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FATCA: 2 Steps Forward!

Published on Mon, Jun 25,2012 | 07:20, Updated at Tue, Jun 26 at 16:51Source : 

By: Carol Tello, Partner, Sutherland

FATCA implementation moves forward: Treasury outlines a new cooperation agreement model with Japan and Switzerland and IRS issues draft forms W-8BEN

FATCA implementation moved forward with two important developments. The most recent was the release on June 21, 2012 of two new Joint Statements with Japan and Switzerland that introduce a new direct IRS reporting model for financial institutions in those countries. The second development was the release of draft Forms W-8BEN on June 6, 2012, which foreign entities will be required to provide to U.S. withholding agents.

FATCA is the U.S. legislation that requires all non-U.S. financial institutions to identify and report its U.S. account holders. A financial institution that does not comply is subject to 30 percent U.S. withholding from any payments of U.S. source income, including the payment of gross proceeds from the sale of most assets, including securities. Proposed regulations implementing the legislation were issued on February 8, 2012. Approximately 200 detailed comments were submitted on various aspects of the proposed regulations. Final regulations are to be issued in late summer or early fall.

New FATCA Cooperation Agreement Model

On June 21, 2012, the U.S. Treasury Department released two new Joint Statements, one with Japan (click here for a copy) and one with Switzerland (click here for a copy). Both Joint Statements describe a new Cooperation Agreement Model (Model II) under which financial institutions would directly report U.S. account holder information to the IRS. This reporting mechanism is in contrast to the government-to-government reporting under the Intergovernmental Agreement (Model I). (The Model I Joint Statement was issued by the United States, the United Kingdom, France, Germany, Italy, and Spain simultaneously with the proposed regulations.) Model II is very important for FATCA compliance because it permits a country that may not be able or willing to engage in the contemplated automatic government-to-government exchanges to nonetheless enable its financial institutions to be FATCA compliant and to enjoy similar benefits as those enjoyed by financial institutions under Model I Agreements.

Similar to Model I, Model II would not require withholding on passthru payments to financial institutions that were covered under either a Model I or Model II agreement. The accounts of recalcitrant account holders will not be required to be closed or withheld upon; rather, recalcitrant account holders will be reported to the IRS on an aggregate basis. The IRS will then be able to request information on those recalcitrant account holders from the FATCA partner. 2

Significantly, both Joint Statements with Japan and Switzerland provide for the treatment of pension funds as deemed-compliant or exempt. This treatment is important because under the proposed regulations, most non-U.S. pension plans could not qualify for exemption or deemed-compliant status. Although Model I does not contain such specific proposals, presumably Model I agreements will be drafted to include such provisions. Certainly, commentators on the proposed regulations asked for those provisions.

Although the new Joint Statements with Japan and Switzerland provide similar frameworks, there are variations that are tailored to the needs of the financial institutions in those respective countries. Under the Japan Model II, a Japanese financial institution apparently will not be required to enter into a separate comprehensive Foreign Financial Institution (“FFI”) Agreement with the IRS as long as the financial institution is registered with the IRS or exempted from registration.

Switzerland will direct all Swiss financial institutions that are not exempt or deemed-compliant to enter into agreements with the IRS and to report U.S. account holders directly to the IRS. Moreover, in order to enable such reporting, Switzerland will agree to provide Swiss financial institutions an exemption under the Swiss Criminal Code.

The Swiss Federal Council issued a statement about the Joint Statement that acknowledged the major disadvantages that would accrue to Swiss financial institutions if Switzerland refused to implement FATCA, among them being exclusion from the world’s largest capital market.

A Treasury official speaking at a FATCA conference on June 21 confirmed that Treasury will not provide further alternatives to Models I and II. Moreover, he indicated that Treasury will not customize agreements, but would consider modifications of the classification rules of financial institutions. Presumably, the proposals relating to the treatment of pensions as exempt or as deemed-compliant in the Japan and Switzerland Joint Statements reflect such special classification rules.


The draft Form W-8BEN is designed for use by individuals who are claiming non-U.S. status for both Chapter 3 and Chapter 4 purposes and, where applicable, claiming a reduced rate of U.S. withholding tax, and to assert non-U.S. status for FATCA purposes. The draft Form W-8BEN-E is for the use of foreign entities to identify their Chapter 3 status as well as their FATCA (Chapter 4) status and to make any applicable treaty claims for U.S. withholding tax purposes. Chapter 3 (sections 1441-1464) is the portion of the U.S. Internal Revenue Code that imposes U.S. withholding tax on payments of certain U.S. source income, while Chapter 4 refers to the FATCA provisions, sections 1471-1474 of the U.S. Internal Revenue Code. This commentary will focus on the Form W-8BEN-E. It is questionable whether the draft Form W-8BEN will be usable by its intended target audience. The current Form W-8BEN is considered difficult to understand by non-U.S. persons. 3

