Financial Institutions (FIs) around the world find themselves with terminated FATCA accounts. As a result their Global Intermediary Identification Numbers (GIINs) have been removed from the IRS FFI List and counterparties consider them to be Non-Participating Foreign Financial Institutions (NPFFIs). The costly outcome is that these FIs are subject to FATCA withholding. Although the IRS established a reinstatement process, the process is not working.
FATCA Withholdable Payment
FATCA requires FIs to withhold 30 percent on U.S. Source Withholdable Payments made to an NPFFI. The term “U.S. Source Withholdable Payment” means payments of interest (including any original issue discount), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income, if such payment is from sources within the U.S. This type of income is also known as FDAP income.
Failure to Certify
Certain entities may register in the IRS FATCA portal and, upon registration approval, receive a GIIN. For some entities, the FATCA portal registration process involves the entity entering into an FFI Agreement with the IRS and timely submitting a Certification of Preexisting Account (COPA) and Periodic Certifications. If the entity fails to submit these certifications, their IRS FATCA account may turn from Approved to Terminated.
How to Reinstate A GIIN
The IRS created a process by which an entity may request reinstatement of its GIIN. For details on this process, please see my April 25, 2022 blog post FATCA: Reversing Agreement Terminated Status.
Although the system sounds reasonable: register, follow the rules, be penalized for not following the rules, correct the internal failure, avoid future penalties. However, the reality is the IRS department responsible for GIIN reinstatement appears to be understaffed. The result is that FIs have been waiting for many months to receive any response from the IRS. One FI told me an IRS agent told them to stop calling because the IRS will only communicate with them via email. However, there has not been any email communication since their reinstatement request in January 2022. I have experienced similar frustrations in lack of IRS response.
Yes, these FIs made a mistake in not understanding the RO certification process. However, most of the FIs who have contacted me have been following the most important aspects of FATCA: due diligence and reporting. The reasons for failure to certify are varied: local laws required the FI to shut down during COVID, staff turnover, not realizing certifications were required, not realizing there were two separate certifications, etc.
RO certifications are required in Model 2 and Non-IGA jurisdictions. The governments in these jurisdictions chose not to fully engage in FATCA. The government entered into a Model 2 IGA with the U.S. rather than a Model 1 IGA or chose not to engage in FATCA at all and did not sign any FATCA IGA. There is no local government support system for FIs in many of these jurisdictions to help FIs better understand the intricacies of FATCA. Layer on non-English speakers and time zone differences, communication with the IRS becomes even more difficult. The U.S. must find ways for small FIs (especially those in developing nations) to cost effectively contribute to the safety of the global financial system.
The IRS automatically generates a GIIN on demand. Why not automatically reinstate a GIIN on demand until the IRS has time to investigate the particular FI’s reasons for failing to timely file certifications.
Education is key. The IRS should offer free FATCA training in local languages through local consulates and embassies. While the IRS has useful recorded webinars in English which could be translated by the IRS, I have always found my clients ask questions in a live group training session that benefit everyone in attendance.
In the Meantime
Log into your FATCA accounts to determine if you have any certifications past due or coming due soon.
Follow the instructions in my previous blog on reinstatement Reversing Agreement Terminated Status.
Try to submit your annual FATCA reporting to the IRS using your old GIIN even if you have not been reinstated. You want to be able to move forward once the IRS reinstates your account.