FATCA e-alert Issue 2014-20 | KPMG | LU
Share with your friends

FATCA e-alert Issue 2014-20

FATCA e-alert Issue 2014-20



Related content

IRS Discusses Various Withholding and Reporting Issues at Recent Conference

At a recent conference in New York, IRS and Treasury officials discussed various issues of particular interest to U.S. withholding agents (USWAs), Foreign Financial Institutions (FFIs), and Qualified Intermediaries (QIs). Officials addressed the regulations intended to “harmonize” existing withholding and reporting regimes with FATCA regulations, including: future guidance, agreements, technical corrections, withholding issues, and several other regulatory concerns that may impede the implementation of FATCA. A summary of comments follows.


Upcoming Guidance

The IRS discussed upcoming guidance it anticipates issuing in the near term including.

  • Instructions to Forms
    • 1042-S: The Instructions for Form 1042-S are in the final stages of review and will contain detailed guidance under Chapters 3 and 4 including examples for applying the rules.
    • 8966: The Instructions for Form 8966 have been released today (25 June 2014).
    • Forms 1099: Instead of changing the forms, the IRS reported it will leave 1099 forms as already published, and will provide detailed instructions that will explain the requirements.
    • The Instructions for the Requestor of Forms will be revised and issued after 1 July 2014, and will contain significant guidance.
  • Agreements
    • FFI Agreement: The final agreement was released on 24 June 2014 and covers technical requirements under FATCA. It does not discuss obligations pursuant to Chapter 3. The agreement will adopt the transitional relief provided under Notice 2014-33. 
    • Qualified Intermediaries, Withholding Partnerships/Trusts: The agreement will contain technical requirements and operational guidance under Chapter 3, but not discuss obligations pursuant to FATCA. The IRS stated that this was an intentional drafting decision because there are too many classifications of FFI to properly address in the QI/WP/WT agreement.
  • Technical Corrections: Technical corrections are expected to be released on or shortly after 1 July 2014, including:
    • Reliance on Pre-FATCA Forms: As provided in Notice 2014-33, the IRS intends to expand the preexisting account treatment to entity accounts opened between 1 July 2014 and 31 December 2014. In acknowledgement for its delays in issuing instructions to the new certification forms, with the exception of Form W-8BEN and Form W-9, the IRS stated that pre-FATCA forms are permitted to be used until 31 December 2014.
    • Collateral Exception for Withholdable Payments: The current Chapter 4 regulations provide that a payment made prior to 1 January 2017 by a secured party with respect to collateral securing one or more transactions under a collateral arrangement will not be treated as a withholdable payment provided that a commercially reasonable amount of collateral is held by the secured party as part of the collateral agreement. The current regulations do not specify that the exception is allowed for withholding agents other than the secured party. The IRS has stated that it is looking into the provision, and will provide future guidance if needed.
    • Payments for Offshore Obligations: The recent amendments to the Chapter 4 and Chapter 3 regulations limited the use of these provisions. By cross-referencing many areas of the section with language found in Chapter 61, the drafters have included limitations which are not broad enough for all institutions. In its current state, the exception does not include payments on offshore obligations made by insurance companies. The IRS did not comment on this issue in detail, but did mention that this provision may likely change.
    • Presumption Rules: The IRS will reinstate the rule that requires withholding agents to presume a partnership or trust is foreign when they have indicia of foreign status.
    • Commercial Activities Test: In the current regulations, a payee will not be treated as an exempt beneficial owner with respect to a payment that is derived from an obligation that is held in connection with a commercial financial activity. The recent amendments changed the limitations to this section. The IRS stated that this change was erroneous, and that withholding agents should apply the rule as written in the final regulations.
  • Intergovernmental Agreements

The Model I agreement was revised on 10 June 2014, with the following updates:

  • Annex I, paragraph H: updated documentation timelines for entities, as provided in Notice 2014-33. 
  • IGAs in substance:
    • The new models provide two alternatives for documenting accounts opened between 1 July 2014 and the end of the year. 
      • Alternate Procedure #1 (Paragraph G): The first alternate procedure is applicable to both new entity and individual accounts. The effective date of their agreements will be the date of entry into force (mentioned in the last article of the IGA). The procedure allows a withholding agent to wait up to one year prior to obtaining a self-certification from its account holder or report on such a account holder. If after the first year, the self-certificate is not obtained, the withholding agent must close the account. 
      • Alternative Procedure #2 (Paragraph H): This approach adopts the relief set forth in Notice 2014-33.
    • Foreign branches of USFIs: The IRS noted that it does not anticipate that U.S. payors will have fewer obligations than they currently have under Chapter 61.
  • Withholding Issues
    • Withholding on NPFFIs: For those NPFFIs onboarded on or after 1 July 2014, FATCA withholding will be required, as will for passive NFFEs that do not certify they have no substantial US owners or that fail to provide the names, addresses, and TINs where they do have substantial U.S. owners”. Absent indications of a Prima Facie FFI, documentation can be collected up until 30 June 2016. Withholding agents must continue to comply with the normal validation process (e.g., looking through intermediaries and indentifying payees). 
    • Chapter 3 Presumptions: The application of the recently revised presumption rules under Chapters 3 and 61 are effective 1 July 2014. Payees previously presumed a Chapter 3 status, will be treated for purposes of Chapter 4, as they were treated under Chapter 3. 
    • Payments to QIs not electing QI Status: The final Form 1042-S instructions will provide guidance on the residual obligations a withholding agent will have for purposes of withholding and reporting when they are not electing primary withholding responsibility. 
    • Direct Payments on Offshore Obligations: Section 1.1473-1 (a)(4)(vi) does not define the criteria for “retail customer.” Under this section, a payment with respect to an offshore obligation made prior to 1 January 2017, will not be treated as a withholdable payment if such a payment is U.S. Source FDAP income that is made by a person other than an intermediary, WP, or WT to the payee. This definition excludes interest payments made by a foreign branch of a U.S. financial institution with respect to depository accounts it maintains for retail customer. During the conference, the service did not provide a definition, and sought guidance from industry. The reference to “retail” has caused significant confusion. It is unclear how the IRS will clarify this other than it announced future guidance will be issued
  • Paying Agent Rules

Reliance on documentation and certifications provided between principals and agents: The rules described in this section will not be updated to account for recent guidance. Withholding agents may continue to rely on the provisions, as they are stated in the regulations.

