The Foreign Account Tax Compliance Act (FATCA) was enacted as a component of the HIRE Act of 2010. Among other things, FATCA imposed a new 30% withholding tax with respect to certain payments made to any foreign financial institution (FFI), including a foreign bank, brokerage, or investment fund. In addition to their existing withholding tax collection obligations, U.S. persons making certain withholdable payments are liable for ensuring that the withholding tax under FATCA is collected.
The withholding tax can be avoided if the FFI enters into an agreement with the IRS under which the FFI will report to the IRS information about its U.S. account holders. FFIs located in countries that have executed a so-called “Model 1” intergovernmental agreement (IGA) for the implementation of FATCA are entitled to a lesser compliance burden, typically reporting the U.S. account information to their own home country, which then shares such information with the IRS under the terms of the IGA.
Withholding under FATCA is scheduled to begin on July 1, 2014, except for FFIs in jurisdictions that are treated as having a Model 1 IGA in place, for which withholding will begin on January 1, 2015.
Therefore, commencing July 1, 2014, any person making certain withholdable payments to any FFI must, pursuant to FATCA, withhold 30% of the gross amount of such payment, unless the payor obtains the FFI’s special FATCA identification number, called a global intermediary identification number (GIIN), and confirms that the GIIN appears on the list of FFIs published by the IRS. (A new IRS Form W-8BEN-E has been created to facilitate the payor’s tax compliance obligations.)
As mentioned above, a special rule provides that a payor has until January 1, 2015 to obtain the GIIN from any FFI located in a jurisdiction that is treated as having a Model 1 IGA in place.
The IRS just issued Announcement 2014-17. This Announcement is directed towards FFIs in any jurisdiction that has not yet executed an IGA. Under this Announcement, the IRS is now expanding the list of jurisdictions that are treated as having an IGA in effect, by publishing a list of jurisdictions that have “reached an agreement in substance” with the US on the terms of an IGA, but have not yet executed it. (Those jurisdictions must execute an IGA before December 31, 2014, or else their status may terminate.)
The current list of jurisdictions that have actually executed Model 1 IGAs consists of Canada, Cayman Islands, Costa Rica, Denmark, Finland, France, Germany, Guernsey, Honduras, Hungary, Ireland, Isle of Man, Italy, Jersey, Luxembourg, Malta, Mauritius, Mexico, Netherlands, Norway, Spain, and United Kingdom.
The current list of jurisdictions that have reached an agreement in substance with respect to a Model 1 IGA, but have not yet executed it, consists of Australia, Belgium, Brazil, British Virgin Islands, Croatia, Czech Republic, Estonia, Gibraltar, India, Israel, Jamaica, Kosovo, Latvia, Liechtenstein, Lithuania, New Zealand, Poland, Portugal, Qatar, Romania, Slovak Republic, Slovenia, South Africa, and South Korea. [Revision: As of April 28, 2014, Bahamas, Bulgaria, Columbia, Cyprus, Israel, and Sweden were also added to this list. See http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA-Archive.aspx for the current list.]
FFIs in these covered jurisdictions should register with the IRS before December 22, 2014 to obtain a GIIN.
The Announcement also states that FFIs from any other jurisdiction should register with the IRS to obtain a GIIN before May 5, 2014. (This is an extension from the April 25, 2014 date that was previously in effect.) Even after this date, the IRS will be updating its list of registered FFIs on a monthly basis. Thus, any FFI wishing to register may do so at any time, and avoid FATCA withholding on payments made after it is included in the IRS list of registered FFIs.
If you have any questions regarding FATCA, please contact any member of the Tax practice group at Hinckley Allen.