FATCA—Updates and Coordinating Regulations: Treasury Releases Last Substantial Regulations Package Necessary to Implement FATCA

Sullivan & Cromwell LLP - March 21, 2014

On February 20, 2014, the IRS and the Treasury Department issued the last substantial package of regulations necessary to implement FATCA. The package consists of two Treasury Decisions: T.D. 9658, which modifies the nonresident alien withholding rules and the domestic backup withholding and reporting rules to coordinate with the FATCA regulations; and T.D. 9657, which revises the FATCA regulations regarding information reporting and withholding. The regulations have been released in final and temporary form, meaning that although they are subject to further comments and revision, they are generally effective as drafted when published in the Federal Register on March 6, 2014.

The amendments to the regulations under FATCA and the coordinating rules released under T.D. 9657 and T.D. 9658 affect several broad areas of the federal income tax withholding regimes. For example, an entity’s FATCA status is affected by:

  • Modifications to the expanded affiliated group rules; and
  • Changes to the rules used to determine whether an entity is subject to, or exempt from, FATCA.
Adjustments have been made to FATCA compliance mechanisms and procedures, including:
  • The addition of provisions allowing certain nonfinancial foreign entities to report information directly to the IRS, rather than to withholding agents;
  • Changing the responsibilities of entities that “sponsor” foreign financial institutions;
  • Limiting the circumstances under which a failure to reduce certain “bad” accounts maintained by a financial institution will be considered an event of default under FATCA;
  • Allowing withholding agents to rely solely on an issuer’s determination of whether an obligation has been subject to a material modification and is thus no longer grandfathered under FATCA; and
  • Updating the FATCA due diligence procedures applicable to various types of payees.
Withholding and reporting requirements under FATCA and other areas of the Internal Revenue Code have been amended to:
  • Allow certain withholding agents to elect to withhold under the existing domestic backup withholding regime rather than under FATCA;
  • Apply existing rules for credits and refunds to claims for refund or credit of amounts withheld under FATCA;
  • Narrow the scope of payees in respect of which an FFI has to report non-U.S. source payments; and
  • Temporarily suspend the FATCA withholding requirement for certain payments under collateral agreements.
In addition, T.D. 9658 announces an extension of the sunset date for the portfolio interest withholding exemption applicable to certain foreign-targeted obligations to January 1, 2016.