TAX PRACTICE

tax notes
The FATCA Registration Process: If You Build It, They Will Come
By Philip Robin Cleary
Philip Robin Cleary is a manager in KPMGs tax controversy services group in New York. Before joining KPMG, he worked as an attorney-adviser in the IRS Office of Chief Counsel (Large Business and International Division), where he served as LB&I Foreign Account Tax Compliance Act counsel.

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To date, the extent of information required by this registration is unknown. It is also unclear how the IRS will verify (if at all) the identity of FFIs and their points of contact. The FFI registration process is further complicated by the fact that affiliated FFIs will likely have to register together, necessitating global leadership and coordination. And its not just limited to FFIs that register to become participating FFIs. Even FFIs that merely seek to obtain deemedcompliant status will likely have to go through a similar registration process. The price of a temporarily defective or altogether failed registration is steep: the threat of 30 percent withholding and a cumbersome refund process for the FFIs or their clients. In other words, foreign entities have to get this right.1 B. Background 1. FATCA generally. The majority of FATCAs provisions are found in newly enacted sections 1471 through 1474. Those provisions impose a new 30 percent withholding tax on some payments made to FFIs2 and nonfinancial foreign entities (NFFEs)3 that decline to identify U.S. account holders, investors, and owners. Payments that are subject to the 30 percent tax include withholdable payments and passthrough payments. Withholdable payments generally consist of U.S.-source income (for example, interest or dividends paid by a U.S. corporation), including fixed or determinable annual or periodic4 income as well as the gross proceeds from the sale of assets that theoretically could generate U.S.-source interest or dividends. A passthrough payment is defined

Philip Robin Cleary

This article seeks to raise awareness among tax professionals and leadership at foreign financial institutions and their U.S. affiliates about open issues surrounding the challenge of online registration with the IRS as well as post-registration responsibilities. The information herein is of a general nature and based on authorities that are subject to change. Its applicability to specific situations should be determined through consultation with your tax adviser. This article represents the views of the author only and does not necessarily represent the views or professional advice of KPMG LLP. Cleary may be reached at prcleary@kpmg.com.

A. Introduction The purpose of this article is simply to raise awareness among tax professionals and leadership at foreign financial institutions (FFIs) as well as their U.S. affiliates about the Foreign Account Tax Compliance Acts most immediate (and overlooked) challenge: online registration with the IRS. Its easy to understate the importance of the FFI registration process. In fact, much of the FATCA commentary has focused on complex technical topics like due diligence and passthrough payments. That commentary sidesteps the fact that hundreds of thousands of foreign entities will soon be required to register with the IRS. This is a huge logistical undertaking, not least for the IRS, which has promised to build an online FFI registration portal on or before January 1, 2013.
TAX NOTES, December 5, 2011

1 The tax at issue may be American, but this principle is universal. For example, the German expression attributed to Baron Rothschild: Die Unkenntnis der Steuergesetze befreit nicht von der Pflicht zum Steuerzahlen. Die Kenntnis aber hufig. (This may be loosely translated as Knowing the tax laws is always cheaper than ignorance.) 2 See section 1471(a). An FFI is very broadly defined and includes banks and other deposit-taking institutions, broker dealers, and other financial intermediaries and custodians, funds, securitization vehicles, insurance companies, pension plans, 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 a financial institution. Section 1472(d). 4 At the risk of oversimplification, it may be helpful for foreign executives to think of FDAP as investment income.

