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William Byrnes (Texas A&M) tax & compliance articles

IRS Makes Substantial Amendments To FATCA Regulations

Posted by William Byrnes on February 21, 2014


On February 20, 2014 the IRS issued many changes to the FATCA Final Regulations via newly released Temporary Regulations.  These temporary regulations reflect changes made to the final regulations to coordinate the chapter 4 regulations with the temporary regulations published under chapters 3 and 61 and section 3406 of the Code  modifications to the final regulations to further harmonize them with the IGAs.  Several of the changes made by these temporary regulations were previewed in Notice 2013-69, the draft FFI agreement, and certain of the draft IRS forms released throughout 2013.

Attached I have highlighted the significant FATCA changes from the 229 page document:  Highlighted FATCA Changes 2-20-14

For previous analysis of FATCA updates, see my blog articles: https://profwilliambyrnes.com/category/fatca/ and LexisNexis Guide to FATCA Compliance

Below I simply include the FATCA sections that have been changed.

II. Comments and Changes to §1.1471-1–Scope of Chapter 4 and Definitions

A. Direct reporting NFFE, sponsored direct reporting NFFE, and sponsoring entity

B. Excepted NFFE

C. Offshore obligation and offshore account

D. Pre-FATCA Form W-8

E. Standardized industry coding system

F. Certain foreign insurance companies treated as U.S. persons

G. Coordination of definitions

The temporary regulations add definitions of:

  • backup withholding,
  • branch,
  • chapter 4 withholding rate pool,
  • exempt recipient,
  • IGA, non-exempt recipient,
  • reportable payment, and
  • reporting Model 2 FFI.

These regulations modify the definition of a U.S. branch treated as a U.S. person. In addition, the definitions of financial institution, limited branch, limited FFI, and substantial U.S. owner are modified to ensure coordination between the FFI agreement and these temporary regulations.

H. Harmonization with IGAs

III. Comments and Changes to §1.1471-2–Requirement to Deduct and Withhold Tax on Withholdable Payments to Certain FFIs

A. Grandfathered obligations–definitions–material modification

B. Grandfathered obligations–determination by withholding agent of grandfathered treatment

IV. Comments and Changes to §1.1471-3–Identification of Payee

A. Payee defined

1. Exceptions–U.S. Intermediary or Agent of a Foreign Person

2. Exceptions–U.S. Branch of Certain Foreign Banks or Foreign Insurance Companies

B. Determination of payee’s status–determination of whether the payment is made to a QI, WP, or WT

C. Rules for reliably associating a payment with a withholding certificate or other appropriate documentation

1. Requirements for Validity of Certificates–Withholding Certificate of an Intermediary, Flow-Through Entity, or U.S. Branch (Form W-8IMY)–In General

2. Requirements for Validity of Certificates–Withholding Certificate of an Intermediary, Flow-Through Entity, or U.S. Branch (Form W-8IMY)–Withholding Statement–Special Requirements for an FFI Withholding Statement

3. Requirements for Validity of Certificates–Withholding Certificate of an Intermediary, Flow-Through Entity, or U.S. Branch (Form W-8IMY)–Withholding Statement–Special Requirements for a Chapter 4 Withholding Statement and Exempt Beneficial Owner Withholding Statement

4. Applicable Rules for Withholding Certificates, Written Statements, and Documentary Evidence–Period of Validity

5. Applicable Rules for Withholding Certificates, Written Statements, and Documentary Evidence–Electronic Transmission of Withholding Certificate, Written Statement, and Documentary Evidence

6. Applicable Rules for Withholding Certificates, Written Statements, and Documentary Evidence–Acceptable Substitute Withholding Certificate–Non-IRS Form for Individuals

7. Documentation Furnished on Account-by-Account Basis unless Exception Provided for Sharing Documentation within Expanded Affiliated Group–Preexisting Account

D. Documentation requirements to establish payee’s chapter 4 status

1. Reliance on Pre-FATCA Form W-8

2. Identification of U.S. Persons–In General

3. Identification of U.S. Persons–Preexisting Obligations

4. Identification4. Identification of Participating FFIs and Registered Deemed-Compliant FFIs

5. Identification of Excepted NFFEs–Identifying a Direct Reporting NFFE, Identifying a Sponsored Direct Reporting NFFE, and Identification of an Excepted Inter-Affiliate FFI

