engaged in such practices.
A PFFI’s responsible officer must certify that the required due diligence has been completed. This certification must be made no later than 60 days following the date that is two years after the effective date of the FFI agreement.
In addition, a PFFI must also establish a compliance program that includes policies, procedures and processes sufficient for the PFFI (or one or more FFIs that belong to a consolidated compliance group) to satisfy the requirements of the FFI agreement. A PFFI will be required to periodically review its compliance program and its compliance with the requirements of the FFI agreement. Once every three years, based on the results of this review, the responsible officer must certify to the IRS that it maintains effective internal controls and that there were no material failures during the certification period or any material failures that did occur were corrected. If a material failure occurring during the certification period has not been corrected, or if an event of default has occurred, the responsible officer may instead make a qualified certification.
Withholding—Finally, PFFIs must perform withholding with respect to U.S.-sourced FDAP income (this includes any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments and other fixed or determinable, annual or periodical gains, profits and income). Specifically, withholding must be undertaken with respect to U.S.-sourced FDAP income paid to holders of new accounts that are nonparticipating FFIs beginning on January 1, 2014, and with respect to prima facie FFIs not documented as compliant with FATCA beginning on July 1, 2014.
Highlights of future requirements
For 2015 and beyond, PFFIs must prepare to (1) complete due diligence procedures on all remaining accounts— i.e., accounts held by entities other than prima facie FFIs and by individuals with account balances or values between US$50,000 and $1,000,000; (2) begin information reporting; (3) expand its withholding capabilities to encompass U.S.-sourced FDAP payments to entities other than undocumented prima facie FFIs (in 2016) and gross proceeds (in 2017); and (4) complete responsible officer certifications to the IRS (in 2016), including establishing an internal compliance program. Finally, the final regulations provide that withholding on foreign passthru payments may begin no earlier than January 1, 2017.
Enhanced J.P. Morgan Operating Model
By January 1, 2014, J.P. Morgan will launch an enhanced operating model in response to FATCA regulatory requirements.
J.P. Morgan will update internal processes to electronically search and extract client account documentation to enable the firm to assess a client’s FFI status. Further documentation may also be requested for certain accountholder profiles.
As part of an enhanced client onboarding process, J.P. Morgan will obtain new versions of U.S. tax forms (e.g., W8 series documents) in order to identify, collect and store the client’s FFI status and other important client data. As new clients are onboarded, J.P. Morgan will begin imposing FATCA withholding tax payments on the U.S. assets of nonparticipating FFIs.
Additionally, J.P. Morgan is positioning itself to introduce new IRS reporting related to U.S. accountholders and recalcitrant accountholders. This reporting will commence in 2015 and will be aligned with the phased IRS requirements’ timeline. Significant differences exist between J.P. Morgan’s reporting requirements as a U.S. entity (including branches outside the U.S.) and its reporting requirements as a J.P. Morgan subsidiary outside the U.S. that enters into a FATCA FFI agreement with the IRS. For both U.S. and non-U.S. entities, J.P. Morgan must implement FATCA-required onboarding and account due diligence procedures. It must also report annually to the IRS on specific accounts and in certain instances collect FATCA withholding tax.