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FATCA e-alert issue 2015-14

FATCA e-alert issue 2015-14



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FATCA - Additional Transition Relief

On 18 September 2015, the Department of Treasury (Treasury) and the Internal Revenue Service (IRS) released Notice 2015-66 (“the Notice”), announcing additional transition relief relating to the Foreign Account Tax Compliance Act (FATCA). Specifically, the Notice states an intent to amend the regulations to include the following additional relief:

  • Withholding on gross proceeds will be delayed until 1 January 2019
  • Withholding on foreign pass thru payments will be delayed until at least 1 January 2019.
  • Limited Branch and Limited FFI statuses will be extended until 1 January 2017. (But Limited FFIs and Limited Branches will be required to amend their registration to maintain this status during 2016).
  • The deadline for registering sponsored entities (RDCFFI Sponsored Entities and sponsored direct reporting NFFEs) will be extended until 1 January 2017.
  • A sponsored entity that obtains a new GIIN will be permitted to provide its new GIIN orally or through written confirmation (e.g., email) to an existing withholding agent.
  • Updates to grandfathered rules regarding collateral.

In addition, the Notice addresses the following as it relates to the Model 1 Intergovernmental Agreement (IGA):

  • Countries that have a Model 1 IGA in substance (or signed but not yet in force) on 30 September 2015, will continue to be treated as having an IGA in substance provided that reporting for the 2014 calendar year is exchanged with the IRS by 30 September 2016.
  • Countries that have a Model 1 IGA in effect but that are unable to exchange the required data by 30 September 2015, will continue to be treated as meeting the terms of IGA as long as the country notifies the U.S. competent authority prior to 30 September 2015, of the delay and provides an assurance that good faith efforts are being made.


Withholding on Gross Proceeds

Pursuant to FATCA, withholding agents are generally required to impose a 30 percent withholding tax on withholdable payments made to certain noncompliant payees. The term “withholdable payment” generally means any payment of U.S. source fixed or determinable annual or periodical (FDAP) income and, after 31 December 2016, gross proceeds from the sale or other disposition of property that can generate U.S. source interest or dividends.

While the initial delay for withholding on proceeds was welcomed, the timeline continued to present problems for impacted withholding agents. Specifically, withholding on proceeds paid to non-U.S. persons is a new concept that requires significant systems modifications. In an effort “to facilitate an orderly phase-in of FATCA withholding,” the Notice provides that requirement to impose withholding on gross proceeds will be delayed an additional two years. Consequently, a withholding agent will not be required to withhold on such proceeds until 1 January 2019.


Foreign Passthru Payments

Participating FFIs that are withholding agents must, among many other requirements, agree to impose withholding on any passthru payments made to a recalcitrant account holder or nonparticipating FFI. A passthru payment is defined in the regulations to mean a withholdable payment as well as any foreign passthru payment. The regulations reserve, however, on the definition of the term “foreign passthru payment.”

Similar to the transition relief for gross proceeds, the regulations currently provide that a participating FFI is not required to impose withholding on a foreign passthru payment made to a recalcitrant account holder or a nonparticipating FFI before the later of 1 January 2017, or the date of publication in the Federal Register of final regulations defining the term foreign passthru payment. As above, and for similar reasons, the Notice announces that Treasury and the IRS intend to push the effective date out an additional two years. Thus, a participating FFI will not be required to impose FATCA withholding on a foreign passthru payment made to a recalcitrant account holder or a nonparticipating FFI before the later of 1 January 2019, or the date of publication in the Federal Register of final regulations defining foreign passthru payment.


Extension of Limited Branch and Limited FFI Statuses

Pursuant to the FATCA rules, every FFI that is a member of an expanded affiliated group (EAG) must be FATCA compliant. That said, in certain jurisdictions, local laws prohibit an FFI from complying with some, or all, of the requirements set forth in the FFI Agreement. Because of this, the final regulations contain transition rules providing interim relief to FFIs with branches or affiliates that are located in jurisdictions that have such prohibitive laws. The relief was intended to provide those jurisdictions additional time to either enter into an IGA or amend local laws to enable to FFIs operating therein to comply with the FATCA requirements. Specifically, the regulations permitted branches and FFIs that satisfied the “limited” requirements to operate under that status until 31 December 2015, without impacting the compliant status of their EAG members.

The Notice provides that Treasury and the IRS recognize there may be jurisdictions that have not been able (or willing) to enter into an IGA or to modify their local law within the time originally allotted. To address this issue, the Notice announces the government’s intent to provide an additional year to allow: 1) these jurisdictions to enter into an IGA; or 2) the limited branches and limited FFIs operating within these jurisdictions to determine whether to continue such operations.

KPMG Observation

It is important to note that any limited branch or limited FFI that would like to maintain its limited status will be required to re-register, on the IRS FATCA Portal, after 31 December 2015, for the 2016 year.


