United States Foreign Account Tax Compliance act (FATCA) Concepts and Deadlines

Contributed by IBSA, by Howell Bramson, Robert Kiggins, 30 September, 2014

FATCA is aimed at addressing perceived tax abuse by US citizens and residents using accounts located outside the US to hide income from the US revenue authorities. Robert Kiggins and Howell Bramson outline the reasons behind FATCA and some of the practicalities affecting implementation.


The United States Foreign Account Tax Compliance Act ("FATCA") is aimed at addressing perceived tax abuse by US citizens and residents using accounts located outside the US to hide income from the US revenue authorities. FATCA requires non-US financial institutions ("FFIs") and US withholding agents to implement extensive new due diligence procedures for tax information reporting and withholding, account identification, and documentation. It also imposes reporting requirements on certain non-financial foreign entities ("NFFEs") and on certain US individual taxpayers holding financial assets located outside the United States. However, the greatest impact of FATCA is probably on FFIs.  That being said, perhaps the most unwary group that could find themselves having to comply with FATCA are NFFEs who, despite having no active business in the US, receive payments subject to FATCA reporting and withholding rules.

The fact that a country has entered into an income tax treaty with the United States does not exempt individuals or entities located in that country from FATCA compliance. FATCA applies to different types of income than the established US withholding system on US source income and it applies regardless of statutory or treaty exemptions or reductions. Moreover, an entirely different chapter of the US tax code (Chapter 4) applies to FACTA than the one (Chapter 3) applicable to traditional withholding at source.

Foreign Financial Institutes (FFIs)

To avoid a 30% withholding charge on withholdable and pass through payments from their relevant withholding agents, FATCA requires FFIs to enter into an agreement with the US tax authorities to, amongst other things, report certain information with respect to US accounts (an "FFI Agreement") held by the FFI. As an alternative, certain countries have already entered into intergovernmental agreements (IGAs) with the US to overcome legal impediments that prevented FFIs from entering into FFI Agreements with the US.

Non-Financial Foreign Entities (NFFEs)

A NFFE may be subject to FATCA if it receives US income or holds US investments. Foreign entities that are not qualified as FFI’s will be considered as NFFEs under FATCA. They do not have FATCA reporting or withholding obligations to the IRS. However, a NFFE which is a client of, or investor in, a participating FFI or a US Financial Institution ("USFI")  may be asked by its FFI's or USFI's to provide FATCA certification on the US or non-US tax status of their ultimate direct or indirect owners. If the required information is not provided in a timely manner, the account held by the NFFE will be deemed non-compliant and subject to FATCA withholding.

Generally, as a non-exhaustive list, the following categories of NFFEs are excluded from FATCA withholding and reporting:

·        Non-financial foreign affiliated groups whose stock is regularly traded on an established securities market;

·        Foreign governments; and

·        Foreign Central banks.

US Taxpayers Holding Assets Located Outside the US

US taxpayers holding financial assets outside the United States must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. There are serious penalties for not reporting these financial assets. This FATCA requirement is in addition to the long-standing requirement to report foreign financial accounts on Form TD F 90.22-1, Report of Foreign Bank and Financial Accounts. Where an individual is not married, the individual satisfies the reporting threshold if the total value of specified foreign financial assets is more than $50,000 ($100,000 in the case of married persons filing jointly) on the last day of the tax year or more than $75,000 ($150,000 in the case of married persons filing jointly) at any time during the tax year. Different higher thresholds may apply in certain cases. These reporting provisions are currently in effect and, unlike other provisions of FATCA, have not had their effective dates delayed as discussed later in this article.

Payments Covered by FATCA

FATCA provisions generally apply to two defined payment types:

• Withholdable payments; and

• Pass-through payments.

However, FATCA withholding is not required with respect to any payment under, or gross proceeds from the disposition of, a "grandfathered obligation".

A withholdable payment is defined as any US source dividend or interest payment and any other "fixed or determinable annual or periodical gains, profits and income" ("FDAP" income), as well as any gross proceeds from the sale or other disposition of assets that can produce US source interest or dividends. FDAP income includes payments such as interest (including original issue discount), dividends, rents, salaries, wages, premiums and annuities.

The definition of a pass through payment is broad and includes any withholdable payment and any other payment to the extent it is attributable to a withholdable payment. The concept is complex but the main purpose behind the pass through payment concept is to prevent an FFI from being a reporting "blocker" for US persons trying to avoid US tax by making indirect investments in US assets.

Implementation Deadline Delays

In July 2013 the US tax authorities gave notice of:

(i) revised deadlines for implementation of the requirements of FATCA essentially postponing the date for many of them by six months; and

(ii) gave additional guidance concerning the treatment of financial institutions located in jurisdictions that have signed IGAs for the implementation of FATCA but have not yet enacted legislation bringing them into force.

In sum, the US tax authorities intend to amend the final FATCA regulations to postpone the start of FATCA withholding by six months, and make corresponding adjustments to various other deadlines.

