Tuesday, April 12, 2011

IRS Unveils FATCA Guidance, but Practitioners Say Challenges Remain

By Alison Bennett

The Internal Revenue Service April 8 unveiled its eagerly awaited second notice on the Foreign Account Tax Compliance Act, offering what practitioners said is welcome guidance under the new law that requires foreign banks to disclose their U.S.-owned accounts or face a 30 percent withholding tax in some cases.

In Notice 2011-34, IRS further refined the methodology banks must use to determine how to identify their U.S. accounts, with a new focus on private banking. It also offered new guidance on “passthru payments” subject to the withholding tax, and on entities that will be deemed compliant for reporting purposes.

Practitioners interviewed by BNA said they are glad to see more guidance, although some said banks may be disappointed by an apparently narrow stance taken on some issues, such as how to calculate passthru payments and exceptions for expanded affiliated groups. The methodology for identifying accounts remains complex, some said.

The guidance follows Notice 2010-60, issued last August. FATCA was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act (Pub. L. No. 111-147) in March 2010.

IRS said it expects to issue proposed regulations on a variety of issues, but did not say when.
West Says Industry Will Be Disappointed

“I think Treasury has to be applauded for working hard for trying to get as much FATCA guidance out as possible as quickly as possible,” Phil West, a former Treasury international tax counsel, told BNA April 8. “Two substantial notices in roughly six months' time is to be commended.”

However, he said, “I think financial institutions will be disappointed in the substance of the notice because although the procedures that FFIs will have to adopt are in some ways relaxed, in many ways they are not.”

West, now with Steptoe & Johnson LLP in Washington, D.C., told BNA that while the definitions provide some needed specificity, “they appear to remain burdensome in a way that is disproportionate to the benefit to be expected from these rules.”

He noted that, “In Treasury's defense, they believe they have a congressional mandate. They're trying to fulfill the congressional mandate as they see it. But it's not clear that Treasury doesn't have flexibility to write less burdensome rules.”

Two examples of the continuing burden are the steps for identifying U.S. accounts and the rules relating to passthru payments, West said, adding that there are a number of issues not addressed that could beneficially be addressed, including the rules related to duplicative reporting.
Account Identification Methodology

The rules provide a methodology for account identification that has five steps and contains a new step specifically for private banking. In the passthru area, IRS provided a formula to calculate the payments.

IRS said taxpayers also would have to calculate a passthru payment percentage which must be tested quarterly, and said banks would have to make those percentages available on a website or database readily searchable by the public.

John Harrington, a former Treasury international tax counsel now with SNR Denton in Washington, D.C., said the guidance shows that “IRS and Treasury are responding to comments, especially those that raised practical concerns with the guidance in Notice 2010-60, such as its rules for identification of pre-existing individual accounts, the reporting of account balances, the reporting of gross receipts and gross payments, and reporting by branches.”

However, he said, the notice's account identification rules are very detailed, and foreign financial institutions (FFIs) will have to digest the new account identification rules to determine how well they can apply the rules in practice.
Passthru Payment Definition Seen Broad

Further, “I expect that there will be disappointment that ‘passthru payment’ is not defined more narrowly,” Harrington said. He explained that the notice provides specific rules for how to calculate the passthru payment percentage, and FFIs will have to look at the new rules for determining passthru payments carefully to see how practical they are.

Barbara Angus, also a former Treasury international tax counsel, now with Ernst & Young LLP in Washington, D.C., said April 8 that the guidance is a positive development.

With the statute effective on Jan. 1, 2013, a tremendous amount still must be done, she said. “The second notice reflected an appreciation of the need for guidance,” she said. “This notice does several things. It follows up on the first notice, provides more information, and continues a dialogue between the government and industry.”

Notice 2011-34 will be published in Internal Revenue Bulletin 2011-19, scheduled to be published May 9.

The complete text of this article can be found in the BNA Daily Tax Report, April 11, 2011.

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