FATCA — Information Reporting and Withholding Under Chapter 4 (Portfolio 6565)

Tax Management Portfolio, FATCA — Information Reporting and Withholding Under Chapter 4, discusses the reporting and withholding requirements of chapter 4 (§1471–§1474) of the Internal Revenue Code.

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These requirements generally require: (i) non-U.S. financial institutions to enter into agreements with the Internal Revenue Service under which they agree to identify and report U.S. account holders, and (ii) non-U.S. nonfinancial entities to disclose direct and indirect U.S. owners in certain circumstances, and which imposes a 30% withholding tax on certain payments to non-U.S. financial institutions and nonfinancial entities that do not comply with chapter 4's requirements. The Portfolio covers the chapter 4 withholding and reporting mechanism; the definitions and requirements chapter 4 places on both foreign financial institutions and nonfinancial entities (including rules under which entities with certain characteristics may qualify for exemption from some or all of chapter 4's requirements); due diligence and reporting; refund procedures; the impact of intergovernmental exchange of information agreements; and specific issues affecting certain industries, such as asset management and insurance.


FATCA — Information Reporting and Withholding Under Chapter 4 was authored by the following experts.
Steve Nauheim

Steve Nauheim, B.S., University of North Carolina (Chapel Hill); J.D., Georgetown University Law Center; LL.M. (Taxation), George Washington University Law School; former attorney/advisor in the IRS Office of Chief Counsel, where he was a principal drafter of the 1968 U.S. transfer pricing regulations; has been professor of international tax law and lectured and written extensively on the subject; has held leadership positions in several professional associations.

Nils Cousin

Nils Cousin, B.A., Emory University; J.D., University of San Diego School of Law; LL.M. (Taxation), Georgetown University School of Law; former attorney advisor to Hon. Joseph Gale, Judge, United States Tax Court.

Candace Ewell

Candace Ewell, B.S. Oregon Health Sciences University School of Nursing; J.D., North Carolina Central University School of Law; LL.M. (Taxation), Georgetown University Law Center; former assistant chief counsel for tax matters at U.S. Small Business Administration Office of Advocacy; former attorney/advisor in the IRS Office of Chief Counsel (Corporate); member of the IRS's Information Reporting Program Advisory Committee.

Robert Limerick

Robert Limerick, B.A., State University of New York at Binghamton; J.D., Nova Southeastern University School of Law; LL.M. (Taxation), University of Florida Levin College of Law; former chair, Securities Industry and Financial Markets Association (SIFMA) Technical Tax and Compliance Committee.

Jon Lakritz

Jon Lakritz, B.S., State University of New York; M.S. (Taxation), Pace University; Certified Public Accountant, New York; former chair, IRS Information Reporting Program Advisory Committee.

Rebecca E. Lee

Rebecca E. Lee, B.A., The College of William and Mary; J.D., Tulane University; LL.M. (Taxation), Georgetown University Law Center; former assistant to the IRS Chief Counsel; former attorney/advisor in the IRS Office of Chief Counsel (Financial Institutions and Products).