Extension of Time to Register Sponsored Entities

The FATCA rules permit certain entities to perform the FATCA requirements for entities that they agree to sponsor (e.g., a fund manager sponsoring the funds that it manages). The sponsoring entity is required to register with the IRS as a sponsoring entity and must also register the sponsored entity. To alleviate some of the registration burden, however, the IRS permitted the sponsoring entity additional time (until 1 January 2016) to register and obtain GIINs for its sponsored entities (See Notice 2013-69).

The regulations include a corresponding due diligence rule that permits withholding agents to accept withholding certificates provided by a sponsored entity with the GIIN of its sponsoring entity for payments made prior to January 1, 2016. The IGAs contain similar provisions, though under the IGA a sponsored entity is not required to obtain a GIIN if it is not required to report (i.e., it does not have a U.S. account).

The IRS is currently developing a streamlined process for sponsoring entities to register, and obtain GIINs for, the entities they sponsor. The IRS anticipates that this system will be available in the “coming months.” As indicated above, however, sponsoring entities currently have just over three months to obtain the GIINs for their sponsored entities and provide new withholding certificates (containing the new GIIN) to every withholding agent that will be making a withholdable payment to such sponsored entities on or after 1 January 2016.

The Notice addresses this timing issue in two ways. First, it provides sponsoring entities an additional year, until 1 January 2017, to register their sponsored entities. Second, it provides flexibility in how the sponsoring entity is to provide the new GIIN to withholding agents currently holding a sponsored entity’s withholding certificate. Specifically, the Notice provides that, in this case, the GIIN may be provided orally or via written confirmation (e.g., email).

KPMG Observation

Note, however, that if the GIIN is provided in this manner (as opposed to on a new withholding certificate) the withholding agent must retain a record of the GIIN receipt. Further, regardless of how the new GIIN is provided, the withholding agent will have 90 days from the date it obtains the new GIIN to verify it against the IRS’s published list.


Updates to Grandfather Rules for Collateral

The Notice also addresses two issues regarding the application of the grandfather rules as they relate to collateral:

  • Pooled Collateral: The final regulations provide that a withholdable payment does not include a payment made with respect to a “grandfathered obligation.” These provisions also include an agreement requiring a secured party to make a payment with respect to collateral posted to secure a grandfathered obligation. If collateral secures both grandfathered and non-grandfathered obligations, the collateral posted to secure the grandfathered obligations must be determined by allocating, pro rata by value, the collateral to all outstanding obligations secured by the collateral (the pro rata rule). To ease the administrative burdens for withholding agents that hold collateral that secures both grandfathered obligations and obligations that are not grandfathered, the Notice provides that the pro rata rule will no longer be mandatory. Instead, the withholding agent will be permitted to apply the pro rata rule or withhold on all withholdable payments relating to all the collateral.
  • Substitute Payments Relating to Collateral: Further relating to the grandfather rules and collateral, the Notice provides that the definition of grandfathered obligations will be modified to include any obligation that gives rise to a substitute payment that was created by way of the payee posting a grandfathered obligation as collateral, which may have been rehypothecated by the secured party. Without this modification, withholding agents faced the difficult task of tracking which obligations were retained (and thus still grandfathered) and which had been rehypothecated (creating a new obligation the substitute payments on which would not be exempt from withholding).


Model 1 IGA – Timing of Exchange of Information

Finally, the Notice addresses information exchange requirements under the Model 1 IGA. Prior to this, there had been two pending issues relating to Model 1 IGAs and the looming 30 September 2015, date for the first exchange of information.

The first issue relates to a country that has a Model 1 IGA in substance (or signed but not yet in force) on 30 September 2015. To address this, the Notice provides that Treasury and the IRS intend to treat FFIs operating in such jurisdictions as compliant as long as the partner jurisdiction continues to demonstrate “firm resolve to bring the IGA into effect.” In addition, the 2014 information that would have been exchanged by 30 September 2015, must be exchanged by 30 September 2016 (along with the 2015 information that is due by that date).

The second issue relates to Model 1 countries that have agreements in effect but do not yet have the infrastructure to exchange the 2014 account information by the 30 September 2015, deadline. To address this, the Notice provides that Treasury and the IRS will continue to treat FFIs operating under such an IGA as compliant as long as the partner country: 1) notifies the U.S. competent authority of its information exchange delay by 30 September 2015; and 2) provides assurances that it is making good faith efforts to exchange the information as soon as possible.

KPMG Observation

It is important to note that this provision relates only to the date the partner country is required to exchange the information with the IRS and does not impact the date the FFIs in the country are required to report to the local regulators, the date of which is dictated under local law.


For Your Reference

For additional information, Notice 2015-66 may be accessed by clicking here: (PDF, 74 KB)


For further information, please do not hesitate to contact us.







Any tax advice in this communication is not intended or written by KPMG to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing, or recommending to another party any matters addressed herein.The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


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