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as any payment to the extent that it is attributable to a withholdable payment.5 FFIs and NFFEs can avoid withholding, but only by agreeing to collect and share specified information with the IRS. For instance, FFIs must enter into an agreement with the IRS to become a participating FFI and identify and report on their U.S. account holders, follow due diligence rules, and withhold on payments to a nonparticipating FFI or recalcitrant account holders. NFFEs must disclose the identity of any U.S. persons who directly or indirectly own more than 10 percent of the NFFE. An FFIs reporting requirement on a U.S. account also encompasses accounts maintained by the same U.S. account holder at another FFI that is a member of the same expanded affiliated group. An expanded affiliated group is an affiliated group as defined in section 1504(a) except that more than 50 percent of vote or value is substituted for at least 80 percent, and the threshold is determined without regard to paragraphs (2) and (3) of section 1504(b).6 According to the latest guidance, an expanded affiliated group will have to designate one of the FFIs as a lead FFI for purposes of the FFI registration process.7 As detailed below, the lead FFI will likely have to start the registration process for all other FFIs in the expanded affiliated group. Further, the lead FFI may be in the best position to address misunderstandings or disputes arising with the IRS. It is important to note that the lead FFI doesnt necessarily have to be a parent company. As a result, leadership at FFIs should think carefully about their designation.8 Even when FFIs and NFFEs fully disclose their U.S. account holders and owners, the current withholding regime under sections 1441 et seq. continue to apply. Withholding agents will still be required to comply with all existing documentation, withholding, and reporting rules. In other words, FATCA is an overlay on the existing withholding regime. Congress slated this overlay of FATCA withholding to commence on January 1, 2013; however, interim guidance has pushed this date back to January 1, 2014, for U.S.-sourced FDAP payments

and to January 1, 2015, for all other withholdable and passthrough payments.9 2. FATCA implementation team. It is well known that Treasury and the IRS Office of Associate Chief Counsel International (collectively, the guidance team) are working on the forthcoming proposed regulations for release by December 31.10 In addition to the efforts of the guidance team, earlier this year the Large Business and International Division organized a team headed up by an LB&I executive on permanent reassignment from another operating division of the IRS. That new executive wisely brought on board a group of seasoned IRS professionals with prior experience on information technology-intensive projects. The team is nationwide and involves IT professionals, business managers, national office and field attorneys, revenue agents, territory managers, directors, technical advisers, customer service representatives, public relations personnel, cyber-security employees, and others. It is helpful to think of this collection of individuals as the implementation team.11 The implementation team is essentially charged with building an online FFI registration portal and laying the groundwork for a future FATCA office. The former involves serving as a liaison between the guidance team and the IRSs in-house IT department known as Modernization and Information Technology Services (MITS). The FFI registration portal is essentially a website that will allow FFIs to register as participating or deemed-compliant. There had been speculation that the IRS was going to contract out the building of a website; the current understanding, however, is that MITS has already started coding. If true, that is a huge accomplishment and underscores the commitment of key IRS employees to make (if not beat) the January 1, 2013, deadline. Organizationally, the implementation team involves a lot of dotted lines, especially because of the diversity of its makeup. Within LB&I, the team regularly briefs the director of international business compliance as well as the deputy commissioner (international). The team has also provided

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See section 1471(d)(7). See section 1471(e)(2). 7 See Notice 2011-34, 2011-19 IRB 765, Section IV.B, Doc 2011-7619, 2011 TNT 69-16. 8 Depending on future guidance, it may even be possible to designate a U.S. financial institution a lead FFI. That may be ideal given the possible extensive nature of interaction with the IRS.
6

See Notice 2011-53, 2011-32 IRB 124, Section II.C, Doc 2011-15397, 2011 TNT 136-9. Note that the notice provides that the January 1, 2015, withholding date on passthrough payments is the earliest date that withholding would be required. Thus, the date for that withholding may actually be later than January 1, 2015. 10 See Notice 2011-53, Section III. 11 It is instructive that the LB&I deputy commissioner (international) most recently used this terminology. See Kristen A. Parillo and Stephanie Soong Johnston, Proposed FATCA Regs on Track to Be Issued by Year-End, Tax Notes, Nov. 21, 2011, p. 949, Doc 2011-24226, or 2011 TNT 223-2.