In addition, the US tax authorities intend to provide a list of jurisdictions that will be treated as having in effect an IGA, even though that IGA may not have been enacted into force by the new July 2014 effective date for FATCA withholding compliance.

FATCA Registration Process

The US tax authorities have announced their intent to create a FATCA registration website, which would serve as the primary way for FFIs to interact with the IRS to complete the required registration, agreements, and certifications. The registration website was to have been accessible to FFIs no later than July 15, 2013, however this too has been affected by the delays mentioned above. After approval of its registration, each PFFI and "registered deemed-compliant FFI" would be assigned a global intermediary identification number ("GIIN"), which would be used both for reporting purposes and to identify the FFI's status to withholding agents. The announcement provided that the IRS would electronically post the first list of PFFIs and registered deemed-compliant FFIs (IRS FFI List) in December 2013, and would update the list on a monthly basis.

The FATCA registration website is now projected to be accessible to financial institutions in August 2013. Other key dates for registration, however, will be extended by six months. Thus, after the FATCA registration website opens, a financial institution will be able to begin the process of registering by creating an account and inputting the required information for itself, for its branch operations, and, if it serves as a "lead" financial institution, for other members of its expanded affiliated group. Financial institutions can use the remainder of 2013 to get familiar with the registration process, to input preliminary information, and to refine that information. On or after January 1, 2014, each financial institution will be expected to finalize its registration information by logging into its account on the FATCA registration website, making any necessary additional changes, and submitting the information as final.

Consistent with this six month extension, the IRS will not issue any GIINs in 2013. Instead it expects to begin issuing GIINs as registrations are finalized in 2014.

As provided in the final regulations, subject to certain exceptions for pre-existing obligations and for offshore obligations, a withholding agent generally may treat a payee as such and verifies the GIIN contained on that withholding certificate against the official List.

Revised Implementation Timelines


Withholding agents generally will now be required to begin withholding on withholdable payments made after June 30, 2014 (the old date was for withholdable payments made after December 31, 2013), to payees that are FFIs or NFFEs with respect to obligations that are not "grandfathered" obligations, unless the payments can be reliably associated with documentation on which the withholding agent can rely to treat the payments as exempt from withholding. The definition of "grandfathered" obligation will be revised to mean debt/interest obligations outstanding on July 1, 2014 (and associated collateral) in place of the old date of January 1, 2014.  Unaffected are the timing provided in the final FATCA regulations for withholding on gross proceeds (January 1, 2017) and pass through payments (no earlier than January 1, 2017).

New Account Due Diligence Opening Procedures

Withholding agents generally will be required to implement new account due diligence opening procedures by July 1, 2014, or, in the case of a PFFI, by the later of July 1, 2014 or the effective date of its FFI agreement.

Testing Dates for Pre-existing Obligations

The definition of the term "pre-existing obligation" will be modified to mean:

·        With respect to a withholding agent other than a PFFI or a registered deemed-compliant FFI: any account, instrument, or contract maintained, executed, or issued by the withholding agent that is outstanding on June 30, 2014 (the date was previously December 31, 2013);

·        With respect to a PFFI: any account, instrument, or contract maintained, executed, or issued by the PFFI that is outstanding on the effective date of the FFI agreement; and

·        With respect to a registered deemed-compliant FFIany account, instrument, or contract maintained, executed or issued by the FFI prior to the later of July 1, 2014, or the date on which the FFI registers as a deemed-compliant FFI and receives a GIIN.

Treasury intends to include a similar change to the definition of the term "Pre-existing Account" in both model IGAs. Thus, it is expected that future IGAs will define the term to mean a financial account maintained as of June 30, 2014. For IGAs in force that contain the previous definition, the partner jurisdiction will be permitted under the coordination provision of the IGA to permit its FFIs to substitute the definition of the term "pre-existing account" from the amended final regulations for the definition of the term "Pre-existing Account" in the IGA. For IGAs concluded before the coordination provision was added, the provision will apply through the operation of the most-favored nation provision once an IGA containing the coordination provision is in force.

Transition Rules for Completing Due Diligence on Pre-existing Obligations

The FFI Agreement of a PFFI that registers and receives a GIIN from the IRS on or before June 30, 2014, will have an effective date of June 30, 2014, effectively resulting in a six-month postponement of the deadlines for completing due diligence on preexisting obligations. For withholding agents other than PFFIs, the deadlines for completing due diligence on preexisting obligations will be postponed by six months. Thus, for example, a withholding agent other than a PFFI will be required to document payees that are prima facie FFIs by December 31, 2014, instead of by June 30, 2014.

