ONCE again the US authorities have put Foreign Account Tax Compliance Act's
(FATCA) key implementation deadlines on hold.
FATCA, enacted in 2010 as part of the HIRE Act, requires all foreign
financial institutions to record all payments to US persons, and report them to
the US Internal Revenue Service. Institutions that do not comply will have a 30
per cent withholding tax docked from all income of their US investments.
Initially, FATCA's reporting obligations were scheduled to come into
force in January 2013. Nevertheless, in July 2011 resistance from foreign banks
and governments forced the US Treasury to postpone the start dates by a year.
Reporting requirements and withholding taxes on dividends and interest were put
back to January 2014, while withholding tax on gross proceeds of asset disposals
were postponed until January 2015.
This
week the Treasury has conceded that even these deadlines cannot be met. It has
issued a notice postponing the start dates for applying withholding taxes, due
diligence on existing obligations, and filing the first information reports, by
one to two years.
The
principal launch date is postponed by 12 months to January 2014, and now foreign
banks need not begin filing reports until 31 March 2015. They will not have to
start deducting US tax from client payments until January 2017.
Pre-existing arrangements between banks and their clients, or other
banks, will now be considered exempt from FATCA if signed before January 2014,
rather than 2013. Thus banks will not need to introduce new account-opening
procedures for US clients until January 2014.
Key changes noted in the Announcement include the following:
•
“Gross proceeds” withholding will only apply to sales or dispositions occurring
after December 31, 2016. Previously, “gross proceeds” withholding was to be
effective for sales or dispositions occurring after December 31, 2014.
•
FATCA's grandfathering deadline (currently December 31, 2012) will be extended
for “obligations” that could be subject to FATCA withholding solely because
future guidance treats them as generating either: (i) “foreign pass thru
payments” or (ii) U.S.-source “dividend equivalent” payments. Such instruments
will be grandfathered if they are “outstanding” on the date that is six months
after the date when final guidance that would otherwise subject them to FATCA
withholding is issued.
•
Obligations to make payments with respect to collateral posted to secure an
obligation under a grandfathered notional principal contract will also be
eligible for grandfathering from FATCA.
• As
discussed in additional detail below, the timeframes under which “foreign
financial institutions” (“FFIs”) and other withholding agents will need to
review their accounts under FATCA will be modified and generally extended. The
new timelines generally harmonize the timelines for FFIs in jurisdictions with
and without FATCA intergovernmental agreements (“IGAs”).
•
FFIs in countries that do not sign IGAs will be required to file their first
FATCA account reports on March 15, 2015 (the same date when the first such
reports from FFIs in IGA countries are due under the model IGAs), rather than
the earlier proposal of September 30, 2014.
The
move was to some extent expected by the financial sector, though it was still
very welcome. Many advisors and banks had complained that complying with the
original deadlines was proving to be impractical.
The
Announcement does not modify the January 1, 2014 date on which FATCA withholding
will commence on U.S.-source “withholdable payments.” In addition, the
Announcement observes—in an appendix—that withholding and reporting will need to
begin with respect to any documented account, even if the deadline for reviewing
that account has not yet expired.
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