Before describing the draft Form W-8BEN, some background may be helpful. The draft Form W-8BEN is based upon the current Form W-8BEN, a one-page form with seven pages of instructions, which is used by non-U.S. persons (both individuals and entities) to self-identify as non-U.S. persons and, if applicable, to claim any treaty benefits such as s reduced withholding rate on dividends or other investment income. Without a W-8BEN, a U.S. withholding agent must withhold 30 percent of the payment as U.S. tax. The payee may claim a refund of that tax by filing a U.S. income tax return and making a refund claim. Non-English speaking users find this simple form (by contrast) hard to understand.

The draft Form W-8BEN-E is formidable (six pages in length without instructions, adopting the language of the proposed FATCA regulations that describe FATCA entities). Click here for a copy of the draft Form W-8BEN-E. As yet, no instructions have been issued, although the form refers to the instructions. The draft form requires a foreign entity not only to determine its FATCA status from a menu of 23 FATCA entities, but also to make representations necessary to qualify for the indicated FATCA status. (The representations are provided as part of the form, and a box is to be checked to indicate that the signatory is certifying that the representations are correct as applied to that particular foreign entity.) The FATCA entity classifications are based upon the proposed regulations issued on February 8, 2012. In addition, a certain type of foreign entity must list its substantial U.S. owners on the form.

The draft Form W-8BEN-E is designed for entity users only. Because of the various FATCA entities exist, the form must provide a checkbox and a certification section for each type of entity. That means that in order for a foreign entity to fill out the form, an employee of the entity will be required to have more than a working knowledge of the various requirements for each type of FATCA entity. Because the legal descriptions of the FATCA entities are sprinkled throughout the proposed regulations, essentially this will require knowledge of the regulations. (The proposed regulations consisted of 387 pages, and the final regulations could be even more extensive if the proposals of various commentators are adopted.)

For example, a nonfinancial foreign entity (NFFE) must determine whether it is an “active” NFFE or a “passive” NFFE. A “passive” NFFE is an entity whose passive income is less than 50 percent of its overall income and the value of its passive assets is less than 50 percent of the value of all its assets. An “active” NFFE is any NFFE that is not a passive NFFE. A passive NFFE must certify that it is a foreign entity that is not a financial institution and is not an “excepted NFFE.” An “excepted NFFE” is a term defined in the proposed FATCA regulations, which must be consulted so that an official of a foreign entity signing the Form W-8BEN-E may make the appropriate certification under penalties of perjury in Part III of the form, discussed below. The term includes a number of the types of entities such as publicly traded companies.

For a participating foreign financial institution (PFFI) that has an agreement and an FFI-EIN, i.e., the IRS-assigned FATCA compliant identification number, completing a Form W-8BEN-E should be relatively easy because the PFFI only needs to check that it is a PFFI and to fill out the information required in Part IV of the form. Part IV requires that the active FATCA 4

ID be provided plus a certification that the form is not being submitted for payments or an account that belongs to a limited branch of an FFI. A limited branch is a branch that is unable to be a participating FFI because it is located in a jurisdiction that imposes limitations on the release of customer-identifying information. As a limited branch, the branch may not receive payments without 30 percent withholding while a PFFI is not subject to FATCA 30 percent withholding. For FFIs and other non-U.S. entities covered by a Model I or Model II agreement whose status is determined under the agreement, the new Form W-8BEN-E should be easy to complete. 

Because of the numerous detailed comments on the types of FATCA foreign entities described by the proposed regulations, the final regulations may revise the types of FATCA entities and the qualifications. Thus, it is too early to begin planning based on either the proposed regulations or the draft Form W-8BEN-E. In fact, IRS officials have recently made this point in public statements. 

The Form W-8BEN-E must be signed by an official of the foreign entity with authority to sign the certificate. That official must indicate the capacity in which the official is signing, e.g., president, treasurer, or other official with authority to sign. Moreover, that signature must be made under penalties of perjury as that concept is understood under U.S. law. Because the signature is made under penalties of perjury, a careful review of the FATCA status of the foreign entity will be required.


Progress is being made in implementing the FATCA provisions. However, from the perspective of a foreign financial institution, until the status of a FATCA agreement with its home country is known and final regulations and a final Form W-8BEN-E are issued, it is difficult to prepare for implementation. Although the effective dates for withholding and reporting have been deferred under recent Treasury guidance, those deferred effective dates may still be too soon for financial institutions to be FATCA-ready.



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