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The Fatca Registration Process: If You Build It They Will Come

The Fatca Registration Process: If You Build It They Will Come

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Published by Philip Cleary

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Published by: Philip Cleary on Jan 26, 2012
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The FATCA Registration Process:If You Build It, They Will Come
By Philip Robin Cleary
A. Introduction
The purpose of this article is simply to raiseawareness among tax professionals and leadershipat foreign financial institutions (FFIs) as well astheir U.S. affiliates about the Foreign Account TaxCompliance Act’s most immediate (and over-looked) challenge: online registration with the IRS.It’s easy to understate the importance of the FFIregistration process. In fact, much of the FATCAcommentary has focused on complex technicaltopics like due diligence and passthrough pay-ments. That commentary sidesteps the fact thathundreds of thousands of foreign entities will soon be required to register with the IRS. This is a hugelogistical undertaking, not least for the IRS, whichhas promised to build an online FFI registrationportal on or before January 1, 2013.To date, the extent of information required bythis registration is unknown. It is also unclear howthe IRS will verify (if at all) the identity of FFIs andtheir points of contact. The FFI registration processis further complicated by the fact that affiliated FFIswill likely have to register together, necessitatingglobal leadership and coordination.And it’s not justlimited to FFIs that register to become participatingFFIs. Even FFIs that merely seek to obtain deemed-compliant status will likely have to go through asimilar registration process. The price of a tempo-rarily defective or altogether failed registration issteep: the threat of 30 percent withholding and acumbersome refund process for the FFIs or theirclients. In other words, foreign entities have to getthis right.
1
B. Background1. FATCA generally.
The majority of FATCA’s pro-visions are found in newly enacted sections 1471through 1474. Those provisions impose a new 30percent withholding tax on some payments made toFFIs
2
and nonfinancial foreign entities (NFFEs)
3
thatdecline to identify U.S. account holders, investors,and owners.Payments that are subject to the 30 percent taxinclude withholdable payments and passthroughpayments. Withholdable payments generally con-sist of U.S.-source income (for example, interest ordividends paid by a U.S. corporation), includingfixed or determinable annual or periodic
4
income aswell as the gross proceeds from the sale of assetsthat theoretically could generate U.S.-source inter-est or dividends.Apassthrough payment is defined
1
The tax at issue may be American, but this principle isuniversal. For example, the German expression attributed toBaron Rothschild:
Die Unkenntnis der Steuergesetze befreit nichtvon der Pflicht zum Steuerzahlen. Die Kenntnis aber häufig.
(Thismay be loosely translated as ‘‘Knowing the tax laws is alwayscheaper than ignorance.’’)
2
See
section 1471(a). An FFI is very broadly defined andincludes banks and other deposit-taking institutions, brokerdealers, and other financial intermediaries and custodians,funds, securitization vehicles, insurance companies, pensionplans, family trusts, and other investment-holding vehicles.
See
section 1471(d)(5)(A) through (C).
3
An NFFE is defined as any foreign entity that is not afinancial institution. Section 1472(d).
4
At the risk of oversimplification, it may be helpful forforeign executives to think of FDAP as investment income.
Philip Robin Cleary
Philip Robin Cleary is amanagerinKPMG’staxcon-troversy services group inNew York. Before joiningKPMG, he worked as anattorney-adviser in the IRSOffice of Chief Counsel(Large Business and Interna-tional Division), where heserved as LB&I Foreign Ac-count Tax Compliance Actcounsel.This article seeks to raise awareness among taxprofessionals and leadership at foreign financialinstitutions and their U.S. affiliates about openissues surrounding the challenge of online registra-tion with the IRS as well as post-registration re-sponsibilities.The information herein is of a general nature and based on authorities that are subject to change. Itsapplicability to specific situations should be deter-mined through consultation with your tax adviser.This article represents the views of the author onlyand does not necessarily represent the views orprofessional advice of KPMG LLP. Cleary may bereached at prcleary@kpmg.com.
taxnotes
®
TAX PRACTICE
TAX NOTES, December 5, 2011 1249
 (   C  )   an al   y  s  t   s  0 .l  l  i   g t   s  e s  e e d . an al   y  s  t   s  d  o e s n o t   c l   ai  m  c  o p y i   g t  i  n an y  p u b l  i   c  d  om ai  n o t  i   d  p a t   y  c  on t   en t  .
 
