Diversity & Inclusion
On October 29, 2013, the IRS issued Notice 2013-69 as the next step in implementing far-reaching legislation commonly known as the Foreign Account Tax Compliance Act (FATCA).
Congress enacted FATCA in 2010 as part of the HIRE Act to combat perceived tax evasion by U.S. persons through the use of overseas accounts. FATCA requires foreign financial institutions (FFIs) — defined broadly to include not only foreign banks but other offshore entities such as foreign investment funds — to enter into agreements with the IRS to report information about the holdings of U.S. taxpayers or face significant withholding taxes. The Treasury Department has delayed the start dates of FATCA several times to give FFIs more time to comply with FATCA’s substantial administrative burdens.
In addition, the Treasury has been working to address local law impediments, such as bank secrecy laws, through intergovernmental agreements (IGAs) with different countries.1 Last year, the Treasury published two versions of model IGAs. The Model 1 IGA requires FFIs resident in the relevant country to report all FATCA-related information to their own governmental agencies, which in turn report the information to the IRS. Some Model 1 IGAs are reciprocal, requiring the U.S. to provide certain information about residents of the Model 1 country to the Model 1 country in exchange for the information that country provides to the United States. An FFI covered by a Model 1 IGA does not need to enter into an FFI agreement with the IRS. The second version — the Model 2 IGA — requires FFIs to report information directly to the IRS. Certain FFIs covered by Model 2 IGAs will enter into an FFI agreement with the IRS (modified to reflect the IGA).2
The notice provides guidance to FFIs entering into agreements with the IRS pursuant to FATCA, including coordination of the new legislation with existing reporting and withholding rules. The notice also includes a much-anticipated draft FFI agreement, and notes the IRS will finalize it by the end of the year. Although the notice generally contains no surprises, it represents an important development as FATCA’s start date of July 1, 2014, fast approaches.
The notice provides general background on the scope of the statutory and regulatory requirements for FFIs, as well as FFIs and branches of FFIs treated as reporting financial institutions under an applicable Model 2 IGA (Reporting Model 2 FFIs). Generally, any FFI or Reporting Model 2 FFI that can comply with the required terms of an FFI agreement is eligible to enter into such FFI agreement. A Reporting Model 2 FFI also must register with the IRS to obtain a global intermediary identification number (GIIN).
The IRS is working on modifying the agreements for a qualified intermediary (QI), withholding foreign partnership (WP) and a withholding foreign trust (WT), so as to add new requirements under Chapter 3 (the existing withholding regime) and Chapter 4 (the FATCA regime) of the Internal Revenue Code.
The notice also provides a description of some of the intended updates to the regulations under FATCA and other withholding/reporting regimes of the code. Specifically, the notice indicates that Treasury and the IRS intend to issue regulations that would:
The notice also details the procedures for registering for: (i) participating FFI status, (ii) Reporting Model 2 FFI status and (iii) sponsoring entities (i.e., entities that agree to perform the due diligence, withholding and reporting of one or more FFIs pursuant to the FATCA regulations).
Finally, the notice provides a draft FFI agreement that substantially incorporates the provisions set forth in the FATCA regulations (Treas. Reg. § 1.1471-4) and includes appropriate modifications for Reporting Model 2 FFIs.
1 The Treasury has signed nine IGAs and reached 16 agreements in substance, with many others under negotiation.
2 So far, only Japan and Switzerland have entered into Model 2 IGAs.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.