E. Standards of knowledge

1. GIIN Verification

2. Reason to Know

F. Presumptions regarding chapter 4 status of the person receiving the payment in the absence of documentation

V. Comments and Changes to §1.1471-4–FFI Agreement

A. Withholding requirements

1. Satisfaction of Withholding Requirements–Election to Withhold under Section 3406

2. Special Rule for Dormant Accounts

B. Due diligence for the identification and documentation of account holders and payees

1. Identification and Documentation Procedure for Preexisting Individual Accounts–Specific Identification and Documentation Procedures for Preexisting Individual Accounts–U.S. Indicia and Relevant Documentation Rules–Documentation to be Retained upon Identifying U.S. Indicia–Standing Instructions to Pay Amounts

2. Identification and Documentation Procedure for Preexisting Individual Accounts– Specific Identification and Documentation Procedures for Preexisting Individual Accounts–Exception for Preexisting Individual Accounts Previously Documented as Held by Foreign Individuals

C. Account reporting

1. Reporting Requirements In General–Financial Institution Required to Report an Account–Special Reporting of Account Holders of Territory Financial Institutions

2. Reporting Requirements In General–Financial Institution Required to Report an Account–Requirement to Identify the GIIN of a Branch that Maintains an Account

3. Reporting Requirements In General–Financial Institution Required to Report an Account–Reporting by Participating FFIs and Registered Deemed-Compliant FFIs (including QIs, WPs, WTs, and Certain U.S. Branches Not Treated as U.S. Persons) for Accounts of Nonparticipating FFIs (Transitional)

4. Reporting Requirements In General–Special U.S. Account Reporting Rules for U.S. Payors–Special Reporting Rule for U.S. Payors Other Than U.S. Branches

5. Reporting Requirements in General–Special U.S. Account Reporting Rules for U.S. Payors–Special Reporting Rules for U.S. Branches Not Treated as U.S. Persons

6. Reporting on Recalcitrant Account Holders–Extensions in Filing

7. Treatment of a Disregarded Entity

D. Expanded affiliated group requirements

E. Verification–IRS review of compliance

F. Event of default

VI. Comments and Changes to §1.1471-5–Definitions Applicable to Section 1471

A. U.S. accounts–account holder–in general; grantor trust

B. Financial accounts–value of interest determined, directly or indirectly, primarily by reference to assets that give rise (or could give rise) to withholdable payments, and return earned on the interest (including upon a sale, exchange, or redemption) determined, directly or indirectly, primarily by reference to one or more investment entities or passive NFFEs

C. Definition of financial institution

1. In General

2. Holding Financial Assets for Others as a Substantial Portion of its Business–Income Attributable to Holding Financial Assets and Related Financial Services

3. Investment Entity—Examples

 4. Exclusions–Excepted Nonfinancial Group Entities–In General

5. Exclusions–Excepted Nonfinancial Group Entities–Nonfinancial Group

6. Exclusions–Excepted Nonfinancial Group Entities–Holding Company

7. Exclusions–Excepted Nonfinancial Group Entities–Treasury Center

8. Exclusions–Excepted Inter-Affiliate FFI

D. Deemed-compliant FFIs

1. Registered Deemed-Compliant FFIs–Restricted Funds

2. Registered Deemed-Compliant FFIs–Qualified Credit Card Issuers and Servicers

3. Registered Deemed-Compliant FFIs–Sponsored Investment Entities and Controlled Foreign Corporations

4. Certified Deemed-Compliant FFIs–Nonregistering Local Bank

5. Certified Deemed-Compliant FFIs–Limited Life Debt Investment Entities (Transitional)

6. Certified Deemed-Compliant FFIs–Investment Advisors and Investment Managers

7. Related Persons

E. Expanded affiliated group

VII. Comments and Changes to Section 1.1471-6–Payments Beneficially Owned by Exempt Beneficial Owners–Foreign Central Bank of Issue

