Overview of the Chapter 4 FATCA Regulations Under T.D. 9610

On January 17, 2013, the Treasury and IRS released the final Foreign Account and Tax Compliance Act (FATCA) regulations under Code Secs. 1471-1474. Enacted in 2010 pursuant to the Hiring Incentives to Restore Employment (HIRE) Act (P.L. 111-147), FATCA is intended to combat offshore tax evasion by U.S. taxpayers with overseas accounts.  According to Deputy Treasury Secretary Neal Wolin, the regulations “give the administration a powerful set of tools to combat offshore tax evasion…[and]…provide important clarity for foreign and U.S. financial institutions.” Under FATCA, certain foreign financial institutions (FFIs) are required to report financial account information of their U.S. taxpayer clients to the IRS.

The regulations, effective January 28, 2013 are briefly summarized below. The issuance of the final regulations renders the following notices and announcements obsolete:

  • Notice 2010-60, 2010-37 I.R.B. 329;
  • Notice 2011-34, 2011-19 I.R.B. 765;
  • Notice 2011-53, 2011-32 I.R.B. 124; and
  • Announcement 2012-42, 2012-47 I.R.B. 561


§1.1471-0 outlines the regulations under Code Secs. 1471-1474.

§1.1471-1 defines the scope of the final FATCA regulations under Code Secs. 1471-1474 with respect to withholding by foreign financial institutions (FFIs as defined under §1.1471-5(d)) or non-financial foreign entity (NFFEs).

§1.1471-2 provides that under Code Sec. 1471(a), withholding agents must withhold 30% of withholdable payments made after December 31, 2013, to payees that are FFIs unless the agent can reliably associate the payment with documentation supporting exemption from the withholding tax or the payment is made under a grandfathered obligation. A determination must be made under §1.471-3 of who the payee is and their status for purposes of chapter 4. Special withholding rules apply to certain payments of U.S. source FDAP income, intermediaries and other flow-through entities, persons that would be payees but elect to be withheld upon, certain territory financial institutions if they qualify as withholding agents under §1.1473-1(d), foreign branches of U.S. financial institutions (which is generally not an FFI unless it is a Q1 branch or Model 1 FFI). Generally, withholding may be exempt if the withholding agent lacks control or custody of the money or property owned by the payee from which to withhold or does not have knowledge of facts to give rise to the payment (not knowing the character or source of the payment for U.S income tax purposes is insufficient to warrant the exemption).Where the agent knows of facts that gives rise to the payment but cannot determine its character, the payment is deemed to be a withholdable payment. If the agent is unable to determine source, the payment is treated as U.S. source income.

§1.1471-3 provides guidance on determining the payee and the documentation requirements to establish the payee’s status. Payees are persons to whom the payment is made whether or not they are the beneficial owner of the amount. There are numerous exceptions under §1.1471-3(a)(3). For example, foreign persons acting as agents or intermediaries are generally not payees if such persons are NFFEs (non-financial foreign entities) or, with respect to the U.S. source FDAP income, the person is a participating FFI, a deemed-compliant-FFI, or restricted distributor. This is assuming, however, that such person is not a QI that assumed primary responsibility for withholding. Once analysis is concluded on who is a payee, the payee’s status must be determined. Status is determined based on documentation that can be reasonably associated with the payment. The documentation requirements are set out in §1.1471-3(d). Reasonable association hinges on the receipt of valid documentation, appropriate to the payee’s status, from which it can be determined how much the payment relates to such documentation. Furthermore, the agent does not know or have reason to know, with respect to the documentation, that any of the information, certifications, or statements in or associated with the documentation, is unreliable or incorrect. In other words, the document bears relation to the payment based on the payee’s status and the agent does not have grounds to believe the documents and/or information therein are unreliable or incorrect.

 §1.1471-4 lays out the requirements for an FFI agreement that an FFI registers with the IRS. Participating FFIs must:

  • Deduct and withhold tax with respect to payments made to recalcitrant account holders and nonparticipating FFIs;
  • Obtain information regarding each holder of each account maintained by the participating FFI to determine whether each account is a U.S. account or an account held by a recalcitrant account holder or nonparticipating FFI;
  • Annually report the information with respect to U.S. accounts and reportable amounts paid to recalcitrant account holders and nonparticipating FFIs;
  • Be a participating FFI or registered deemed-compliant FFI to be considered as part of an expanded affiliated group;
  • Adopt a compliance program that periodically certifies compliance with the FFI agreement;
  • Cure events of default.

Generally, participating FFI withhold tax equal to 30% of the withhold payment amount made by the participating FFI to recalcitrant account holders and nonparticipating FFIs. The FFI must determine whether the payment is reasonably associated with the valid documentation. The FFI must also, generally, identify U.S. accounts or those held by recalcitrant holders or nonparticipating FFIs. Such information is then reported pursuant to the agreement. The reporting requirement carries a corollary record retention requirement. The requirement is typically satisfied by maintaining withholding certificates, written statements, or other documentary evidence for six years after completion of due diligence procedures. The identification and documentations processes must occur within six months of the agreement effective date for preexisting accounts.

