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IRS Provides Guidance to Foreign Financial Institutions on FATCA Timelines

On Behalf of | Oct 26, 2012 | International Tax Law, IRS, Tax Controversy, Tax Crimes |

The US Treasury Department (Treasury Department) and the Internal Revenue Service (IRS) issued Announcement 2012-42 providing guidance on various timelines for withholding agents and foreign financial institutions (FFIs) to complete due diligence required under the Foreign Account Tax Compliance Act (FATCA).

In 2010, the Hiring Incentives to Restore Employment Act of 2010, added sections 1471 through 1474, Chapter 4, to Subtitle A of the Internal Revenue Code. These provisions require withholding agents to withhold 30 percent of certain payments to an FFI unless the FFI has entered into an agreement with the IRS to report certain information with respect to US accounts. FACTA also imposes on withholding agents certain withholding, documentation, and reporting requirements with respect to certain payments made to certain other foreign entities.

On July 26, 2012, the Treasury Department released a model for bilateral agreements with other jurisdictions (in both nonreciprocal and reciprocal versions) under which FFIs would satisfy their Chapter 4 requirements by reporting information about US accounts to their respective tax authorities, followed by the automatic exchange of that information on a government-to-government basis with the US. The model agreement outlines time frames for FFIs in partner jurisdictions to complete the necessary due diligence to identify accounts held by US tax residents. The Treasury Department also announced its intent to develop a second model agreement. Under the second model agreement, FFIs in the partner jurisdiction would report specified information directly to the IRS in a manner consistent with FATCA, supplemented by intergovernmental exchanges of information on request, between the US and the foreign government.

Announcement 2012-42 outlines certain timelines for withholding agents and FFIs to complete due diligence requirements, along with additional guidance concerning gross proceeds withholding and the status of certain instruments as grandfathered obligations under Sections 1471 through 1474 of the IRC. The Treasury Department and the IRS intend to incorporate the rules described in this announcement in final regulations.

Comments received by the IRS and Treasury Department identified practical issues in implementing the chapter 4 rules within the proposed time frames. Many Comments also requested that obligations that may give rise to foreign pass-through payments be treated as grandfathered obligations under certain conditions. The IRS recognized these issues and provided guidance concerning certain grandfathered obligations and withholding on gross proceeds in the Announcement.

The announcement also includes a table, see below, summarizing the timing of certain due diligence requirements for withholding agents and FFIs.

Summary of Timing for Performing Due Diligence Procedures to Identify and Document Accounts

The following table summarizes the dates by which withholding agents and financial institutions must fully implement new account opening procedures to identify account holders and the dates by which withholding agents and financial institutions must complete the review and documentation of all preexisting accounts for purposes of applying the relevant Treasury regulations. The table is intended only as an illustrative tool and therefore should be interpreted consistently with the accompanying Announcement. It is important to emphasize that although the final regulations will provide a reasonable period of time to allow withholding agents to review and document all preexisting accounts, the final regulations will make clear that once a particular account has been documented, for example as a U.S. Account or as a nonparticipating FFI, withholding or reporting, as appropriate, must begin with respect to that account even though the time period for completing the identification and documentation of preexisting accounts may not have expired.


New Individual and Entity Accounts

(Implementation of new account opening procedures)

Preexisting Accounts of Prima Facie FFIs (Date by which due diligence must be completed for all accounts)

Preexisting Accounts of Entities other than Prima Facie FFIs

Preexisting High Value Accounts of Individuals

Preexisting Accounts of Individuals other than High Value Accounts

Withholding Agents other than Participating FFIs and Deemed-Compliant FFIs

By January 1, 2014

By June 30, 2014

By December 31, 2015



Withholding Agents that are Participating FFIs

By later of January 1, 2014, or effective date of FFI agreement

By the later of June 30, 2014, or 6 months after the effective date of the FFI


By the later of December 31, 2015, or two years after the effective date of the FFI Agreement

By the later of December 31, 2014, or one year after the effective date of the FFI Agreement

By the later of December 31, 2015, or two years after the effective date of the FFI Agreement

Withholding Agents that are Registered Deemed-Compliant FFIs

By later of January 1, 2014, or date of registration





To read the IRS announcement 2012-42, click here.


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