Table of Contents

Detailed Analysis

I. Introduction and History

A. Overview of Portfolio Contents

B. Overview of Chapter 4

C. Historical Background

D. Other Contemporaneous U.S. and International Efforts to Combat Offshore Tax Evasion



3. EU Savings Directive

4. EU Third AML Directive

5. Financial Action Task Force

6. OECD Report on Base Erosion and Profit Shifting (BEPS)

7. Multilateral Tax Information Exchange Agreements

8. OECD Common Reporting Standard

II. Rules Applicable to Withholding Agents

A. In General

B. Withholdable Payments

1. Fixed or Determinable Annual or Periodic (FDAP) Payments

2. Gross Proceeds

3. Payments Not Treated as Withholdable Payments

a. Short-Term Obligations

b. Effectively Connected Income

c. Excluded Nonfinancial Payments

d. Fractional Shares

e. Offshore Payments of U.S. Source FDAP Income Prior to 2017

f. Collateral Arrangements Prior to 2017

4. Grandfathered Obligations

C. Withholding Exceptions and Limitations

1. Withholding Agent Lacks Control, Custody, or Knowledge

2. Payments to Payees Not Subject to Withholding

3. Payments to Certain Excepted Accounts

4. Transitional Rules for Payments Made Prior to January 2016; Exception for Payment to Prima Facie FFIs

D. Coordination of Chapter 4 Reporting and Withholding

1. Coordination Between FATCA and Chapter 3

a. Withholding Under § 1441—§ 1443

b. Withholding Under § 1445

c. Withholding Under § 1446

d. Coordinating Reporting on Forms 1042 and 1042-S

2. Coordination of FATCA with Chapter 61 and § 3406

a. Withholding Under § 3406

b. Reporting Under Chapter 61

E. Requirement to File Income Tax Return

F. Requirement to File Information Return Form 1042-S

1. Participating and Deemed-Compliant FFIs

2. Special Reporting of Participating and Deemed-Compliant FFIs

3. Special Reporting for Nonparticipating FFIs and Territory Financial Institutions

4. Form 1042-S: Determining Who Is a Recipient

5. Amounts Subject to Reporting on Form 1042-S

6. Information Required on Form 1042-S

III. Rules Applicable to FFIs

A. Definition of Foreign Financial Institutions

1. Foreign Entity

2. Types of Financial Institutions

a. Depository Institutions

(1) Banking or Similar Business

(2) Exception for Certain Lessors

(3) Application of § 581

(4) Effect of Local Regulation

b. Custodial Institutions

(1) Substantial Portion

(2) Income Attributable to Holding Financial Assets and Related Financial Services

(3) Effect of Local Regulation

c. Investment Entities

(1) Entities that Conduct Business for or on Behalf of Customers

(2) Professionally Managed Investment Entities

(3) Other Investment Entities

d. Specified Insurance Companies

e. Holding Companies or Treasury Centers

3. Exclusions — Entities Excluded from the Definition of Financial Institution

a. Excepted Nonfinancial Group Entities

(1) Nonfinancial Group

(2) Holding Companies, Treasury Centers, and Captive Finance Companies

b. Excepted Nonfinancial Start-Up Companies

c. Excepted Nonfinancial Entities in Bankruptcy or Liquidation

d. Excepted Inter-Affiliate FFIs

e. Section 501(c) Entities

f. Nonprofit Organizations

B. Definition of U.S. Account and Financial Account

1. Introduction

2. Financial Accounts

a. Depository Accounts

b. Custodial Accounts

c. Equity or Debt Interests

d. Insurance or Annuity Contracts

e. Other Exceptions

(1) Escrow Accounts

(2) Accounts Held by an Estate

(3) Retirement and Certain Savings Accounts

3. U.S. Accounts

4. Specified U.S. Person

5. U.S.-Owned Foreign Entity

C. Participating FFIs

1. FFI Agreement

a. Withholding Requirements

(1) Satisfaction of Withholding Requirements

(2) Foreign Passthru Payments

(3) Withholding on Limited FFIs and Limited Branches

(4) Special Rule for Dormant Accounts

(5) Special Rule for U.S. Branches of Participating FFIs

b. Expanded Affiliated Group

(1) EAG Defined

(2) Limited Branch Status

(3) Limited FFI Status

(4) Special Rule for Qualified Intermediaries

c. Account Due Diligence

(1) Individual Accounts

(a) New Individual Accounts

(b) Preexisting Individual Accounts

(i) Procedures Applicable to Low-Value Individual Accounts

(ii) Procedures Applicable to Accounts Other than Low-Value or High-Value Accounts

(iii) Procedures Applicable to High-Value Accounts

(2) Entity Accounts

(a) New Entity Accounts

(b) Preexisting Entity Accounts

(i) Accounts Documented as Held by U.S. Entities

(ii) Entity Accounts Not Documented as Held by U.S. Entities

d. Account Reporting

(1) In General

(2) Form 8966 Reporting for Specified U.S. Persons, U.S.-Owned Foreign Entities, and Owner- Documented FFIs

(a) Descriptions Applicable to Reporting Requirements

(b) Payments Made with Respect to an Account

(c) Transfers and Closings of Deposit, Custodial, Insurance, and Annuity Financial Accounts

(d) Amount and Character of Payments Subject to Reporting

(e) Record Retention Requirements

(3) Special U.S. Account Reporting Rules for U.S. Payors

(a) U.S. Branches Treated as U.S. Persons

(b) U.S. Payors Other than U.S. Branches

(4) Election to Perform Chapter 61 Reporting

(5) Election to Report in a Manner Similar to § 6047(d)

(6) Reporting on Recalcitrant Account Holders

(7) Special Reporting Rules with Respect to 2014 and 2015

(a) PFFIs that Elect to Report Under Chapter 61

(b) Time for Filing

(c) Transitional Reporting of Payments Made to NPFFI Account Holders

(8) Form 1042 Reporting

(9) Form 1042-S Reporting

(a) Special Form 1042-S Reporting Requirements for PFFIs and Deemed-Compliant FFIs

(b) Reporting by U.S. Branches of a PFFI or Registered Deemed-Compliant FFI that Are Treated as U.S. Persons