 §1.1471-5 provides additional definitions, specifically applicable to Code Sec. 1471. For example, U.S. accounts is any financial account maintained by an FFI that is held by one or more specified U.S. persons or U.S. owned foreign entities. The account holder is the person listed or identified as the holder or owner of such account. The definitions are relevant with respect to their exclusions. For example, a trust may not be an account holder for purposes of Code Sec. 1471 based on the ownership interests in the trust. Numerous examples are provided to illustrate classification of a U.S. account based on interests held therein. There are exceptions to classifying the status of an account as a U.S. account. For example, “U.S. account” does not include accounts solely maintained by one or more individuals and the aggregate balance or value of all depository accounts held by such individual does not exceed $50,000. Participating FFIs may, however, elect forgo the exception by reporting all accounts despite whether individual accounts would meet the requirements for the exception.

 §1.1471-6 defines and elaborates upon who or what constitutes an exempt beneficial owner as defined in Code Sec. 1471(f). Exempt beneficial owners include: (1) foreign governments; (2) any political subdivision of a foreign government; (3) any wholly owned agency or instrumentality of any one or more of the foregoing; (4) any international organization or wholly owned agency or instrumentality thereof; (5) any foreign central bank of issue; (6) any government of a U.S. territory; (7) certain foreign retirement funds; and (8) certain entities that are wholly owned by one or more other exempt beneficial owners.

 §1.1472-1 pertains to withholding where the withholding agent makes payment to an NFFE, a non-financial foreign entity, under Code Sec. 1472. If a participating FFI complies with its obligations under §1.1471-4(b), it will be deemed to have satisfied its obligation under Code Sec. 1472 where it makes withholdable payments to NFFEs that are account holders. Agents must generally withhold 30% of any withholdable payment paid after December 31, 2013, to an NFFE payee. There are several exceptions to the withholding requirement, including where the beneficial owner of the payment is an NFFE.

§1.1473-1 provides definitions that accompany Code Sec. 1473 and apply to Chapter 4 generally. For example, a withholdable payment is any payment of U.S. source FDAP income and any gross proceeds from the sale or other disposition of any property of a type that can produce interest or dividends that are U.S. source FDAP income. U.S. sourced FDAP income is fixed or determinable, annual or periodic income that is derived from sources within the United States. The amount is the gross amount, not otherwise offset or reduced. The payment is deemed to be made when it is includible if the beneficial owner’s income for U.S. tax purposes. With respect to gross proceeds, a sale or other disposition is a sale, exchange or disposition of property.

§1.1474-1 provides guidance with respect to liability for withholding tax and reporting. An agent must deposit withheld taxes and file the appropriate returns. A withholding agent’s failure to withhold or deposit will result in liability for the amount not withheld and deposited. The withholding agent may, however, designate an agent to fulfill its obligations but the agents’ actions (and presumably inactions) are imputed to the withholding agent. Agency for purposes of chapter 4 requires a written agreement and filing of Form 8655. The agent’s books and records must be available for compliance evaluation and the withholding agent must remain fully liable for the acts of the agent. The inability to reliably associate payments with documentation and corresponding failure to withhold (or withholds at a lesser rate) also results in liability unless the withholding agent appropriately relied on the presumptions set out in §1.1471-3(f) or obtained valid documentation after the payment date that establishes the withholding exemption. The agent must also file Form 1042 to report the amounts under Chapter 4. The form must be filed even if no tax was withheld.

§1.1474-2 provides guidance with respect to over- or under-withholding. In the event the agent overwithholds, the amount may be adjusted either pursuant to a reimbursement procedure or a set-off procedure. The adjustment must be made within a proscribed time period or the resulting remedy is a refund of the amount that constitutes overwithholding. Overwithholding is the excess of the greater of the amount needed to be withheld and the actual tax liability attributable to the income or payment from which the amount was withheld. Reimbursement is the procedure under which the agent repays the owner or payee the amount overwithheld. Documentation is necessary to support the reduced rate of withholding and the agent must retain records of the reimbursement.

§1.1474-3 provides guidance on credits. Income attributable to a payment from which tax is withheld pursuant to Chapter 4 is includible in gross income. No deduction is made for the amount withheld but the amount actually withheld is permitted to be applied as a credit against the total, computed income tax.

§1.1474-4 provides that amounts to be withheld are only collected once. This situation arises in circumstances with multiple agents. If the tax withheld is paid by payee, beneficial owner or agent, it will not be re-collected from any other party.

§1.1474-5 provides additional guidance on refunds and credits. Under certain circumstances, a beneficial owner may be entitled to a refund or credit of taxes actually withheld. Subject to the application of relevant treaty provisions, an amount will not be refunded or credited to a beneficial owner that is an NFFE unless certain information is attached to the income tax return. Otherwise, the NFFE must provide certification that they do not have any substantial U.S. owners, a Form 8966 report or other appropriate documentation.

 §1.1474-6 provides guidance on coordinating Code Secs. 1471 and 1472 with other Code provisions, such as Code Sec. 1441. If a withholding payment is subject to Chapter 4 and Code Secs. 1441, 1442, or 1443, the withholding agent can credit the Chapter 4 withholding against liability under Code Secs. 1441, 1442, or 1443. Amounts subject to withholding under Code Sec. 1445 are typically not subject to withholding under Chapter 4. Amounts subject to withholding under Code Sec. 1446 or certain passthru payments are not subject to Chapter 4 withholding.

 §1.1474-7 provides that confidentiality applies to information obtained or used in connection with Chapter 4. Under §31.3406(f)(1), no person may use information obtained pursuant to Code Sec. 3406 for any purpose other than compliance with Code Sec. 3406 or the limited purposes under Code Sec. 6103. Violation of confidentiality is subject to civil damages.




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