VIII. Comments and Changes to Section 1.1472-1–Withholding on NFFEs

A. Exceptions–payments to an excepted NFFE–active NFFEs

B. Exceptions–payments made to an excepted NFFE

C. Exceptions–payments to an excepted NFFE–direct reporting NFFEs and sponsored direct reporting NFFEs

IX. Changes and Comments to §1.1473-1–Section 1473 Definitions

A. Definition of withholdable payment– U.S. source FDAP income defined–special rule for sales of interest bearing debt obligations; gross proceeds defined–payment of gross proceeds–amount of gross proceeds

B. Definition of withholdable payment–payments not treated as withholdable payments–offshore payments of U.S. source FDAP income prior to 2017 (transitional)

1. In General

2. Insurance Brokers

C. Definition of withholdable payment–payments not treated as withholdable payments–collateral arrangements prior to 2017 (transitional)

D. Substantial U.S. owner–indirect ownership of foreign entities–interests owned or held by a related person

X. Changes and Comments to §1.1474-1–Liability for Withheld Tax and Withholding Agent Reporting

A. Information returns for payment reporting–filing requirement–in general

B. Information returns for payment reporting–filing requirement–recipient–defined; persons that are not recipients

C. Information returns for payment reporting–amounts subject to reporting–in general

D. Information returns for payment reporting–method of reporting–payments by U.S. withholding agents to recipients–payments to participating FFIs, deemed-compliant FFIs, and certain QIs

XII. Future Guidance

A. Verification requirements of sponsoring entities

B. FFI agreement

The 229 pages of changes and explanation of the changes to the FATCA Final Regulations is available at http://www.irs.gov/Businesses/Corporations/Additional-FATCA-Guidance-Submitted-for-Publication

LexisNexis FATCA Compliance Manual

book coverFifty contributing authors from the professional and financial industry provide 600 pages of expert analysis within the LexisNexis® Guide to FATCA Compliance (2nd Edition): many perspectives – one voice crafted by the primary author William Byrnes.

The LexisNexis® Guide to FATCA Compliance (2nd Edition) comprises 34 Chapters grouped in three parts: compliance program (Chapters 1–4), analysis of FATCA regulations (Chapters 5–16) and analysis of FATCA’s application for certain trading partners of the U.S. (Chapters 17–34), including intergovernmental agreements as well as the OECD’s TRACE initiative for global automatic information exchange protocols and systems. The 34 chapters include many practical examples to assist a compliance officer contextualize the regulations, IGA provisions, and national rules enacted pursuant to an IGA.  Chapters include by example an in-depth analysis of the categorization of trusts pursuant to the Regulations and IGAs, operational specificity of the mechanisms of information capture, management and exchange by firms and between countries, insights as to the application of FATCA and the IGAs within new BRIC and European country chapters.

4 Responses to “IRS Makes Substantial Amendments To FATCA Regulations”

  1. […] the previous Friday article covering amendments to the FATCA Final regulations:  https://profwilliambyrnes.com/2014/02/21/irs-makes-substantial-amendments-to-fatca-regulations/  Below I cover the amendments for Coordination of FATCA with Pre-Existing Reporting and […]

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  2. As per Deloitte US analysis:
    The Temporary Regulations modify the definition of an expanded affiliated group (“EAG”) to allow a partnership or other non-corporate entity to elect to be treated as the common parent entity of an EAG. The temporary regulations also set forth new rules for establishing the ownership requirements for determining if an entity is a member of an EAG. For example, a corporation owned by a partnership or other non-corporate entities can now be included in a chain of entities that are part of the same EAG. Further, in determining whether an entity is an EAG member, only direct – not indirect or constructive – ownership is considered.

    Would it be possible to discuss the new definition of “Expanded Affiliated Group” under the amendments?
    A more down-to-earth example would be welcomed.

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  3. […] On May 12, 2014 the IRS published in the IRB its April 21st technical corrections relating to brokers making certain returns of information with respect to their customers as per the final and temporary regulations that relate to the withholding of tax on certain U.S. source income paid to foreign persons, information reporting and backup withholding with respect to payments made to certain U.S. persons, portfolio interest paid to nonresident alien individuals and foreign corporations, and the associated requirements governing collection, refunds, and credits of withheld amounts under these rules.  See my February 21, 2014 article analyzing these substantial amendments to the FATCA regulations. […]

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