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briefings to MITS executives, the IRS deputy commissioner (services and enforcement), and the commissioner himself. As an intellectual and policy matter, FATCA is clearly in the hands of the guidance team. As a practical matter, FATCA resides in the hands of the implementation team. 3. FFI registration process. As a part of the FATCA legislation, newly enacted section 1471(b) specifically mandates that an FFI must enter into an agreement with the IRS to avoid the 30 percent withholding regime. Despite being at the heart of FATCA, there has been little guidance about the process of obtaining such an agreement. It is commonly understood, however, that the process will be electronic, that is, via a website.12 Moreover, affiliated groups of FFIs will have to designate a lead entity that will apply on behalf of all the members.13 What is also known is that the FFI registration portal will go live on or before January 1, 2013.14 Further, there is something of a safe harbor15 for FFIs that register by June 30, 2013: They are guaranteed to appear on the forthcoming published list of certified participating FFIs on the effective start of withholding, now pushed back until January 1, 2014, for U.S.-sourced FDAP types of income and to January 1, 2015, for all other affected payments. A careful reading of the guidance reveals there is some uncertainty as to whether the process is an application or a registration. The difference is not just semantics. An application implies that there are some FFIs the IRS would reject. It also implies a lengthier and more selective process. By contrast, a registration implies an easier and more manageable process to obtain the agreement that the code now requires. The application-versus-registration debate reflects the broader tension between enforcing the

12 Marie Sapirie, Comments Crucial to FATCA Implementation, Officials Say, Tax Notes, Sept. 20, 2010, p. 1226, Doc 2010-20157, 2010 TNT 178-3. This development follows the somewhat cumbersome experience of the qualified intermediary program, which is entirely paper-based. An open issue is whether an FFI will be allowed to submit a paper registration form. As a part of FATCA, newly enacted subsection 6011(e)(4) allows the IRS to require FFIs to e-file returns for their liability under section 1461 (chapter 3 withholding) or section 1474(a) (chapter 4 withholding). It is unclear if that gives the IRS sufficient legal authority to require FFIs to register electronically. It is also an open question whether an FFI may be required to file 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.

responsibilities of a participating FFI and allowing foreigners easy access to U.S. capital markets and investments. Naturally, the IRS is concerned about potential FFIs being committed to meeting their responsibilities; however, it is also concerned about discouraging foreign entities from obtaining an agreement instead of divesting from U.S. investments. This is not unlike the tension surrounding the creation of the qualified intermediary program (discussed below in greater detail). There was naturally a desire for the QI program to be attractive for FFIs. I believe Congress intended a registration process; therefore, this article uses that term. Common sense would dictate that the FFI registration process would entail at a minimum (1) a representative or an employee of a stand-alone FFI or an FFI acting as the lead of an expanded affiliated group establishing an account on the portal; (2) if necessary, other affiliates of the lead FFI establishing accounts (or subaccounts?) on the portal; (3) FFIs providing the required information and electronically signing the registration form; (4) some sort of authentication effort to check the identity of the FFI and its representative; (5) the IRSs acceptance; and (6) issuance of an employer identification number for the participating FFI or deemed-compliant FFI. An electronic FFI registration process does not necessarily mean an automated one. Each of the above steps could give rise to a number of logistical challenges, some of which are discussed below. For instance, what happens if all the FFIs of an affiliated group have submitted registrations except for one or two? Do the missing submissions hold up registration for the entire group? Perhaps the most interesting question is what happens if an FFI does not meet the June 30, 2013, registration date. Will those late registration forms be subject to greater scrutiny? Does a late registration automatically guarantee that the FFI will not appear on the published list in time for January 1, 2014? Is there an appeals process? To whom would FFIs appeal? Most likely, there would be some sort of FATCA office. 4. The future FATCA office. Initially, many policymakers indicated a desire that FATCA would run itself. However, the registration process alone has demonstrated that the work of actual human beings will be crucial to making FATCA succeed. Presumably, there would be a couple ways to organize a FATCA office. First, the FATCA office could be housed under the QI program. As background, the QI program, which became effective in 2000, allows FFIs in some