(c) Reporting by Territory Financial Institutions

(d) NPFFIs

(e) Other Withholding Agents

e. Events of Default

f. Verification of Compliance

(1) Compliance Program

(2) Consolidated Compliance Program

(3) Periodic Certifications of Compliance

(a) Qualified Certifications

(b) Material Failures

(4) IRS Review of Compliance

g. Legal Prohibitions on Reporting U.S. Accounts and Withholding

2. Collective Credit or Refund Procedures for Overpayments

D. Deemed-Compliant FFIs

1. Introduction

2. Registered Deemed-Compliant FFIs

a. Procedural Requirements Applicable to All Registered Deemed-Compliant FFIs

b. Local FFIs

c. Nonreporting Members of PFFI Groups

d. Qualified Collective Investment Vehicles

e. Restricted Funds

f. Qualified Credit Card Issuers and Servicers

g. Sponsored Investment Entities and Controlled Foreign Corporations

3. Certified Deemed-Compliant FFIs

a. Nonregistering Local Banks

b. FFIs with Only Low-Value Accounts

c. Sponsored, Closely Held Investment Vehicles

d. Limited Life Debt Investment Entities

e. Investment Advisors and Investment Managers

4. Owner-Documented FFIs

E. Exempt Beneficial Owners

1. Introduction

2. Commercial Activities

3. Non-U.S. Governments

4. International Organizations

5. Non-U.S. Central Banks of Issue

6. Governments of U.S. Territories

7. Retirement Funds

a. Categories of Retirement Funds that Qualify as Exempt Beneficial Owners

b. Treaty-Qualified Retirement Funds

(1) Resident of a Treaty Country

(2) Limitation on Benefits Provisions

c. Broad Participation Retirement Funds

d. Narrow Participation Retirement Funds

e. Funds Formed Pursuant to Plans Similar to § 401(a) Plans

f. Pension Funds of an Exempt Beneficial Owner

g. Investment Vehicles Exclusively for Retirement Funds

8. Entities Wholly Owned by Exempt Beneficial Owners

IV. Special Considerations for Insurance Companies

Introductory Material

A. When Is an Insurance Company an FFI?

1. Specified Insurance Companies

2. Section 953(d) Election

3. Investment and Deposit Activity

4. Captive Insurance Companies

B. Reviewing and Monitoring Cash Value Policy Exclusions

1. $50,000 Threshold

2. Election to Disregard

3. Indemnity Reinsurance Contracts

4. Determining Cash Value

5. Term Life Insurance Exclusion

C. Scope of Withholdable Payments

1. Insurance and Reinsurance Premiums

a. Payments of Premiums Made to Insurance Brokers

b. Absence of Payee Documentation

2. Grandfathered Obligations

3. Death Benefits

V. Special Considerations for Asset Managers

Introductory Material

A. Special Considerations for Certain FFI Categories

1. Treatment of Non-U.S. Investment Advisors as FFIs

2. Registered Deemed-Compliant and Certified Deemed-Compliant Statuses

a. Concept of Registered Deemed Compliance in General

b. Qualified Collective Investment Vehicles

c. Restricted Funds

d. Sponsored Investment Entities, Sponsored Controlled Foreign Corporations, and Sponsored Closely Held Investment Vehicles

