On Friday May 2nd, 2014, the IRS released Notice 2014-33 introducing a new transition period for 2014 and 2015 for purposes of enforcement and administration of the Foreign Account Tax Compliance Act, or FATCA, but only for those financial institutions making a good faith effort to comply with the regime. In addition, certain transitional aspects of the due diligence requirements are being extended.

While this transition concept is welcome, it also adds some complexity to the already moving target of FATCA deadlines and procedures.

BACKGROUND

Enacted in 2010, FATCA generally requires foreign financial institutions, or FFIs, to disclose offshore accounts belonging to U.S. taxpayers to the IRS as a means of combating U.S. tax evasion. Failure by an FFI to comply can result in a 30% penalty tax being withheld from certain U.S. income.

FFIs are subject to either (i) the U.S. final regulations governing FATCA, which require FFIS to register with the IRS and agree to perform due diligence, information reporting, and, in some cases, withholding on accounts and investors, or (ii) a FATCA intergovernmental agreement, or IGA, if their home government has signed one with the United States. Almost 60 countries thus far are participating in FATCA via an IGA.

THE NOTICE

Pursuant to the Notice, the IRS will ease its enforcement of FATCA through 2015 for entities in its scope if they have made good faith efforts to comply with FATCA. Evidence of good faith efforts includes reasonable efforts to modify account opening procedures to document the FATCA status of payees, and good faith efforts to identify and facilitate the registration of all FFI members of an expanded affiliated group.

In addition, the Notice extends the term of a “pre-existing” account for due diligence purposes under FATCA by extending the term by six months, including accounts if they are opened, executed, or issued on or after July 1, 2014, and before January 1, 2015. The change is valuable because the due diligence for pre-existing entity accounts is less onerous than for new accounts, although accounts opened during this period will not benefit from the $250,000 threshold exception applicable to accounts opened prior to July 1, 2014. The change generally will apply equally to FFIs in IGA countries.

The extension applies only to entity accounts and not to individual accounts because the procedures for documenting individual accounts are less complex. Furthermore, the Form W-8BEN for individual documentation was published with instructions on March 3, 2014, while the W-8BEN-E for entities still lacks instructions.

Notice: The information contained in this publication should not be construed as legal advice. You are encouraged to consult your own tax advisors regarding the matters discussed herein.

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