Investment Companies Advisor: FATCA Certifications Delayed, Due Diligence Procedures Still Required by June 30

The United States Internal Revenue Service (“IRS”) issued Notice 2016-08 (“Notice”) on January 19, 2016, which announced the IRS’ intention to amend the Treasury regulations promulgated under Chapter 4 of the IRS Code, Foreign Account Tax Compliance Act, or “FATCA” as it is commonly known. The Notice modifies several important aspects of FATCA applicable to foreign financial institutions (“FFIs”). First, it extends the August 29, 2016 deadline pertaining to pre-existing account certification for participating foreign financial institutions (“Participating FFIs”) and foreign institutions located in Model 2 IGA jurisdictions (“Model 2 FFIs”). Second, it eliminates gross proceeds reporting with respect to payments made by Participating FFIs, Model 2 FFIs and registered deemed-compliant foreign financial institutions (“Registered Deemed-Compliant FFIs”) to nonparticipating foreign financial institutions (“NPFFIs”) during the 2015 calendar year. Lastly, the Notice modifies certain rules to permit the reliance on electronically signed Forms W-8 and W-9 provided by an intermediary.

Account Certification

Prior to the Notice, Participating FFIs and Model 2 FFIs were required to certify to the IRS that they had complied with the applicable due diligence procedures for pre-existing accounts. The timing for such certification was originally due no later than 60 days after the two years following the effective date of the FFI agreement. For example, if a Participating FFI or Model 2 FFI had a FFI agreement with an effective date of June 30, 2014, the FFI would be required to submit its account certification to the IRS no later than August 29, 2016.

The Notice delays the deadline for filing a pre-existing account certification. Consequently, the pre-existing account certification will be due at the same time as when a Participating FFI or Model 2 FFI is required to provide its first periodic certification to the IRS that it has complied with the terms of the FFI agreement. (The periodic certification of compliance must be submitted to the IRS no later than six months following the end of the certification period, and the first certification period begins on the effective date of the FFI agreement and ends at the close of the third full calendar year following the effective date of the FFI agreement.) For example, a Participating FFI or Model 2 FFI that has an FFI agreement with an effective date of June 30, 2014, will be required to submit a pre-existing account certification to the IRS by July 1, 2018, instead of by August 29, 2016.

Due Diligence

It is important to note, while the Notice extends the pre-existing account certification period, it does not affect the deadlines for a Participating FFI or Model 2 FFI to complete the actual due diligence procedures for pre-existing accounts. This means that all pre-existing high-net-worth individuals and entities should have updated their documentation by December 31, 2015 (individuals) and June 30, 2016 (entities) to the new FATCA-compliant forms. Their due diligence must also include efforts to ensure the documentation received is accurate and include procedures for confirming certain information on reportable accounts as set forth by Treasury regulations. Even with the Notice, FFIs are still required to certify they completed the due diligence procedures within the required time frame.

The Notice also modifies the deadline for certain Registered Deemed-Compliant FFIs to file certifications with the IRS. Specifically, local FFIs and restricted funds are now obligated to submit their one-time pre-existing account certifications at the same time that they submit the first periodic certification of Registered Deemed-Compliant FFI status, which will typically be due on July 1, 2018.

Additionally, a Registered Deemed-Compliant FFI is obligated to provide a periodic certification of its registered deemed-compliant FFI status on or before July 1 of the calendar year following the end of the certification period. The Notice clarifies that the certification period will begin on the later of the date the FFI registered as a deemed-compliant FFI or June 30, 2014, and end at the close of the third full calendar year following such date.  Again, as a typical matter, these certifications will be due by July 1, 2018, with respect to a Registered Deemed Compliant FFI that registered with the IRS on or before June 30, 2014.

Elimination of Gross Proceeds Reports

A Participating FFI, Registered Deemed-Compliant FFI or Model 2 FFI was required to report to the IRS certain foreign source payments, including gross proceeds, paid to an account held by a NPFFI for calendar years 2015 and 2016.  The Notice effectively eliminates gross proceeds reporting with respect to amounts paid by Participating FFIs, Model 2 FFIs and Registered Deemed-Compliant FFIs to a NPFFI for calendar year 2015.  Instead NPFFIs reporting now occurs in the same manner as reporting for U.S. accounts and accounts held by owner-documented FFIs.

Electronically Signed Forms W-8 and W-9

Under Treasury Regulations and corresponding IRS guidance, a withholding agent may rely on an electronically signed Form W-8 or Form W-9, provided that certain procedural requirements are satisfied. Certain withholding agents expressed concerns regarding their ability to rely on an electronically signed Form W-8 or W-9 that had been indirectly obtained through a nonqualified intermediary (NQI), non-withholding foreign partnership (NWP) or non-withholding foreign trust (NWT) that obtained such form via the NQI’s, NWP’s or NWT’s own electronic system.

The Notice clarifies that a withholding agent may rely on an electronically signed Form W-8 or W-9 that has been collected from the beneficial owner or payee of the payment through an electronic system maintained by a NQI, NWP or NWT and furnished to the withholding agent by such NQI, NWP or NWT. However, the withholding agent may only do so provided that 1) the NQI, NWP or NWT is a direct or indirect account holder of the withholding agent,2) the withholding agent obtains a written statement from the NQI, NWP or NWT confirming that the electronic documentation was generated from a system that meets the applicable requirements, and 3) the withholding agent does not have actual knowledge that such statement is incorrect.

Open Questions and Concerns

Although the Notice addressed a number of stakeholder concerns, many questions remain.  For instance, while the Notice provides additional guidance regarding the timing of pre-existing account certification, it does not address the substance of the certification or the process by which a Responsible Officer undertakes the necessary review to complete the certification.  Also, the Notice only addresses the certification obligations of Participating FFIs and Model 2 FFIs. It is silent when it comes to FATCA-related QI certifications applicable to a QI located in a Model 1 jurisdiction. It is hopeful that future Treasury and IRS Notices will address these open issues.  (See Footnote for definition of Model 1 and Model 2.*)

We Can Help

The rules and regulations found within FATCA should command the attention of all those involved in a Foreign Financial Institution. There are many considerations for those subject to informational filings and withholdable payments under FATCA. The Investment Companies Practice at Elliott Davis Decosimo has the knowledge and expertise necessary to assist management in answering questions related to FATCA. Our tax consulting team understands the wide range of considerations for those impacted by FATCA, and we take the time to look at who the stakeholders are and where the stakeholders are domiciled. We also consider the type of entity in determining the compliance requirements outlined under FATCA. To learn more about how Elliott Davis Decosimo can address your questions and needs pertaining to FATCA, contact your Elliott Davis Decosimo advisor or email us at elliottdavis@elliottdavis.com.

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*Model 1 and Model 2 defined: A government may enter into a bilateral agreement with the U.S. to simplify reporting compliance and avoid FATCA withholding. Under a Model 1 IGA, Foreign Financial institutions (FFIs) in partner jurisdictions report information on U.S. account holders to their national tax authorities, which in turn will provide this information to the IRS. Under a Model 2 IGA, FFIs report account information directly to the IRS. https://tax.thomsonreuters.com/fatca-crs/key-terms/