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countries to apply to become a QI,16 which generally makes the institution responsible for determining the proper rate of withholding for its account holders (typically 30 percent as reduced by statutory and treaty law). If desired, QIs may even undertake the withholding responsibilities. For instance, a QI is not required to forward beneficial ownership information regarding its customers to a U.S. financial institution or other withholding agent of U.S.-source investment-type income to establish the customers eligibility for an exemption from, or reduced rate of, U.S. withholding tax.17 By contrast, a non-QI must forward each U.S. withholding agent all the forms W-8 and W-9 of the underlying customers. There are some obvious advantages to QI status. For instance, QIs avoid the cumbersome process of forwarding documentation to U.S. withholding agents. Also noteworthy, QIs are permitted to independently determine the appropriate rate of withholding for each customer. Perhaps the main advantage to QI status is that in many cases the QI may shield account holders identities from the U.S. withholding agent and the IRS. Finally, with responsibility comes privilege: QIs have an unusual entre into the IRS because they may take advantage of working with a specialized cadre of knowledgeable IRS officials based in New York. Indeed, the QI office exercises broad discretion in how the program is operated. The QI office has shown remarkable flexibility in approving alterative arrangements, customizing riders to the standard agreement, accepting explanations and substitutions for documentation failures, and tailoring the external audit process to a taxpayers facts and circumstances. The role of the QI program is significant. Since its inception, more than 7,000 institutions have entered into QI agreements with the IRS.18 In 2007, for instance, QIs were responsible for more than $2.3 billion in withholding on more than $60 billion of U.S.-sourced payments to foreigners.19 Recently, however, the QI program has come under scrutiny

because of reports that QIs were being used by U.S. account holders to hide assets overseas. In some respects, the obvious model for any future FATCA office would be the current QI program. It is true that the purpose of the QI program is fundamentally different from the goals of FATCA. The QI program is about streamlining the collection of withholding tax owed by foreigners, whereas FATCA is about ferreting out secret U.S. accounts. Nevertheless, the two share the same unique constituency: FFIs. If the FATCA office bears any resemblance to the QI office, it would maintain real autonomy. Many tax practitioners are satisfied with the QIs modus operandi and are pleased that QI issues can be resolved without needlessly elevating every problem to officials in Washington. Second, the FATCA office could be a stand-alone organization, at least nominally, if not actually, independent of the QI program. That could be beneficial for several reasons. Independence from the QI program may be politically favorable given current perceptions (fair or unfair) about abusive use of QI entities by high-net-wealth U.S. customers. A stand-alone approach could allow the FATCA program to be based somewhere other than New York. Still, it is probable that a stand-alone approach would be in name only. The guidance has already indicated that all QIs must become participating FFIs.20 Therefore, the impact of FATCA on QIs will be too great for the dedicated staff of QI professionals not to insist on some level of coordination with FATCA operations. The third solution would be an office that provided grand integration of FATCA and nonFATCA data flows, as one senior IRS official put it.21 One could imagine a total restructuring of the way the IRS handles foreign payments. Indeed, FATCA stands at the backdrop of the recent LB&I reorganization and renewed emphasis on withholding.22 Regardless of the structure of the FATCA office, it is clear that FATCA will not run itself. Further, it is likely that the implementation team will serve as some sort of de facto forerunner to any future

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16 See Rev. Proc. 2000-12, 2000-1 C.B. 387, Doc 2000-1307, 2000 TNT 6-7, amended by Rev. Proc. 2003-64, 2003-2 C.B. 306, Doc 2003-15886, 2003 TNT 133-2. The revenue procedure includes a model QI agreement. 17 To be clear, a QI is allowed to designate the accounts for which it will act as a QI. As a result, there may be accounts for which it acts as a non-QI. 18 See Joint Committee on Taxation, Selected Issues Relating to Tax Compliance With Respect to Offshore Accounts and Entities, JCX-65-08 (July 23, 2008), Doc 2008-16279, 2008 TNT 143-11. 19 See Scott Luttrell, Foreign Recipients of U.S. Income 2007, IRS Statistics of Income Bulletin (Winter 2010), available at http:// www.irs.gov/pub/irs-soi/10winbulforeignreceps.pdf.

