On Tuesday, the US Internal Revenue Service (IRS) issued its latest guidance in preparation for the implementation of the US Foreign Account Tax Compliance Act (FATCA) reporting and withholding requirements (Notice 2013-69). The guidance applies to foreign financial institutions (FFIs) entering into an FFI agreement with the IRS under Sec. 1471 or to FFIs or branches of FFIs treated as reporting financial institutions under an applicable Model 2 intergovernmental agreement (IGA).
Under FATCA, US withholding agents are required to withhold tax on certain payments to FFIs that do not agree to report certain information to the IRS regarding their US accounts and on certain payments to certain nonfinancial foreign entities (NFFEs) that do not provide information on their substantial US owners to withholding agents.
Final regulations issued in January (T.D. 9610) integrated two types of model intergovernmental agreements (IGAs) into their reporting requirements: reciprocal agreements and nonreciprocal agreements, which are called Model 1 IGAs and Model 2 IGAs, respectively. Generally, Model 2 agreements require FFIs to report required information directly to the IRS instead of to the FFI’s government.
The notice provides a description of the general responsibilities of participating FFIs and FFIs and their branches treated as reporting financial institutions under an applicable Model 2 IGA. It also describes some intended updates to the regulations under chapters 4 and 61 and related forms.
The notice says that regulations will be issued providing that a payer other than a US payer or US middleman (i.e., a non-US payer) that is a participating FFI or treated as a reporting FFI under a Model 1 IGA will satisfy its reporting obligations with respect to a US payee (or presumed US payee) that is a nonexempt recipient if that FFI reports the account holder pursuant to the FFI agreement or the applicable Model 1 IGA.
Regulations will also be issued that clarify how the Form 1099 reporting requirements apply when an FFI must withhold on a payment and that backup withholding under Sec. 3406 will not apply in addition to withholding under FATCA. Existing regulations will be modified to change the requirement for reporting foreign reportable amounts for nonparticipating FFIs in 2015 and 2016 so that only foreign reportable amounts paid for a financial account that the FFI maintains for a nonparticipating FFI must be reported.
Finally, regulations will be issued that change the definition of what is a passive NFFE and the definition of U.S. person to include a foreign insurance company that elects under Sec. 953(d) to be treated as a domestic corporation.
The notice also describes the procedures for FFIs to register for participating FFI or reporting Model 2 FFI status and contains a draft Model 2 agreement, which the IRS says it will finalise by December 31st.
—Sally P. Schreiber (sschreiber@aicpa.org) is a CGMA Magazine senior editor.
