Thursday, July 21, 2011

IRS Provides A Phased In Timeline For Implementation Of The FATCA Rules

Notice 2011-53, 2011-32 IRB, IR 2011-76

In a Notice, IRS has indicated the timeline to be provided in regs to be issued for the implementation of the FATCA rules which were included in the Hiring Incentives to Restore Employment Act of 2010 (HIRE Act, P.L. 111-147, 3/18/2010). These rules expand the information reporting requirements imposed on foreign financial institutions (FFIs) and impose withholding, documentation, and reporting requirements with respect to certain payments made to specified foreign entities. While these rules were to be effective beginning in 2013, IRS has determined that because of the need for significant modifications to the information management systems of FFIs, withholding agents, and IRS, it's reasonable to provide for a phased implementation of the provisions.

Background. Generally effective for payments made after Dec. 31, 2012, the HIRE Act establishes rules for withholdable payments to FFIs and to other foreign entities by adding a new Chapter 4 to the Code (Code Sec. 1471 through Code Sec. 1474). The new rules provide for withholding taxes to enforce new reporting requirements on specified foreign accounts owned by specified U.S. persons or by U.S.-owned foreign entities. These provisions don't apply to any obligation outstanding on Mar. 18, 2012 (the date that is two years after the enactment date), or to the gross proceeds from any disposition of the obligation. (HIRE Act §501(d))

Under these provisions, a withholding agent must deduct and withhold a tax equal to 30% of any withholdable payment made to a FFI that does not meet certain requirements. (Code Sec. 1471(a)) A “withholdable payment” is non-effectively connected (1) U.S.-source fixed or determinable annual or periodical (FDAP) income (which includes interest and dividends but not gains on sales of property and on which nonresident withholding applied under pre-HIRE Act law), (2) gross proceeds from the sale of property that produces interest and dividend income (which have not previously been subject to nonresident withholding), and (3) interest on deposits with foreign branches of a domestic commercial bank (which is otherwise non-U.S. source income). (Code Sec. 1473(1)) To avoid this 30% withholding requirement, a FFI must either enter into a Code Sec. 1471(b) agreement (FFI Agreement) with IRS and satisfy its requirements or satisfy one of several alternatives. (Code Sec. 1471(a))

In August of 2010, IRS released Notice 2010-60, 2010-37 IRB 329, which provided preliminary guidance on priority issues involving the implementation of FATCA, including the scope of obligations exempt from withholding, the definition of a FFI under Code Sec. 1471(d)(4), the scope of collection of information and identification of persons by financial institutions under Code Sec. 1471 and Code Sec. 1472, and the information that FFIs must report to IRS under a Code Sec. 1471(b) FFI Agreement with respect to their U.S. accounts. In April of 2011, IRS released Notice 2011-34, 2011-19 IRB 765, which supplemented Notice 2010-60 and responded to concerns identified by commentators following its publication.

New guidance. Notice 2011-53 describes the timeline for the implementation of Chapter 4 and discusses certain substantive and procedural matters that will be addressed in the regs that IRS will issue. IRS anticipates issuing proposed regs incorporating the guidance in Notice 2010-60, as amended and supplemented by Notice 2011-34 and Notice 2011-53, and providing further guidance on implementing Chapter 4 by Dec. 31, 2011. After consideration of comments, IRS anticipates publishing final regs in the summer of 2012. In addition, IRS expects to issue draft versions followed by final versions of the associated FFI Agreement and reporting forms for use by withholding agents and participating FFIs in the summer of 2012.

The regs to be issued will provide that certain obligations of participating FFIs will begin in 2013, and that Code Sec. 1471(a) withholding obligations of withholding agents with respect to amounts described in Code Sec. 1473(1)(A)(i) (U.S.-source FDAP payments) will begin on Jan. 1, 2014. FFIs that would otherwise be subject to Chapter 4 withholding will be identified as participating FFIs and so should not be subject to the withholding if they have registered as participating FFIs and entered into FFI Agreements by June 30, 2013. The Code Sec. 1471(b)(1)(D) withholding obligations of participating FFIs with respect to pass-thorough payments will be specified in future regs, but will begin no earlier than Jan. 1, 2015.

