On June 24, 2014 the IRS released an updated version of the FATCA FFI Agreement for Participating FFI and Reporting Model 2 FFI, just one week before FATCA withholding begins July 1st.   The previous FFI agreement version was released January 13^th as Revenue Procedure 2014-13 (see my article link).

The IRS has updated the FFI agreement make it consistent with the coordination temporary regulations under chapter 4 of the Code, chapters 3 and 61 of the Code, and section 3406, which were released on February 20, 2014. (link to my article on these US Withholding and Documentation Rules changes).

This revenue procedure also provides guidance to FFIs and branches of FFIs treated as reporting financial institutions under an applicable Model 2 intergovernmental agreement (IGA) (reporting 2 Model 2 FFIs) on complying with the terms of the FFI agreement, as modified by the Model 2 IGA. The FFI agreement does not apply to a reporting Model 1 FFI, or any branch of such an FFI, unless the reporting Model 1 FFI has registered a branch located outside of a Model 1 IGA jurisdiction so that such branch may be treated as a participating FFI or reporting Model 2 FFI. In such a case, the terms of the applicable FFI agreement apply to the operations of such branch.

A reporting Model 2 FFI should apply the FFI agreement by substituting the term “reporting Model 2 FFI” for “participating FFI” throughout the FFI agreement, except in cases where the FFI agreement explicitly refers to a reporting Model 2 FFI.  The FFI agreement in section 5 of this revenue procedure shall apply to an FFI that has submitted a FATCA registration with the IRS to be treated as a participating FFI (including a reporting Model 2 FFI) and that has received a global intermediary identification number (GIIN), regardless of whether the FFI receives a GIIN before or after the effective date of this revenue procedure.

How Many FFIS are Impacted by this Change? 

About 26% (19,960) of the registered FFIs are impacted by the FFI agreement changes, in addition to any new registrations from the current 9 Model 2 countries/jurisdictions and 171 countries/jurisdictions without an IGA.

77,353 financial institutions and their branches registered from 205 countries and jurisdictions, of a total of 250 countries and jurisdictions recognized by the USA.

Of this total registered, 71,219  FFIs (92%) registered from the 79 countries and jurisdictions that as of June 23^rd have an IGA.  57,393 FFIs registered from Model I IGA jurisdictions probably either as a category of a Model 1 Deemed Compliant FFI or as a branch.  However, 13,826 of these registered as Model 2 reporting FFIs or branches.  At least these 13,826 are impacted by the FFI Agreement changes.

Model 2 IGAs – 9 (13,826 FFI Registered)

1. Armenia (5-8-2014): 27
2. Austria (4-29-2014): 2,978
3. Bermuda (12-19-2013): 1,242
4. Chile (3-5-2014): 324
5. Hong Kong (5-9-2014): 1.539
6. Japan (6-11-2013): 3,251
7. Paraguay (6-6-2014): 17
8. Switzerland (2-14-2013): 4,040
9. Taiwan: 408

Non IGA Registrations (Participating FFI and other)

Only 6,134 FFIs registered from the remaining non-IGA countries / jurisdictions either as Participating FFIs or branches.   These 6,134 are also impacted by the FFI agreement changes.

45 countries and jurisdictions did not have a single FFI or branch registration on the GIIN List.  Presumably, FFIs and / or branches from these countries, such as Kosovo, will find their way unto the July 1^st GIIN list.

Meanwhile, 30% withholding on all withholdable payments to nonparticipating FFIs in the 171 non-IGA countries begins next week on July 1.  Most commentators expect a rush of over 300,000 FFI registrations by the end of 2014.  Some predict more than a half million entities must still register, based on the UK’s HMRC estimate that 75,000 entities are impacted by FATCA within the United Kingdom (where less than 6,300 are currently registered on the GIIN list).

Updates to FFI Agreement

Definitions

Several definitions in section 2 of the FFI agreement are updated. For example, the terms chapter 4 withholding rate pool (including the U.S. payee pool) and chapter 4 reporting pool have been redefined and are further clarified.

Incorporating Six Month Extension for Entities

Section 3.02 of the FFI agreement is revised to incorporate the allowance for treating an obligation held by an entity that is issued, opened, or executed on or after July 1, 2014, and before January 1, 2015 as a preexisting obligation for purposes of applying the due diligence procedures under chapter 4 and the regulations thereunder, except that an FFI may not apply the documentation exception.