Account balance or value will be measured initially as of June 30, 2014, for purposes of determining whether an account is exempt from review, subject only to an electronic search for indicia, or subject to enhanced review. An account with a balance or value that was initially $1,000,000 or lesser, and with respect to which there has been no change in circumstances, will not be subject to enhanced review unless the account balance or value exceeds $1,000,000 as of the end of 2015 or any subsequent calendar year. Thus, the obligation to monitor the account balance or value of pre-existing accounts to determine whether enhanced review is required is deferred by one year.

Treatment of Expiring Documentation for Chapter 3 (Non-FATCA) Withholding

FATCA adds a new chapter to the Internal Revenue Code (Chapter 4) which as noted is aimed at addressing perceived tax abuse by US persons through the use of offshore accounts. For purposes of "classic" Chapter 3 withholding (withholding of tax on US source income of Non-US Individuals and Non-US corporations), Forms W-8 (withholding certificates and related documentary evidence generally) expire on the last day of the third calendar year following the year in which the withholding certificate is signed or the documentary evidence is provided to the withholding agent. However, these forms that would have expired on December 31, 2013, will expire instead on June 30, 2014, unless a change in circumstances occurs that would otherwise render the withholding certificate or documentary evidence incorrect or unreliable.

Automatic Extension of Expiring Qualified Intermediary (QI), Foreign Withholding Partnership (WP), and Foreign Withholding Trust  (WT)  Agreements

Under these agreements the QI, WP, or the WT, as the case may be, essentially agrees with the US tax authorities to assume certain documentation and withholding responsibilities in exchange for simplified information reporting for its foreign account holders and, in the case at least of QI's, the ability not to disclose proprietary account holder information to a withholding agent that may be a competitor. All QI, WP, or WT agreements that would otherwise expire on December 31, 2013, will be automatically extended until June 30, 2014.

Extension of Foreign-Targeted, Registered Obligation Rules

The IRS had provided as a limited transition rule that a withholding agent paying interest on an obligation issued in registered form after March 18, 2012, and before January 1, 2014, may apply the foreign-targeted registered obligation rules of §1.871-14. This rule essentially treats payment of interest on such bonds as portfolio interest on which no US withholding tax is due if the payment is made to a non-US person. As a result of the FATCA implementation delay, this transition rule will be extended to obligations issued in registered form after March 18, 2012 and before July 1, 2014.  This is in effect a six month extension of the end date as per other extensions already discussed.

Financial Institutions Operating in FATCA IGA Jurisdictions

A jurisdiction will be treated as having an IGA in effect if it is listed as such on the US Treasury website. In general, the US Treasury and the IRS intend to include on this list jurisdictions that have signed but have not yet enacted into force an IGA.

A financial institution resident in a jurisdiction that is treated as having an IGA in effect will be permitted to register as a registered deemed-compliant FFI or PFFI as applicable. A jurisdiction may be removed from the list if it fails to perform the steps necessary to bring the IGA into force within a reasonable period of time. If a jurisdiction is removed from the list, financial institutions that are residents of that jurisdiction, and branches that are located in that jurisdiction, will no longer be entitled to the status that would be provided under the IGA, and must update their status accordingly.


Nothing in this article is meant to be or should be deemed as legal or tax advice. Tax laws are complex and constantly evolving, especially with relatively new laws like FATCA, and are subject to nuances of differing factual situations and interpretations which may alter their application in a given case. While we have made considerable effort to report accurate FATCA deadlines in this article, these deadlines are numerous, complex in their application, subject to further change, and should not be, and are not meant to be, relied upon as authoritative for any particular factual situation. In all actual cases, US tax counsel should be consulted for advice on the application of FATCA and the FATCA compliance deadlines.



Robert  J. Kiggins is a member of Culhane Meadows' Corporate & General Business and Taxation groups. After 30 years of practice, he has gained extensive experience in corporate finance and tax matters, securities broker-dealers, investment advisors, investment companies, life insurance companies, hedge funds, medical practice purchases and sales, insurance agencies and bank expansion into insurance and securities fields. His focus is on helping organize startup companies. Robert also represents a number of closely held businesses in such industries as medicine, dentistry, hospitality, direct mail monitoring and list protection, computer software, insurance agency, securities brokerage, and investment management. He is especially familiar with the regulations and compliance imposed on securities broker-dealers, investment advisors, insurance companies and insurance agencies.


Partner at McCarthy Fingar LLP

As chair of McCarthy Fingar's Corporate & General Business and Taxation groups, Howell Bramson works in a number of its practice groups. On the estate planning side, he has been involved in planning complicated estates, with an emphasis on estates involving business and real estate interests. On the corporate side, he and other lawyers at the firm help organize startup companies and represent numerous corporations, partnerships and limited liability companies, including those owned by foreign corporations and individuals. On the tax side, he gets involved in the more complex tax problems associated with mergers and acquisitions, S corporations, partnership transactions, real estate transactions, workouts and bankruptcy, and estate planning, with a special emphasis on international tax matters.

Robert  J. Kiggins and Howell Bramson are members of the International Business Structuring Association, www.istructuring.com.

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