  • Third Party Data Providers & Chapter 3

Third Party Data Providers may not be relied upon for purposes of determining the Chapter 3 status of a payee. The IRS did not see a benefit in allowing for this provision, as third party data providers do not generally collect/verify data that is relevant to chapter 3 statuses. The IRS welcomes commentary from industry, but at this point, it does not see the same level of usefulness for Chapter 3, as it sees for Chapter 4. Currently under Chapter 3, withholding agents can rely on agency agreements with third party data providers to achieve this result.


Qualified Intermediaries in a Post-FATCA World

The IRS discussed its recent “harmonization” of the current withholding and reporting rules and FATCA, focusing on its approach to withholding tax compliance. The guidance surrounding such compliance will be found in the new QI Agreement.

  • QI Applications

Initially, new QIs must complete the paper process to enter into new QI agreements. In addition, registration must also be completed online.

  • QI Agreements

All existing agreements will expire on 30 June 2014. Withholding agents should not be in a position to withhold on QIs with expired agreements. Rationale:

  • Chapter 4: Withholding agents paying QIs may rely on the transitional rules to avoid withholding. Therefore, withholding agents will not have to document these entities until the preexisting prima facie FFI deadlines - 1 January 2015. 
  • Chapter 3: Withholding agents paying QIs may rely on actual knowledge. Therefore, since the withholding agents should not have “actual knowledge” that QIs are not NPFFIs, they will not be required to withhold. 
  • Conflicts between QI and FFI Agreements: If a requirement intersects between Chapters 3 and 4, the agreement will provide guidance on how to apply the rules of both regimes. 
  • Differing responsibilities under each Agreement:
    • Will differ based on the type of account: Direct vs. indirect account holders
    • The agreement will provide guidance based on the type of QI and payee (as a QI assuming vs. not assuming withholding and reporting responsibilities) 
  • The concept of QI designated accounts will remain part of the agreement.
    • The Chapter 4 responsibilities will apply across all accounts, regardless of their designation.
    • The Chapter 3 responsibilities will only apply to those accounts designated as QI accounts.
    • Exception: A QSL must act as a QI for all payments regardless of whether it designates an account or not. 
  • The extended guidelines listed in Notice 2014-33 will apply to the QI Agreement and QI designated accounts. The Agreement will not contain guidance on 871(m) payments. The final regulations for these payments need to be completed before it will be incorporated into the QI agreement. 
  • Documentation requirements and “reason to know” standards will not change under the new QI Agreement.
  • Withholding agents should expect to see all of the steps that were described within the coordinating regulations in the agreement. 
  • QI Audits: QIs will be required to perform a periodic internal review and may be required to submit an internal review report.


Impact of Notice 2014-33

IRS officials stated that it is not the government’s interest to dissuade people from trying to comply; therefore, good faith efforts to comply with the FATCA regulations are expected, including:

  • Developing written procedures
    • Documenting rules and responsibilities 
    • Following written procedures 
    • Performing internal audits. Although not required, a function that monitors this process will be viewed favorably
  • Notice 2014-33 may provide penalty relief for impacted entities making good faith efforts
    • Reasonableness standards will be applied.
  • The IRS is not likely to commence Chapter 4 audits until early 2016.

The Instructions for the Requestor of Forms will be revised and issued after 1 July 2014, and will contain significant guidance.

1042-S: The Instructions for Form 1042-S are in the final stages of review and will contain detailed guidance under Chapters 3 and 4 including examples for applying the rules.


8966: The Instructions for Form 8966 have been released today (25 June 2014).


Forms 1099: Instead of changing the forms, the IRS reported it will leave 1099 forms as already published, and will provide detailed instructions that will explain the requirements.


The Instructions for the Requestor of Forms will be revised and issued after 1 July 2014, and will contain significant guidance.

Updated FFI Agreement Has Been Released

An updated FFI Agreement has been released and posted to the FATCA Website. Revenue Procedure 2014-38 updates and supersedes the FFI Agreement originally released as Revenue Procedure 2014-13.

The link to Revenue Procedure 2014-38 (PDF, 180 KB), setting out the updated FFI Agreement, has been added to the FATCA Registration and FATCA Governments Website sections of the FATCA Website.

Model 2 IGA reached “in substance” with Taiwan

On 23 June, the U.S. Treasury Department updated its FATCA webpage to report that Taiwan has reached an “agreement in substance” for a Model 2 intergovernmental agreement (IGA) with the United States, and consented to this status as of 23 June 2014.

A footnote posted today on Treasury’s FATCA webpage indicates that “consistent with the Taiwan Relations Act,” the parties to the agreement would be:

  • The American Institute in Taiwan
  • The Taipei Economic and Cultural Representative Office in the United States

In early April 2014, the IRS and Treasury Department announced that foreign financial institutions (FFIs) located in a jurisdiction that has reached an “agreement in substance” with the United States, under the FATCA regime, will be treated as having an agreement in effect until the end of 2014.


For further information, please do not hesitate to contact us.







Any tax advice in this communication is not intended or written by KPMG to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing, or recommending to another party any matters addressed herein.The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough

Connect with us


Request for proposal