See Notice 2011-34, Section V. See Randall Jackson, IRS Looking to Efficiently Integrate Data From FATCA, Tax Notes, Oct. 31, 2011, p. 524, Doc 2011-22293, or 2011 TNT 205-10. 22 For instance, one could imagine that the IRS may attempt to find discrepancies (real or imagined) between individual taxpayers submissions of the new Form 8832, Statement of Specified Foreign Financial Assets, and the new information returns required to be filed by participating FFIs regarding any identified U.S. account holders. The IRS could theoretically extend this practice to include submissions of Treasury Form 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).
21

20

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FATCA office. To be clear, it is important for FFIs and their tax advisers to form good working relationships with the IRS professionals during the FFI registration process, especially because much of the staff will likely transition into the FATCA office. C. FFI Registration Process Issues Setting up a registration portal will be no small feat for the IRS. According to some estimates, more than 500,000 entities will have to register with the IRS. To my knowledge, this is an unprecedented undertaking. The IRS does not currently host an online portal dedicated to foreign taxpayers. Most tax practitioners are eagerly anticipating the proposed regulations (and, to a lesser extent, the sample agreements), but more attention should be paid to the registration form. Below is a sampling of topics that merit consideration (as early as possible) by FFI leadership, foreign tax professionals, and U.S. advisers. 1. Entities required to register. Under current guidance, FFI registration is an all-or-nothing proposition. That is, if one FFI in an affiliated group intends to become a participating FFI (or deemed-compliant FFI), all the FFI members of that expanded affiliated group must register.23 It is widely assumed that the IRS will change its thinking on this issue. That is partially because there are some jurisdictions with privacy laws that would essentially forbid an FFI from complying with some of the FATCA provisions. Whether compliance is permissible may be a matter of interpretation of foreign law or a change in business practices. As a result, leadership at FFIs should consider this likely change in government thinking. Leadership should be consulting with experts and actively examining the circumstances of each of its FFIs to determine whether registration is desirable. At present, it appears that FFIs that wish to obtain deemed-compliant status will have to register through the online FFI registration portal.24 Initially, it was hoped that deemed-complaint FFIs could simply self-certify their status on a Form W-8BEN (or acceptable substitute) to a U.S. withholding agent or participating FFI. However, the IRS is now looking to provide an official EIN for deemed-compliant FFIs, similar to how it plans to treat participating FFIs. As a result, the IRS may create a public list of deemed-compliant FFIs (and their EINs) so that a U.S. withholding agent or participating FFI could rely on that list to determine whether it needs to withhold on payments.

At any rate, a decision to include deemedcompliant FFIs in the registration process would increase the compliance burden of FATCA on many institutions that may likely understand themselves to be exempt altogether. At a minimum, this policy would dramatically increase the number of institutions seeking access to the FFI registration portal. It will also complicate the efforts of large affiliated groups to register by the safe harbor deadline of June 30, 2013. Registration may also require deemed-compliant institutions to make some affirmative statements to the IRS or confirm specific characteristics (without room for explanation). Finally, full-scale registration also provides the IRS with a greater nexus to one day audit the institution. In other words, foreign tax professionals better be confident that a deemed-compliant FFI is truly deemed compliant.25 2. Information required by the registration form. There has been little public guidance on what the registration form will look like. Because the content must conform to the proposed regulations, at least superficially, it is unlikely that a registration form will be circulated for public comment before next year. This is a shame because that will give the public and the IRS less than a year to finalize the registration form in time for the FFI registration portal to go live by January 1, 2013. To promote the meaningful dialogue between potential participating FFIs and the IRS, there is an urgent need to make the registration form available for public comment. Current guidance26 has stated that the designated lead FFI (on behalf of the affiliated group) will have to provide the following information regarding its affiliates: name, address, and country of organization; the type of FFI under section 1471(d)(5); whether the affiliate is applying for participating FFI or deemed-compliant FFI status; the types of accounts maintained under section 1471(d)(2); whether the FFI maintains private banking accounts; and whether the affiliate is a QI, foreign withholding partnership, or foreign withholding trust.

