Sighs were heard across Wall Street last week after the IRS announced some “FATCA easing,” of the many enforcement and administration requirements of the Foreign Account Tax Compliance Act. However, the fine print may cause those sighing to wish for more relief.
To recap, the IRS announcement, “Further Guidance on the Implementation of FATCA and Related Withholding Provisions, Notice 2014-33,” states that the IRS will consider 2014 and 2015 as “a transition period” for withholding agents, foreign financial institutions (FFIs), and similar entities that are required by law to meet the regulations under chapter 4 of the FATCA legislation. The relief hinges upon the “good faith efforts” made to meet the many requirements of FATCA.
The transition period in which the IRS might be more lenient has been granted “to facilitate an orderly transition for withholding agent and FFI compliance with FATCA’s requirements,” according to the IRS.
However, the term “good faith effort” has yet to be defined and no examples were presented by the SEC, according to William B. Sherman and Summer Ayers LePree, law partners at the Boston-based firm Holland & Knight.
The lawyers, who presented their initial opinions on the Mondaq website for information on legal, accounting, regulatory, compliance and commercial issues, point out that the IRS notice allows accounts “opened before January 1, 2015 to be considered preexisting accounts for FATCA purposes, and thus avoid being subject to heightened due diligence standards” slated to take effect July 1, 2014.
“More specifically, the proposed amendments will allow withholding agents and FFIs to treat any obligation held by an entity that is issued, opened or executed before January 1, 2015 as a preexisting obligation,” according to the lawyers.
At financial systems vendor Wolters Kluwer Financial Services, Stevie D. Conlon, JD, CPA, senior director and tax counsel, and Anna Vayser, CPA, tax and regulatory specialist, note further that FATCA does offer relief for:
- Inter-governmental agreements not yet signed;
- Properly completed W-8IMY and W-8BEN-E forms from entities;
- New due diligence procedures for IGA country-related accounts opened before Jan 1, 2015 (six months of relief);
- Modifications to the standards of knowledge (reason to know) for withholding agents reviewing forms and customer information;
- And revisions to the definition of reasonable explanations supporting foreign status of account holders.
In particular, Conlon notes that “the relief provided does not in any way approach the amount of relief the industry desired. It actually gives tax advisors more reasons to bill clients.” In fact, the IRS has no intention of delaying the July 1, 2014 effective date, and, overall, relief is “very limited and proscribed to specific reporting responsibilities,” she adds.
Firms also have to be careful to read closely the exceptions for FATCA easing.
“There is no general relief or delay, so withholding agents are responsible for certain reporting obligations, beginning July 1, 2014, but get relief for certain others,” Conlon says. “For example, there is Form W-8BEN-E and W-8IMY relief for certification and reporting by entities for six months — through Dec. 31, 2014 — but that relief does not apply to Form W-8BEN required of individuals.”
Relief from penalties “only applies for certain identified subjects (and not others) and is predicated on a withholding agent’s ‘reasonable efforts’ during the transitional period (until Dec. 31, 2015),” Conlon adds. The relief does not apply to the “character and sourcing of payments for withholding and reporting purposes.”
The IRS has not provided “blanket relief for withholding agents regarding grandfathered obligations,” Conlon says.
While some were justifiably cautious, other industry participants found solace (perhaps temporarily).
In the optimistically sighing camp is Kenneth E. Bentsen, Jr., SIFMA president and CEO who thanked the U.S. Treasury and the IRS for being responsive to the concerns of SIFMA members.
“We have repeatedly called for targeted relief from FATCA’s fast-approaching deadlines,” Bentsen says in a prepared statement. He praised the government’s recognition of “the good faith effort” of SIFMA members. “This new guidance will also allow extra time for more economies to sign intergovernmental agreements, to make the official transition to FATCA in 2015 more comprehensive and with fewer penalties.”
Perhaps the silver lining in this latest notice is that the SEC is not significantly adding more rules on top of what already is FATCA. By letting in a few gray areas and acknowledging that good faith efforts can happen, the SEC may start to see that guidances rather than mountains of specifications could be more effective.
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