IRS Unveils Final Agreement for Banks To Sign Up for Direct FATCA Reporting

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By Alison Bennett

Dec. 26 --The Internal Revenue Service unveiled the eagerly awaited final agreement for foreign financial institutions (FFIs) that want to sign up for direct reporting of their U.S.-owned accounts under the Foreign Account Tax Compliance Act in Rev. Proc. 2014-13.

The Dec. 26 move is key to many banks and other financial entities that will have to start reporting and withholding under the 2010 law on July 1, 2014. While the agreement is largely similar to the draft version the IRS issued in October, tax practitioners said a welcome change in the final FFI agreement gives new flexibility to institutions that have “Model 2” intergovernmental agreements (IGAs) with the U.S. to implement FATCA .

They also said the new agreement contains an approach toward definitions by cross-referencing that is very helpful. All the practitioners interviewed by Bloomberg BNA said they are looking forward to the two new sets of FATCA guidance that the IRS said it expects to issue in January. One attorney praised the fact that the government seemed to be indicating it would have an updated, more inclusive definition of a branch in that upcoming guidance.

A Treasury spokeswoman said the final agreement is substantially the same as the draft version, with a few improvements generally made to provide clarity. “The changes between the draft and final FFI agreements include corrections, clarifications, and conforming changes to take into account soon to be issued regulations under FATCA,” she told Bloomberg BNA via e-mail Dec. 26.

IGAs Impact on Reporting.
FATCA requires FFIs to directly report their U.S.-owned accounts to the IRS or face, in some cases, a 30 percent withholding tax on certain U.S.-source payments that are made to them. The withholding tax would also be imposed on U.S. withholding agents. The FFI agreement is intended to facilitate direct reporting.

Since FATCA was enacted, the U.S. has been involved in negotiating IGAs with dozens of jurisdictions. Under Model 1 IGAs, financial institutions would report the information to their own governments, which then would share the data with the IRS. Model 2 accords generally provide for a modified version of direct reporting to the U.S.

So far, Japan, Switzerland and Bermuda have signed Model 2 pacts. As of Dec. 19, Treasury had negotiated a total of 18 signed IGAs. Eleven more agreements have been reached in substance and discussions with many other jurisdictions are continuing, Treasury announced on that day .

The guidance the government unveiled Dec. 26 is generally intended to be used by financial institutions for direct reporting outside of a Model 1 IGA, but it also affects entities that have signed Model 2 IGAs.

Flexibility for Model 2 Jurisdictions.
John Harrington, a partner with Dentons LLP in Washington, told Bloomberg BNA that a “notable change, and a welcome one” is that the final FFI agreement allows banks and other financial entities in Model 2 jurisdictions to choose whether to apply the due diligence procedures under the IGA or under the new FFI agreement.

The agreement allows the financial institution to make that decision, rather than the Model 2 jurisdiction, he said. It also permits “quite a bit of flexibility regarding mixing and matching” between the IGA procedures and the FFI agreement procedures.

This is reasonable, he said, because they are both effective ways for FFIs to satisfy their FATCA obligations.

Jonathan Jackel, senior counsel with Burt, Staples & Maner LLP, said in a Dec. 26 interview that FFIs in Model 2 jurisdictions are likely to appreciate having the choice. Candace Ewell, a principal in the Washington National Tax Services group at PricewaterhouseCoopers LLP, told Bloomberg BNA Dec. 26 she too believes the flexibility will be welcome.

Jackel and Ewell both praised the cross-referencing approach that the agreement takes toward definitions.

Cross-Referencing of Definitions Praised.
“Rather than spelling out a complete definition in the FFI agreement, the IRS is saying this term means what it means in a code section,” Jackel said. “It's a more straightforward way to do it. It takes away all that comparison and it's much nicer,” he said.

Ewell said this approach “cuts back on the confusion that happens when you paraphrase a definition.”

Jackel said the agreement seems to preview that there will be a new definition of a branch that is more inclusive than the current approach, which looks at what it means to be a branch in the context of a limited branch. “It appears that it's going to be in the next set of regulations,” he said. “A definition that applies all across FATCA would be very, very helpful,” Jackel said.

All the practitioners interviewed said taxpayers really need the guidance the IRS said it plans to issue in January.

One set will provide clarifications to final regulations (T.D. 9610) the IRS unveiled 11 months ago . The other will offer help in how to coordinate the reporting requirements across several chapters, including Chapter 3, Chapter 4 and Chapter 61.

The importance of the latter set of rules “can't be understated,” Ewell said. “Having disparity between existing rules and FATCA is just a level of confusion that nobody needs,” she said.

Guidance Needed.
Jackel said for IRS to affirmatively say it will be done with the two new sets of regulations in January means that “they must be pretty far along in the approval process.” The fact that they are issuing them in temporary form means the government still believes more work may be needed, but officials are “done for this round.”

Ewell said in the preamble to the Dec. 26 revenue procedure, the IRS also offered a glimpse of the approach it will be taking in forthcoming agreements for qualified intermediaries, withholding partnerships and withholding trusts. “It looks like they're not going to rewrite it,” she said. “They're just going to coordinate through cross-reference.”

The revenue procedure is scheduled to appear in Internal Revenue Bulletin 2014-3 dated Jan. 13, 2014.

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To contact the editor responsible for this story: Cheryl Saenz at