IRS Publishes Draft FFI Agreement and Previews Additional Guidance Under FATCA

The IRS has finally published a draft of the long-awaited Foreign Financial Institutions ("FFI") Agreement under FATCA. FFIs not located in Model 1 IGA countries and most FFIs located in Model 2 IGA countries must enter into an FFI Agreement with the IRS prior to July 1, 2014 in order to be in compliance with FATCA. The draft agreement, which was published as part of IRS Notice 2013-69, sets forth the specific requirements for due diligence, withholding, information reporting and compliance that each FFI must satisfy. The IRS has promised that the draft Agreement will be finalized before the end of 2013. Notice 2013-69 does not apply to FFIs located in Model 1 IGA countries (other than branches of such entities located in non-Model 1 IGA countries).

Notice 2013-69 also previews certain changes that Treasury and the IRS intend to make to the Final Regulations under FATCA. One important change applies to payments of foreign reportable amounts made by a participating FFI to a nonparticipating FFI in 2015 and 2016. The current regulations require that participating FFIs must report the aggregate amounts of foreign reportable amounts paid to each nonparticipating FFI, even where such payments are not associated with a financial account. This rule will be modified to limit such reporting to amounts paid with respect to a financial account maintained at the participating FFI for such payee. This effectively eliminates reporting on swaps and other transactions that don't involve a financial account. Another change will eliminate potential duplicate reporting of payments by participating FFIs to U.S. persons under both FATCA and Form 1099, as well as potential withholding under both FATCA and backup withholding.

Notice 2013-69 also creates two additional categories of non-financial foreign entities ("NFFEs"). Under the current FATCA regulations so-called "passive" NFFEs (generally non-financial foreign entities that have significant passive income) must report their direct and indirect "substantial U.S. owners" to any participating FFI or U.S. withholding agent which would provide such information to the IRS. The change will permit passive NFFEs ("Direct Reporting NFFEs") to elect to report such information directly to the IRS rather than submit such information to their withholding agents or participating FFIs where they maintain an account. Direct Reporting NFFEs will be required to register with the IRS as such and obtain a Global Intermediary Identification Number or "GIIN" and agree to comply with the reporting requirements under the regulations. The Notice also indicates that the regulations will be changed to permit an entity to sponsor one or more NFFEs who wish to be direct reporting NFFEs, similar to the sponsored FFI status under the regulations. In such case the sponsoring entity will be required to collect and report directly to the IRS information from each Sponsored Direct Reporting NFFE with respect to such entity's "substantial U.S. owners." it is unclear whether these new rules will apply to Model 1 IGAs.

Finally, the regulations will be changed to treat foreign insurance companies (that do not issue cash value insurance policies or annuities) that elect under Section 953(d) of the Internal Revenue Code to be treated as a U.S. corporation, as U.S. persons under FATCA, effectively exempting these entities from FATCA reporting. Under the current regulations, such insurance companies would likely have been treated as passive NFFEs required to report their "substantial U.S. owners" or suffer a 10% withholding tax on payments (including possibly premium payments) made to them.

See: Treasury Notice 2013-69; Treasury Press Release.See generally: Guide to FATCA by Mark Howe and Dan Mulcahy