(1) Sponsored CFCs

(2) Sponsored, Closely Held Investment Vehicles

e. Other Categories of Deemed-Compliant Status

f. Entity Classification Issues

B. Role of Distributors

1. Owners or Mere Intermediaries?

2. Advice-Only Distributors

C. Expanded Affiliated Group Considerations in an Asset Management Structure

D. Collateralized Loan Obligation (CLO) and Collateralized Debt Obligation (CDO) Structures

1. Considerations for Existing CLOs and CDOs

2. Considerations Related to Grandfathered Obligations

3. Potential Deemed-Compliant Status

E. Hedge Fund Considerations

F. Considerations for Service Providers

G. Effect of IGAs on the Asset Management Industry

VI. Rules Applicable to NFFEs

A. Introduction

B. Excepted and Passive NFFEs

1. Excluded Entities

2. Publicly Traded Corporations

3. Affiliates of Publicly Traded Corporations

4. Active NFFEs

5. Territory Entities

6. Passive NFFEs

7. Direct Reporting and Sponsored Direct Reporting NFFEs

C. Substantial U.S. Owners

D. Certification Provided to Withholding Agents

E. Direct Reporting NFFEs and Sponsored Direct Reporting NFFEs

VII. Special Considerations for Other Industries and Entities

A. Real Estate Syndicates

B. U.S. Financial Institutions

1. The U.S. Tax Gap

2. Changes to Pre-FATCA Documentation Standards

3. U.S. Financial Institutions with Non-U.S. Subsidiaries and Branches

4. Agency Issues

VIII. Payee Identification Procedures

A. Procedures for Withholding Agents

1. Identification of Payees

a. Payments to Non-U.S. Agents and Intermediaries

b. Payments to Non-U.S. Flow-Through Entities

c. Payments to U.S. Intermediaries or Agents

d. Payments to Territory Financial Institutions

e. Payments to Disregarded Entities and Branches

2. Documentation of Payees

a. Identifying Intermediaries

b. Identifying Entity Type

c. Determining When a Payee Is Receiving Effectively Connected Income

3. Additional Documentation Requirements

a. Identification of U.S. Persons

b. Identification of Non-U.S. Individuals

c. Identification of PFFIs and Registered Deemed-Compliant FFIs

d. Identification of Reporting Model 1 FFIs

e. Identification of Certified Deemed-Compliant FFIs

f. Identification of NPFFIs

g. Identification of Sponsored, Closely Held Investment Vehicles

h. Identification of Owner-Documented FFIs

(1) Documentation for Owners and Debt Holders

(2) Content of FFI Owner Reporting Statement

(3) Auditor's Letter Substitute

(4) Exception for Certain Offshore Obligations of $1 Million or Less

i. Identification of Nonreporting IGA FFIs

j. Identification of Exempt Beneficial Owners

(1) Documenting Non-U.S. Governments, Governments of U.S. Territories, International Organizations and Non-U.S. Central Banks of Issue

(2) Documenting Retirement Funds

(3) Documenting Entities Wholly Owned by Exempt Beneficial Owners

k. Identification of Territory Financial Institutions and Excepted Territory NFFEs

(1) Documenting Territory Financial Institutions

(2) Documenting Excepted Territory NFFEs

l. Identification of Excepted NFFEs

(1) Documenting Excepted Nonfinancial Group Entities

(2) Documenting Excepted Nonfinancial Start-Up Companies

(3) Documenting Excepted Nonfinancial Entities in Liquidation or Bankruptcy

(4) Documenting § 501(c) Organizations

(5) Documenting Nonprofit Organizations

(6) Documenting NFFEs that Are Publicly Traded Corporations

(7) Documenting NFFE Affiliates of NFFEs that Are Publicly Traded Corporations

(8) Documenting Active NFFEs

(9) Documenting Direct Reporting NFFEs and Sponsored Direct Reporting NFFEs

(10) Documenting Excepted Inter-Affiliate FFIs

m. Identification of Passive NFFEs

B. Reliance on Documentation Collected by Other Persons or Certifications Provided by Other Persons

1. Shared Documentation Systems Maintained by Agents

2. Third-Party Data Providers

3. Certifications Provided by Introducing Brokers

4. Documentation and Certifications Provided Between Principals and Agents

5. Documentation for Accounts Acquired in Mergers or Bulk Acquisitions for Value

C. Standards of Knowledge Applicable to Withholding Agents

1. Reason to Know

2. PFFIs, Registered Deemed-Compliant FFIs, and Reporting Model 1 FFIs

3. Standards of Knowledge Applicable to Withholding Certificates and Written Statements

4. Standards of Knowledge Applicable to Documentary Evidence

5. Standards of Knowledge Applicable to Financial Statements

6. Standards of Knowledge Applicable to Organizational Documents

7. Standards of Knowledge Applicable to Industry Codes and Classifications

8. Standards of Knowledge Applicable to Documentation from Intermediaries and Flow-Through Entities

D. Presumption Rules

1. Presumptions of Classification as an Individual, Trust, or Estate

2. Presumptions of Classification as an Entity

3. Presumptions of Classification as a Branch

IX. Intergovernmental Agreements

A. Introduction

B. History

C. Model 1 IGAs

1. Financial Institutions Under Model 1 IGAs

a. Defining and Categorizing Financial Institutions

b. Annex II

c. Reporting FFI Obligations

d. Noncompliant FFIs

2. Non-U.S. Government Obligations Under Model 1 IGAs

3. Updating IGAs

4. Reciprocal Model 1 IGAs

5. Effective Dates

D. Model 2 IGAs

1. Financial Institutions Under Model 2 IGAs

2. Non-U.S. Government Obligations Under Model 2 IGAs

E. Effect of Local Guidance

X. Liability for Withheld Tax and Refund Procedures

A. Liability for Withheld Tax

1. Use of an Agent

2. Indemnification of Withholding Agent

3. Depositing Withheld Tax

B. Adjustment for Overwithholding and Underwithholding

1. Reimbursement Procedures

2. Set-Off Procedures

C. Refunds or Credits

XI. Other FATCA Provisions

Introductory Material

A. Section 6038D

1. Specified Persons

2. Reporting Thresholds and Procedures

3. Interest in a Specified Foreign Financial Asset

4. Specified Foreign Financial Assets

5. Valuation Issues and Currency Translation

6. Information Required to be Reported

7. Overlap Rules

8. Penalties

B. Withholding on Dividend Equivalent Payments on Notional Principal Contracts

C. Repeal of Certain Exceptions to the Registered Bond Requirements

D. Provisions Relating to Non-U.S. Trusts

E. Targeted Reporting Provisions

Working Papers

Working Papers

Table of Worksheets

Worksheet 1 FATCA Glossary

Worksheet 2 FATCA Timelines