IRS Delays Certain Provisions of FATCA

On October 24, 2012, the Internal Revenue Service issued Announcement 2012-42, which (i) delays withholding on gross proceeds under the "Foreign Account Tax Compliance Act" ("FATCA") provisions until 2017, (ii) extends the deadlines under FATCA for completing due diligence with respect to counterparties and financial account holders to conform to the deadlines set forth in the Model Intergovernmental Agreements released in August, and (iii) expands the grandfathering exemption for several instruments. In particular, under the Announcement, obligations that give rise only to foreign-source payments, and obligations that generate U.S.-source dividend equivalent payments under Section 871(m) of the Code, are grandfathered and therefore not subject to withholding under FATCA if, with respect to foreign source obligations they are issued earlier than six months prior to the date the final regulations defining the scope of pass-thru payment withholding are adopted and with respect to dividend equivalent payments, the instruments are issued earlier than six months prior to the date regulations are issued that cause such payments to be U.S.-source income. Finally, the announcement provides that obligations, with respect to collateral posted to secure notional principal contracts that are grandfathered from FATCA, are also grandfathered from FATCA withholding.

To see the delaying notice, link to Announcement 2012-42 Provides Transitional FATCA Relief for Foreign Financial Institutions. Questions on FATCA may be directed toMark Howe, Dan Mulcahy, or your usual Cadwalader tax contact.