Exempt Market Update | Winter 2013 | www.emdacanada.com 26
or trading in securities, partnership interests or commodities or
any interest in the same. FATCA applies to traditional non-US
banks and brokerage houses, as well as non-US broker-dealers,
investment funds, hedge funds, private equity funds, and
securities underwriters, and will therefore apply to many EMDs.
EMDs may also be involved with “restricted” investment
funds that are seeking to qualify for “registered deemed compliant
FFI” status. Under proposed regulations issued in February 2012,
registered deemed compliant FFI status allows FFIs to certify
their compliance with FATCA and not require an IRS reporting
agreement to avoid FATCA withholding. In order for an investment
fund to get this status, it must satisfy several requirements; one of
which is that distributors (underwriters, brokers, dealers) must be
contractually prohibited from selling debt or equity interests to US
persons (and certain other financial institutions).
What is an IRS reporting agreement?
An FFI will enter into a reporting agreement with the IRS to
avoid withholding on US source payments. Although the IRS has
not released a draft FFI Agreement as of the date this article was
submitted, based on the proposed regulations, we expect that it
will require the participating FFI to do the following
• comply with due diligence procedures for identifying each
account holder to determine whether an account is a “US
account,” recalcitrant account holder (i.e., account holders
who do not provide required information) or an account held
by a nonparticipating FFI;
• report annually certain information on United States accounts
and accounts held by recalcitrant account holders;
• comply with requests by the IRS for additional information
with respect to any US account it maintains,
• deduct, withhold and pay over 30 percent of certain pass-thru
payments that the FFI makes to recalcitrant account holders,
other FFIs that do not enter into reporting agreements or
other FFIs electing to have another FFI higher in the chain
withhold for it;
• attempt to obtain a waiver of applicable bank secrecy or
other local information disclosure limitations or close the
US account if the waiver is not obtained within a reasonable
period of time;
• verify that it has adopted and complied with due diligence
policies and procedures for identifying and documenting
account holders and its withholding and reporting
requirements under the FFI agreement—periodic reviews
of compliance with these policies and procedures will be
required; and. Report on an expanded affiliated group basis.
These requirements may be modified by an applicable
intergovernmental agreement (see below).
Subject to certain exceptions, a “US account” generally
means a depository or custodial account held by US citizens,
US residents, certain trusts and estates and US corporate and
partnership entities. A US account also includes a depository or
custodial account held by certain “US-owned foreign entities.”
What is an intergovernmental agreement?
The United States Treasury Department has sought
to simplify the compliance burdens placed on FFIs under
FATCA by entering into intergovernmental agreements (IGAs).
Generally speaking, an IGA may be reciprocal or non-reciprocal.
Both intergovernmental models seek to address local legal
impediments to financial institutions’ ability to comply with
FATCA. Under the reciprocal model, FATCA may be implemented
through local legislation in the partner country permitting FFIs
in that country to satisfy their FATCA reporting obligations by
reporting US account information to the authorities of the partner
country instead of the IRS. Those authorities then automatically
exchange that information with the US under existing bilateral
treaties or information exchange agreements.
Generally, a non-reciprocal IGA contemplates direct reporting
by FFIs to the IRS, instead of having FFIs report US account
information to the local tax authorities for information exchange
with the United States. In exchange for a reciprocal commitment,
the US would generally not require an FFI agreement for
covered FFIs in the partner country (but may impose registration
guidelines). The US also agrees to eliminate withholding on
FATCA payments to covered FFIs in the partner country, identify
categories of deemed compliant FFIs/low-risk entities, and
reciprocate the collection and reporting of information regarding
US accounts of residents of partner country. Further, covered
FFIs in the partner country would not be required to terminate
accounts of recalcitrant account holders or to impose withholding
on pass thru payments to recalcitrant accounts holders or impose
withholding on pass thru payments to other covered FFIs in the
partner country or in another jurisdiction in which the US has a
similar FATCA implementation agreement.
The IRS has released several model agreements and has
entered into one IGA (with the UK), but has recently announced on
November 8, 2012 that it is in discussions with over 50 countries
regarding IGAs, including Canada.
What is the status of FATCA guidance from the IRS?
The IRS has released many forms of guidance with respect
to FATCA. In February 2012, it released a large set of proposed
regulations regarding the implementation of FATCA. It has