Some key elements of the phased implementation timeline include:

Registration of FFIs beginning in 2013. IRS will begin accepting FFI applications through its electronic submissions process no later than Jan. 1, 2013. An FFI must enter into an FFI Agreement by June 30, 2013, to ensure that it will be identified as a participating FFI in sufficient time to allow U.S. withholding agents to refrain from withholding beginning on Jan. 1, 2014. Because of the time needed for IRS to process FFI applications and for U.S. withholding agents to verify whether a payee is a participating FFI, FFIs that enter into FFI Agreements after June 30, 2013, but before Jan. 1, 2014, will be participating FFIs with respect to 2014, but might not be identified as such in time to prevent withholding beginning on Jan. 1, 2014. The effective date of an FFI Agreement entered into any time before July 1, 2013, will be July 1, 2013. The effective date of an FFI Agreement entered into after June 30, 2013, will be the date the FFI enters into the FFI Agreement.

Participating FFI due diligence for new accounts. For new accounts, a participating FFI will be required to put in place the account opening procedures in Notice 2010-60, as implemented in regs, to identify U.S. accounts among accounts opened on or after the effective date of its FFI Agreement.

Participating FFI due diligence for pre-existing accounts. The following rules apply for pre-existing accounts:

(1) Within one year of the effective date of its FFI Agreement, a participating FFI will be required to have completed Step 3 of the pre-existing account due diligence procedures in Notice 2011-34, Sec. I.A.2 (the private banking procedures), for all accounts opened before the effective date of its FFI Agreement that are associated with a private banking relationship (including individual and entity accounts) and that have a balance or value of at least $500,000 on the effective date of the FFI Agreement.

(2) A participating FFI will be required by the later of Dec. 31, 2014, or the date that is one year after the effective date of its FFI Agreement, to complete the private banking procedures for all accounts opened before the effective date of its FFI Agreement that are associated with a private banking relationship and are not described in (1), above (i.e., private banking accounts with less than $500,000).

(3) For due diligence for all pre-existing accounts not covered in (1) and (2) above, a participating FFI must complete due diligence procedures in Notice 2010-60 and Notice 2011-34, and the regs to be issued, within two years of the effective date of its FFI Agreement.

(4) For purposes of applying the private banking procedures, although private banking relationship managers must identify any client for which the relationship managers have actual knowledge that the client is a U.S. person and request a Form W-9 from such person (as set out in Notice 2011-34), the review of account files may be completed by any person designated by the participating FFI. Accounts subject to due diligence procedures and identified as either U.S. accounts or non-U.S. accounts will not be subject to additional due diligence procedures in later years unless the account undergoes a change of circumstance.

Reporting with respect to new accounts. An account for which a participating FFI has received a Form W-9 from the account holder (or, with respect to an account held by a U.S.-owned foreign entity, from a substantial U.S. owner of such entity) by June 30, 2014, must be reported to IRS as a U.S. account by Sept. 30, 2014.

With respect to these identified U.S. accounts, a participating FFI that doesn't elect to report under Code Sec. 1471(c)(2) must report in accordance with Notice 2011-34, except that for this first year of reporting, the participating FFI will only be required to report certain specified information.

Reporting with respect to post-2013 years. Reporting with respect to 2014 and subsequent years will be required as contemplated in Notice 2010-60 and Notice 2011-34 and as implemented in future regs.

Withholding. The regs under Chapter 4 will implement withholding by withholding agents on withholdable payments in two phases. For payments made on or after Jan. 1, 2014, withholding agents (whether domestic or foreign, including participating FFIs) will be obligated to withhold under Code Sec. 1471(a) only on U.S.-source FDAP payments. For payments made on or after Jan. 1, 2015, withholding agents will be obligated to withhold under Code Sec. 1471(a) on all withholdable payments (including both U.S.-source FDAP payments and gross proceeds described in Code Sec. 1473(1)(A)(ii)).

Participating FFIs will be obligated to withhold on withholdable payments of U.S.-source FDAP under Code Sec. 1471(a) for payments made on or after Jan. 1, 2014, but will not be required to withhold under Code Sec. 1471(b)(1)(D) with respect to other pass-through payments made before Jan. 1, 2015. Accordingly, the obligations of participating FFIs with respect to computing and publishing their pass-through payment percentage as set out in Notice 2011-34 will not begin before the first calendar quarter of 2014.

References: For withholdable payments to FFIs and other foreign entities, see FTC 2d/FIN ¶O-13070 et seq.; United States Tax Reporter ¶14,714 et seq.

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