FATCA finally arrives, amid a flurry of regulatory changes, updates and new partner nations

Financial institutions weren’t the only ones scrambling ahead of the July 1 effective date of the US Foreign Account Tax Compliance Act. The US Treasury and Internal Revenue Service have apparently been very busy as well, heralding FATCA’s arrival with a string of regulatory updates and last-minute publications.

Meanwhile, other nations have also been racing ahead of the deadline, with surprise announcements from Russia and China, and a dozen nations joining the US Treasury as FATCA partners just hours before the law began.

The flurry of eleventh-hour activity emphasizes the extent to which FATCA compliance is still in flux. Even as the far-reaching financial account reporting law becomes a reality, FATCA compliance remains a work in progress.

Instructions provide much-needed guidance, but may be tough to navigate

To meet FATCA’s multitude of reporting and customer due diligence requirements, the IRS created a slew of new forms, or significantly revised existing ones. For months or even years, however, these new forms lacked instructions, exasperating both non-US financial institutions required to identify and report on their US account holders, and US institutions and other “withholding agents” responsible for implementing FATCA’s 30% withholding tax.

In the past two weeks, the IRS has finally published instructions for a number of forms central to FATCA compliance, including those for:

  • Form 8966, used by “foreign financial institutions” (FFIs) to report their US account holders to the IRS, as well as by US withholding agents to report on the US owners of certain legal entities
  • Form 1042-S, used by US withholding agents to report on US-source payments and the amounts withheld under FATCA
  • Form W-8BEN-E, used by a range of non-US legal entities to provide their FATCA status to a withholding agent or FFI
  • Form W-8IMY, used by non-US intermediaries or pass-through entities (including some financial institutions) to provide their FATCA status to withholding agents

This guidance will likely be a relief for the tens of thousands of institutions seeking clarity on how to utilize the forms, and waiting on the instructions in order to properly configure their data management systems. However, the instructions suggest it won’t be easy to use certain forms.

The instructions for Form W-8BEN-E in particular are highly complicated, running 16 pages in length. The W-8BEN-E also contains technical rules detailing how entities using the form should choose their FATCA status from a list of 20 options.

The instructions for Form W-8IMY, meanwhile, extensively reference other forms and IRS regulations, forcing users to seek further details from multiple different sources. While helpful, the instructions may also prove to be baffling for many compliance professionals, especially as they are only available in English.

China enters into IGA, as Russia takes steps toward FATCA compliance

As the IRS put the finishing touches on piles of new instructions and regulatory tweaks, other US Treasury staff rushed to finalize a series of intergovernmental agreements (IGAs) with other nations.

The most surprising of the last-minute additions is China, which entered “in substance” into a Model 1 IGA on June 26 with little prior warning. China’s participation in FATCA, or lack thereof, has long been a subject of speculation. Its place on the IGA roster substantially boosts the global reach of the law. It will also provide China’s government with details on Chinese persons that hold accounts at US institutions, under the reciprocity provision of the Model I IGA.

Russia also took action at the last moment, as President Vladmir Putin signed a new law on June 30 that cleared the way for Russian financial institutions to comply with FATCA. The law is not an IGA, but instead changes domestic laws to allow Russian institutions to register with the IRS and report their US account holders. Russia was once in talks to sign an IGA, but those negotiations collapsed in the wake of Putin’s annexation of the Crimea.

In April, the US Treasury announced it would recognize all intergovernmental agreements whose terms had been established “in substance” as effectively in force, even if they had not been finalized and signed. This policy shift drastically expanded the number of nations and jurisdictions considered FATCA partners. FFIs in countries with an IGA generally face substantially fewer compliance burdens than those institutions not covered by an IGA. They are also largely exempt from FATCA-related withholding, and under the Model 1 IGA, can report account holder information to their own tax authorities, rather than the IRS.

Along with China, more than a dozen other nations joined the ranks of FATCA partners in three days before July 1 (click here to view the full list). In total, 99 nations and jurisdictions now have final or “in substance” IGAs with the IRS. As the US recognizes 263 countries and other jurisdictions worldwide, that leaves financial institutions in 164 jurisdictions not currently covered by an IGA.

IRS tweaks Qualified Intermediary, FFI agreements ahead of deadline

While FATCA has understandably received most of the attention in recent months, it is not the IRS’s only tax reporting regime for non-US institutions. The IRS also maintains its Qualified Intermediary program, which existed prior to FATCA and allowed non-US persons and some institutions to act as withholding agents for their US clients.

Institutions who agree to act as Qualified Intermediaries (QIs) must comply with the terms of that agreement and with FATCA simultaneously. To bring the QI regime in line with FATCA, the IRS issued Revenue Procedure 2014-39 last week, replacing the conditions of the previous program.

Also issued last week was Revenue Procedure 2014-38, which introduces a set of changes to the FFI agreement. The changes are largely designed to update the FFI agreement to make it consistent with changes in IRS rules on preexisting obligations for the purposes of withholding. FFIs in Model 2 IGA jurisdictions, and jurisdictions not covered by an IGA, are required to enter into an FFI agreement directly with the IRS.

FATCA registrations tick upward, but numerous obstacles remain

In a press briefing on Monday, a US Treasury official stated the number of FFIs registered with the IRS had increased since the first list was released in early June, and now included more than 80,000 financial institutions around the globe. Last week, the IRS also released an updated list of all institutions that have registered and received their “Global Intermediary Identification Numbers,” which is used to confirm an institution’s FATCA status.

While the number of FATCA-registered institutions is steadily growing, many institutions still appear to be struggling with FATCA compliance, both internationally and within the US. A recent Deloitte survey of chief financial officers at North American institutions and corporations found 92% were not fully prepared to implement FATCA withholding.

On the government side, the IRS has not released rules on certain aspects of FATCA compliance, such as foreign pass-thru payments, and is still working through corrections and alterations to the final regulations. Many nations that have entered into IGAs have not yet issued their own rules and regulations specifying compliance procedures for their institutions, or made necessary changes to domestic laws to allow compliance. Though FATCA has arrived, there’s still much work left to be done.