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23 24

See Notice 2011-34, Section VI.A. See Notice 2011-34, Section III.

25 Tax Directors and leadership at a global or regional group of FFIs may wish to engage their representatives overseeing their registration process to opine on deemed-compliant status. Those representatives will be most familiar with the worldwide composition of entities and already be in touch with the relevant contacts. 26 See Notice 2011-34, Section VI.B.

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The lead FFI will also have to identify the name, address, and country of organization of each member of the FFI group that is not an FFI.27 What the notice does not make explicit is that even if the lead FFI provides that information, a point of contact at each of the affiliate FFIs presumably would still have to be granted access to the FFI registration portal to electronically sign the agreement. In addition to the above, the registration form could ask for estimates of U.S. account holders or an estimate of the FFIs overall exposure to U.S. investments. It is not far-fetched to imagine the registration form also asking the FFI to detail the extent of its resources and procedures to comply with the terms of the FFI agreement. For example, the QI application asks for that information as well as the answers to other open-ended questions like descriptions of business lines and procedures for opening new accounts. This lack of guidance demonstrates a simple point: It is not hard for a so-called registration process to resemble an application. Even if the questions on the registration form are relatively straightforward, groups of FFIs will face the task of coordinating their answers to ensure timeliness, consistency, and uniformity. For instance, as noted above, it is unclear whether a group that is missing one or two registration forms will hold up the registration process for all the other FFIs in the group. Also, the registration form would be the starting point for any IRS audit of a participating FFIs compliance. Therefore, ambiguities and inconsistencies (even unintentional) may serve to increase an agents scrutiny. That is especially worrisome because the first FATCA audits will be uncharted territory for the IRS and the foreign institutions alike. 3. Authentication efforts. Presumably, the IRS cant just sign a contract with any person claiming to be a participating FFI or its representative. At a minimum, the IRS would surely have concerns about reputational damage if it entered into a purported agreement with a major bank that turned out to be an imposter. Second, there are cyber security protocols to which the IRS must conform. Third, FFIs may be entrusted with access to some powerful compliance tools, such as the ability to verify a U.S. account holders taxpayer identification number (discussed in greater detail below). As a result, tax practitioners should expect that the IRS will authenticate the identity of not only the FFI registrant but also the point(s) of contact. To date, there appears to be no IRS initiative that verifies the identity of an entity (as opposed to a

human being). For instance, any foreign entity may obtain an EIN by completing a Form SS-4, Application For Employer Identification Number, which asks for basic information about the entity (name, country of organization, and so on). The form also requests a TIN of a responsible party, such as a Social Security number, an individual taxpayer identification number (ITIN), or an EIN.28 By mandating an entity supply the TIN of a responsible party, the IRS arguably appears to be relying on the proven existence of the individual (or other entity) to assume the entity applying also exists. Even authentication procedures at the QI program are a bit of an open question. Those with experience have not reported a formal authentication effort (for either individuals or entities). It should be recalled, however, that the mandate of the QI program encompasses only approximately 60 countries. Those are countries that have fairly well-developed regulatory oversight of financial institutions, the personnel of which are usually identifiable. Moreover, each QI application is vetted by IRS professional staff. By contrast, FATCA will apparently operate in almost every jurisdiction in the world.29 It is thus unclear whether a more formal plan of authentication will be adopted. Regarding individual points of contact, one possibility would be to insist on that person providing an SSN or ITIN. Foreigners, of course, generally do not have an SSN, and only those foreigners with a tax filing obligation (or ability to claim specified benefits under a tax treaty) are eligible to apply for an ITIN. Foreigners who are eligible for an ITIN generally send certified copies (with translations, if needed) of documents that may prove their identity (for example, passports) to a special department in the IRS that inspects the documents and determines whether an ITIN may be issued. That same department also verifies the identity of foreigner preparers for purposes of assigning preparer taxpayer identification numbers. Conceivably, the IRS could require points of contacts to acquire an ITIN before or concurrently with the FFI registration process. However, the IRS may want to take additional steps to verify the identity of a point of contact (and make sure to associate that person with the purported participating FFI the person represents). That raises an interesting question: Who is the individual whose identity should be verified? The

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27

Id.