Back Up Withholding in Certain Situations

Sections 4.01(D), 4.02(B), 6.05(A)(2), 6.07, and 9.02(B) of the FFI agreement are also updated to reflect that a participating FFI may elect to backup withhold under section 3406 rather than to withhold under chapter 4 on a withholdable payment that is a reportable payment made to certain U.S. non-exempt recipients only if the participating FFI complies with the information reporting rules under chapter 61 with respect to payments made to such account holders.

Depositing Withheld Tax

In addition, section 5.02 of the FFI agreement (regarding tax withheld and set aside in escrow with respect to withholdable payments to certain dormant accounts) is revised to conform to the temporary chapter 4 regulations for when the tax must be deposited.

Lead FFI Responsibility

Section 11.02(B) of the FFI agreement is revised to clarify that the responsibilities of a lead FI are only with respect to members of the FFI group that have designated the participating FFI to act as lead FI on their behalf. Additionally, if an FFI group has a consolidated compliance program, the participating FFI that is also the compliance FI for the members of the FFI group that are included in such compliance program must act as the lead FI for each such member of the FFI group.

PFFI Reporting NFFE Account Holder as a U.S. Account

Section 9.02(B) of the FFI agreement also is revised to allow a participating FFI that receives a withholdable payment that is allocable to an account holder of the FFI that is a passive NFFE with one or more substantial U.S. owner(s) (or, in the case of a reporting Model 2 FFI, with one or more controlling persons as defined under the applicable IGA) to certify on a withholding statement provided to the withholding agent that the FFI is reporting the account holder as a U.S. account under the terms of the FFI agreement.

When finalizing the temporary chapter 4 regulations, the Treasury Department and the IRS intend to amend the regulations to allow a withholding agent to rely on such a certification provided by a participating FFI, reporting Model 2 FFI, or reporting Model 1 FFI, which, absent a reason to know that the certificate is incorrect or unreliable, would relieve the withholding agent of its obligation to obtain and report information about a passive NFFE with substantial U.S. owners under section 1472. This amendment is intended to eliminate duplicative reporting of substantial U.S. owners (or controlling persons) of passive NFFEs required under section 1472 as well as under the U.S. account reporting requirements of a participating FFI, reporting Model 2 FFI, or reporting Model 1 FFI under chapter 4 or an applicable IGA.

Portional Allocation of Withholdable Payments

Section 9.02(B) is also revised to provide that a participating FFI may allocate a portion of a withholdable payment to a group of documented account holders (other than nonqualified intermediaries or flow-through entities) for whom withholding and reporting is not required under chapter 3, 4, or 61. For example, a participating FFI may allocate a payment of bank deposit interest to a pool of documented foreign account holders rather than providing specific information and a valid withholding certificate or other appropriate documentation for each such payee. The Treasury Department and the IRS intend to amend the regulations to incorporate this change when the temporary chapter 4 regulations are finalized.

FFI Agreement Sections

Section 1. Purpose And Scope
Section 2. Definitions
Section 3. Due Diligence Requirements For Documentation And Identification Of Account Holders And Nonparticipating FFI Payees
Section 4. Withholding Requirements
Section 5. Deposit Requirements
Section 6. Information Reporting And Tax Return Obligations
Section 7. Legal Prohibitions On Reporting U.S. Accounts And On Withholding
Section 8. Compliance Procedures
Section 9. Participating FFI Withholding Certificate
Section 10. Adjustments For Overwithholding And Underwithholding And Refunds
Section 11. FFI Group
Section 12. Expiration, Modification, Termination, Default, And Renewal Of This Agreement
Section 13. Miscellaneous Provisions

Practical Compliance Aspects of FATCA and GATCA

The LexisNexis® Guide to FATCA Compliance (2^nd Edition) comprises 34 Chapters by 50 industry experts grouped in three parts: compliance program (Chapters 1–4), analysis of FATCA regulations (Chapters 5–16) and analysis of Intergovernmental Agreements (IGAs) and local law compliance challenges (Chapters 17–34), including intergovernmental agreements as well as the OECD’s TRACE initiative for global automatic information exchange protocols and systems.   A free download of the first of the 34 chapters is available at http://www.lexisnexis.com/store/images/samples/9780769853734.pdf

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