as any payment to the extent that it is attributable toa withholdable payment.
5
FFIs and NFFEs can avoid withholding, but only by agreeing to collect and share specified informa-tion with the IRS. For instance, FFIs must enter intoan agreement with the IRS to become a participat-ing FFI and identify and report on their U.S. ac-count holders, follow due diligence rules, andwithhold on payments to a nonparticipating FFI orrecalcitrant account holders. NFFEs must disclosethe identity of any U.S. persons who directly orindirectly own more than 10 percent of the NFFE.An FFI’s reporting requirement on a U.S. accountalso encompasses accounts maintained by the sameU.S. account holder at another FFI that is a memberof the same expanded affiliated group. An ex-panded affiliated group is an affiliated group asdefined in section 1504(a) except that ‘‘more than 50percent’’ of vote or value is substituted for ‘‘at least80 percent,’’ and the threshold is determined with-out regard to paragraphs (2) and (3) of section1504(b).
6
According to the latest guidance, an expandedaffiliated group will have to designate one of theFFIs as a lead FFI for purposes of the FFI registra-tion process.
7
As detailed below, the lead FFI willlikely have to start the registration process for allother FFIs in the expanded affiliated group. Further,the lead FFI may be in the best position to addressmisunderstandings or disputes arising with the IRS.It is important to note that the lead FFI doesn’tnecessarily have to be a parent company. As aresult, leadership at FFIs should think carefullyabout their designation.
8
Even when FFIs and NFFEs fully disclose theirU.S. account holders and owners, the current with-holding regime under sections 1441 et seq
.
continueto apply. Withholding agents will still be required tocomply with all existing documentation, withhold-ing, and reporting rules. In other words, FATCA isan overlay on the existing withholding regime.Congress slated this overlay of FATCAwithhold-ing to commence on January 1, 2013; however,interim guidance has pushed this date back to January 1, 2014, for U.S.-sourced FDAP paymentsand to January 1, 2015, for all other withholdableand passthrough payments.
9
2. FATCA implementation team.
It is well knownthat Treasury and the IRS Office of Associate ChiefCounsel International (collectively, the guidanceteam) are working on the forthcoming proposedregulations for release by December 31.
10
In addi-tion to the efforts of the guidance team, earlier thisyear the Large Business and International Divisionorganized a team headed up by an LB&I executiveon permanent reassignment from another operatingdivision of the IRS. That new executive wisely brought on board a group of seasoned IRS profes-sionals with prior experience on informationtechnology-intensive projects. The team is nation-wide and involves IT professionals, business man-agers, national office and field attorneys, revenueagents, territory managers, directors, technical ad-visers, customer service representatives, public re-lations personnel, cyber-security employees, andothers. It is helpful to think of this collection ofindividuals as the ‘‘implementation team.’’
11
The implementation team is essentially chargedwith building an online FFI registration portal andlaying the groundwork for a future FATCA office.The former involves serving as a liaison betweenthe guidance team and the IRS’s in-house IT depart-ment known as Modernization and InformationTechnology Services (MITS). The FFI registrationportal is essentially a website that will allow FFIs toregister as participating or deemed-compliant.There had been speculation that the IRS was goingto contract out the building of a website; the currentunderstanding, however, is that MITS has alreadystarted coding. If true, that is a huge accomplish-ment and underscores the commitment of key IRSemployees to make (if not beat) the January 1, 2013,deadline.Organizationally, the implementation team in-volves a lot of dotted lines, especially because of thediversity of its makeup. Within LB&I, the teamregularly briefs the director of international busi-ness compliance as well as the deputy commis-sioner (international). The team has also provided
5
See
section 1471(d)(7).
6
See
section 1471(e)(2).
7
See
Notice 2011-34, 2011-19 IRB 765, Section IV.B,
Doc2011-7619
,
2011 TNT 69-16
.
8
Depending on future guidance, it may even be possible todesignate a U.S. financial institution a lead FFI. That may beideal given the possible extensive nature of interaction with theIRS.
9
See
Notice 2011-53, 2011-32 IRB 124, Section II.C,
Doc2011-15397
,
2011 TNT 136-9
. Note that the notice provides thatthe January 1, 2015, withholding date on passthrough paymentsis the earliest date that withholding would be required. Thus,the date for that withholding may actually be later than January1, 2015.
10
See
Notice 2011-53, Section III.
11
It is instructive that the LB&I deputy commissioner (inter-national) most recently used this terminology.
See
Kristen A.Parillo and Stephanie Soong Johnston, ‘‘Proposed FATCA Regson Track to Be Issued by Year-End,’’
Tax Notes
, Nov. 21, 2011, p.949,
Doc 2011-24226
, or
2011 TNT 223-2
.
COMMENTARY / TAX PRACTICE1250 TAX NOTES, December 5, 2011
 (   C  )   an al   y  s  t   s  0 .l  l  i   g t   s  e s  e e d . an al   y  s  t   s  d  o e s n o t   c l   ai  m  c  o p y i   g t  i  n an y  p u b l  i   c  d  om ai  n o t  i   d  p a t   y  c  on t   en t  .
 