28 The instructions to Form SS-4 and the IRS website actually provides something of a loophole that allows a Form SS-4 to be submitted without a TIN if the only reason the entity is seeking an EIN is to make a check-the-box election. See http:// www.irs.gov/instructions/iss4/ch02.html. 29 It is hard to imagine, for instance, the IRS allowing institutions in North Korea, Iran, and Cuba to register.

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only individual mentioned in any of the public guidance is a chief compliance officer (CCO), who is responsible for certifying that the participating FFI has carried out certain due diligence steps within a specified time frame.30 Is that the correct person whose identity should be subject to some sort of verification? 4. Representation. A discussion on the verification of a point of contact raises a broader discussion about who should be allowed to represent a participating FFI. Again, the only individual mentioned in any of the public guidance is a CCO or equivalent. That goes against the experience of the QI program, in which, for instance, the QI application requests the name and contact information of both a responsible party (essentially someone who may bind the organization) and a contact person. That is because most interactions between a QI and the IRS do not need to rise to the level of a responsible party (or CCO). Could some other employee (like the newly coined job description, FATCA director) be the more appropriate person to represent the FFI? Could that person be somehow empowered to represent the CCO (and thus make certifications on behalf of the CCO)? Is it important that the point of contact be an employee (or officer) of the entity?31 For example, what if a lead FFI designated an employee of a U.S. affiliated entity as a point of contact for all its affiliated FFIs? That may be useful if the IRS imposes a stringent authentication process on foreigners seeking access to the FFI registration portal. What about outside representation? In many cases an outside representative may be the more productive point of contact. At a minimum, representatives will likely have a better command of the English language. They will also bring a standardized approach to answering any open-ended questions. Arguably, the presence of outside representatives may also lend some credibility not only to the actual existence of the FFI but also to what it is representing on the registration form. It should be expected that the outside representatives will play a vital role during the FFI registration process. For example, over the past 10 years, many of the applicants for the QI program

retained representatives to help them navigate that sign-up process. Therefore, if used correctly, representatives should be able not only to expedite the FFI registration process for their clients but also provide the IRS more useful information. 5. User fees. FATCA is competing for IRS resources in a time of uncertain funding. Because FATCA already involves a burden on FFIs, it may seem counterintuitive to charge them a fee. Nonetheless, it is plausible that the IRS will charge a fee for the FFI registration process. For instance, the IRS has recently begun charging a fee on individuals requesting a PTIN. Indeed, an FFI registration fee may help support the creation of the FFI registration portal as well as authentication efforts. (Indeed, the fee alone may deter individuals in remote jurisdictions from seeking to register nonexistent participating FFIs). D. Post-Registration Issues An FFIs use of the FFI registration portal is not a one-time event. A careful reading of the guidance suggests that the IRS envisions that the portal will be used for future certifications, updating the passthrough payment percentage, as well as other communications between participating FFIs and the IRS. This makes sense because the FFI registration portal may offer a secure medium of communication, whereas current IRS policy forbids the use of unsecured e-mail with taxpayers.32 1. Maintenance of status. Groups of affiliated entities are constantly changing. The burden to ensure the information is accurate and up-to-date will presumably fall on the FFI. Even more work will be required by changes in the deemed-compliant or exempt status of an FFI. How much time will tax practitioners have to make the needed change on the registration portal? What happens, for example, if, after undergoing a change in business operations, an FFI remains deemed-compliant but for a different reason? 2. Participating FFI lists. It is commonly understood that the IRS intends to periodically publish lists of participating FFIs33 (and presumably deemed-compliant FFIs). Congress specifically gave the IRS the statutory right to disclose the names of participating FFIs.34 A list of participating FFIs is supposed to help U.S. withholding agents and participating FFIs comply with FATCA by allowing them to rely on the list. The format of the list is not

