IRS provides FATCA relief to foreign financial institutions

In detail

Background

Requirement to obtain US TINs

Each Model 1 IGA provides that a reporting Model 1 FFI will be deemed to be in compliance with FATCA if the Model 1 IGA jurisdiction complies with its obligations under the IGA with respect to the FFI and the FFI complies with its reporting and registration obligations in accordance with the IGA. A reporting Model 1 FFI must report the US TIN of each specified US person who is (1) an account holder or (2) a controlling person for a non-US entity’s US reportable accounts. 

The US Competent Authority may notify the Model 1 IGA jurisdiction Competent Authority that a reporting Model 1 FFI is significantly noncompliant with its reporting requirements if it fails to report required US TINs. The United States may treat a noncompliant Model 1 FFI as a nonparticipating financial institution subject to FATCA withholding.

Observation: FFIs that are at risk of being treated as nonparticipating FFIs and subject to FATCA withholding should implement policies and procedures intended to avoid this status. FATCA withholding at 30% applies to US source interest, dividends, and other financial payments. Obtaining a refund of an overpaid amount can require significant effort by the FFI’s account holders.

Prior relief

Before 2017, a reporting Model 1 FFI was not required to report a US TIN for a pre-existing US reportable account if the US TIN was not in its records. Notice 2017-46 provided relief for reporting Model 1 FFIs unable to obtain US TINs for pre-existing accounts by January 2017 as required. If a reporting Model 1 FFI complied with the conditions in Notice 2017-46, the US Competent Authority would not determine that there had been significant noncompliance with obligations under an applicable Model 1 IGA solely because a reporting Model 1 FFI’s failure to obtain and report US TINs for each pre-existing account. The relief in Notice 2017-46 was limited to calendar years 2017, 2018, and 2019, and was intended to provide reporting Model 1 FFIs additional time to implement practices and procedures to obtain and report US TINs.

Response to stakeholder concerns

The Treasury Department and the IRS are aware of concerns expressed by Model 1 IGA jurisdictions, FFIs, and US citizens that FFIs are closing or may close bank accounts of US citizens who have failed to provide their US TINs. FFIs have indicated that these closures are based on their concerns about being treated as in significant noncompliance with their Model 1 IGA obligations. 

Treasury and the IRS have heard that some FFIs are refusing to provide accounts to US citizens that are resident in the FFI’s jurisdiction, or otherwise providing access to accounts on less favorable terms than apply to other account holders, even if the US citizen provides a US TIN.

The Notice provides interim guidance intended to address the concerns of FFIs and Model 1 IGA jurisdictions while providing the IRS additional information to enhance compliance procedures.

Requirements for reporting Model 1 FFIs 

A reporting Model 1 FFI is eligible for the relief provided by the Notice if, for each US reportable account (including new accounts) with a missing required US TIN, it:

• obtains and reports the birth date of each account holder that is an individual and controlling person whose US TIN is not reported;
• starts in calendar year 2023 annually requesting from each account holder any missing required US TIN;
• starts in calendar year 2023 annually searching electronically searchable data maintained by the reporting Model 1 FFI for any missing required US TINs; and
• reports an accurate TIN Code for each account that is missing a required US TIN.

For reporting for calendar year 2022, a reporting Model 1 FFI may use either the TIN Codes issued by the IRS in May 2021 or updated TIN Codes to be issued by the IRS in early 2023. Reporting Model 1 FFIs must use the most recent TIN Codes issued by the IRS when reporting calendar years 2023 and 2024.

Eligible Model 1 IGA jurisdictions

For a reporting Model 1 FFI to be eligible for the relief, the applicable Model 1 IGA jurisdiction must make good-faith efforts, by the date that is nine months after the end of the calendar year to which the information relates, to: 

• encourage US citizens resident in the jurisdiction to provide US TINs to FFIs when requested; 
• take measures to enforce compliance by reporting Model 1 FFIs identified by the US Competent Authority to the Model 1 IGA jurisdiction as potentially noncompliant;
• encourage FFIs located in a Model 1 IGA jurisdiction to not discriminate against US citizens that do provide a US TIN; and
• if notified by the US Competent Authority, take steps to conclude Competent Authority Arrangements with the US Competent Authority, to implement an IGA, amend an Annex II to an IGA, or exchange country-by-country information. 

In order to provide a transition period for the satisfaction of these conditions, these requirements will be deemed to have been satisfied for reporting on calendar year 2022. 

Observation: FFIs will need to work with relevant stakeholders to incorporate the additional language in their annual solicitations. The Notice does not describe the path after the transition years, so FFIs should be diligent in documenting the steps taken to comply and attempt to reduce missing TINs.