 briefings to MITS executives, the IRS deputy com-missioner (services and enforcement), and the com-missioner himself. As an intellectual and policymatter, FATCA is clearly in the hands of the guid-ance team. As a practical matter, FATCA resides inthe hands of the implementation team.
3. FFI registration process.
As a part of the FATCAlegislation, newly enacted section 1471(b) specifi-cally mandates that an FFI must enter into anagreement with the IRS to avoid the 30 percentwithholding regime. Despite being at the heart ofFATCA, there has been little guidance about theprocess of obtaining such an agreement. It is com-monly understood, however, that the process will be electronic, that is, via a website.
12
Moreover,affiliated groups of FFIs will have to designate alead entity that will apply on behalf of all themembers.
13
What is also known is that the FFIregistration portal will go live on or before January1, 2013.
14
Further, there is something of a safeharbor
15
for FFIs that register by June 30, 2013: Theyare guaranteed to appear on the forthcoming pub-lished list of certified participating FFIs on theeffective start of withholding, now pushed backuntil January 1, 2014, for U.S.-sourced FDAP typesof income and to January 1, 2015, for all otheraffected payments.Acareful reading of the guidance reveals there issome uncertainty as to whether the process is an‘‘application’’ or a ‘‘registration.’’ The difference isnot just semantics.An application implies that thereare some FFIs the IRS would reject. It also implies alengthier and more selective process. By contrast, aregistration implies an easier and more manageableprocess to obtain the agreement that the code nowrequires.The application-versus-registration debate re-flects the broader tension between enforcing theresponsibilities of a participating FFI and allowingforeigners easy access to U.S. capital markets andinvestments. Naturally, the IRS is concerned aboutpotential FFIs being committed to meeting theirresponsibilities; however, it is also concerned aboutdiscouraging foreign entities from obtaining anagreement instead of divesting from U.S. invest-ments. This is not unlike the tension surroundingthe creation of the qualified intermediary program(discussed below in greater detail). There was natu-rally a desire for the QI program to be attractive forFFIs.I believe Congress intended a registration proc-ess; therefore, this article uses that term. Commonsense would dictate that the FFI registration processwould entail at a minimum (1) a representative oran employee of a stand-alone FFI or an FFI acting asthe lead of an expanded affiliated group establish-ing an account on the portal; (2) if necessary, otheraffiliates of the lead FFI establishing accounts (orsubaccounts?) on the portal; (3) FFIs providing therequired information and electronically signing theregistration form; (4) some sort of authenticationeffort to check the identity of the FFI and itsrepresentative; (5) the IRS’s acceptance; and (6)issuance of an employer identification number forthe participating FFI or deemed-compliant FFI.An electronic FFI registration process does notnecessarily mean an automated one. Each of theabove steps could give rise to a number of logisticalchallenges, some of which are discussed below. Forinstance, what happens if all the FFIs of an affiliatedgroup have submitted registrations except for oneor two? Do the missing submissions hold up regis-tration for the entire group? Perhaps the mostinteresting question is what happens if an FFI doesnot meet the June 30, 2013, registration date. Willthose late registration forms be subject to greaterscrutiny? Does a late registration automaticallyguarantee that the FFI will not appear on thepublished list in time for January 1, 2014? Is there anappeals process? To whom would FFIs appeal?Most likely, there would be some sort of FATCAoffice.
4. The future FATCA office.
Initially, many policy-makers indicated a desire that FATCA would runitself. However, the registration process alone hasdemonstrated that the work of actual human beingswill be crucial to making FATCA succeed. Presum-ably, there would be a couple ways to organize aFATCA office.First, the FATCA office could be housed underthe QI program. As background, the QI program,which became effective in 2000, allows FFIs in some
12
Marie Sapirie, ‘‘Comments Crucial to FATCA Implementa-tion, Officials Say,’’
Tax Notes
, Sept. 20, 2010, p. 1226,
Doc2010-20157
,
2010 TNT 178-3
. This development follows thesomewhat cumbersome experience of the qualified intermedi-ary program, which is entirely paper-based. An open issue iswhether an FFI will be allowed to submit a paper registrationform. As a part of FATCA, newly enacted subsection 6011(e)(4)allows the IRS to require FFIs to e-file returns for their liabilityunder section 1461 (chapter 3 withholding) or section 1474(a)(chapter 4 withholding). It is unclear if that gives the IRSsufficient legal authority to require FFIs to register electronically.It is also an open question whether an FFI may be required tofile information returns on U.S. account holders electronically.
13
See
Notice 2011-34, Section VI.B.
14
See
Notice 2011-53, Section II.C.
15
See
Notice 2011-53, Section II.A.1.
COMMENTARY / TAX PRACTICETAX NOTES, December 5, 2011 1251
 (   C  )   an al   y  s  t   s  0 .l  l  i   g t   s  e s  e e d . an al   y  s  t   s  d  o e s n o t   c l   ai  m  c  o p y i   g t  i  n an y  p u b l  i   c  d  om ai  n o t  i   d  p a t   y  c  on t   en t  .

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