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See Notice 2011-34, Section I.A.3. A related inquiry is who has the legal authority to bind the FFI regarding the agreement. The laws on that issue would be different in every country. One way around this problem is to issue regulations along the lines of reg. section 1.6062-1(c), providing that an individuals signature on a return, statement or other document made by or for a corporation shall be prima facie evidence that such individual is authorized to sign such return, statement, or other document.
31

30

See Internal Revenue Manual section 1.10.3. Notice 2011-53, Section II.A.1. 34 See section 1474(c)(2). Congress may have done this in light of the QI programs long-standing inability to publish a list of QIs because of concerns about the disclosure rules under section 6103.
33

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yet clear. We are waiting for further details on whether the list may be downloaded (and exportable into the systems of financial institutions) as well as on how often the list will be updated (and in turn on financial institutions systems). 3. TIN verification of U.S. account holders. It is unclear if participating FFIs will be held responsible for backup withholding on accounts showing U.S. indicia but also containing an invalid SSN.35 One clear way to largely eliminate the prospect of backup withholding for participating FFIs is to allow them the ability to verify the correctness of the SSN submitted on Forms W-9 by U.S. account holders. For example, many U.S. financial institutions already have access to a system to quickly check the validity of a SSN. The IRS may be thinking of extending access to this system to some for all participating FFIs. 4. Compliance. To date, there has been no guidance on any sort of audit regime for participating FFIs. In considering what to expect, the QI audit regime may be particularly instructive. In many cases, the IRS does not audit a QI, because the QI agrees to engage an external auditor that conducts an audit of a sampling of accounts in the second and fifth full calendar years in which the QI agreement is in effect. Nonetheless, it is expected that in the future the external audit regime will incorporate a QIs responsibilities under FATCA. As a result, QIs would be placed at a competitive disadvantage if other participating FFIs arent subject to some kind of audit regime. Regardless of specifics of the audit regime, many assume that audit and other compliance activity is years off. That is not necessarily the case; the IRS is already setting deadlines, including: first certification of some due diligence requirements for preexisting individual accounts, starting July 1, 2014; first information return filings, commencing September 30, 2014; filing of first Forms 1042, due March 15, 2015; and second certification for remaining preexisting accounts, starting July 1, 2015. What if the IRS decides to immediately examine any of the above? If so, what are the criteria for selection to some sort of audit activity? Will the criteria be based on information found on the registration form (that is, the biggest participating

FFIs, participating FFIs in exotic locations), or will it be based on the information return filings or Forms 1042? At this point, there are obviously no (known) answers to these questions. And the answers will not likely be found in the forthcoming regulations. Instead, it will be crucial to understand the thinking of key IRS officials, even before, if not especially before, the formal creation of the FATCA office. E. Conclusion In tax circles there has been a sense of urgency to educate leadership at FFIs about the coming challenge of FATCA. The goal of this article, however, was to raise awareness that FATCA is not just a systems and legal challenge. Many are not taking into account the work of the implementation team and the possible pitfalls surrounding the registration process of hundreds, if not thousands, of affiliated FFIs. Ultimately, FATCA is a compliance challenge that may involve extensive interaction with the IRS. This should not come as much of a surprise. FFIs are, after all, signing up to become taxpayers with responsibilities and filing obligations under the code. Leadership and tax professionals at FFIs should realize that successfully navigating FATCA (and their new relationships with the IRS) commences even before January 1, 2013, when the FFI registration portal goes live. In truth, FFIs can take real steps today to ensure a successful registration, including carefully considering the issues discussed in this article and following their evolution over the coming year.

(C) Tax Analysts 2011. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.

35 A summary of backup withholding is beyond the scope of this article. In brief, payers of specified payments to a presumed U.S. person who has not provided a valid SSN are subject to a backup withholding regime. There are very complicated rules coordinating the backup withholding rules with the withholding regime imposed on non-U.S. persons.

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