Comments of TEI, Inc. on Notice 2011-34 (NOT-121556-10)
Paul O'Connor, writing on behalf of the Tax Executives Institute (TEI), has directed comments to the Treasury and IRS on its guidance in Notice 2011-34, on the Foreign Account Tax Compliance Act (FATCA), requesting modifications to clarify responsibilities of deemed-compliant foreign financial institutions (FFIs) and additional time to implement the FATCA provisions. 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), expand the information reporting requirements imposed on FFIs and impose withholding, documentation, and reporting requirements with respect to certain payments made to specified foreign entities.
Background. Generally effective for payments made after Dec. 31, 2012, the HIRE Act establishes rules for withholdable payments to FFIs and for withholdable payments 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 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.
Deemed-compliant FFI. Notice 2011-34, Sec. III, provides guidance on certain categories of FFIs that will be deemed compliant under Code Sec. 1471(b)(2). IRS intends to issue regs under which each FFI in an expanded affiliated group will be treated as a deemed-compliant FFI under Code Sec. 1471(b)(2)(A) if: (1) each FFI in the expanded affiliated group is, under the laws of its country of organization, licensed and regulated as a bank or similar organization authorized to accept deposits in the ordinary course of its business and is not described in Code Sec. 1471(d)(5)(C); (2) all of the FFIs in the expanded affiliated group are organized in the same country; (3) no FFI in the expanded affiliated group maintains operations outside the country of organization; (4) no FFI in the expanded affiliated group solicits account holders outside its country of organization; and (5) each FFI in the expanded affiliated group implements policies and procedures to ensure that it does not open or maintain accounts for non-residents, non-participating FFIs, or nonfinancial foreign entities (NFFEs)—other than excepted NFFEs as defined in Notice 2010-60 that are organized and operating in the jurisdiction where all members of the expanded affiliated group are organized.
TEI's comments. TEI said that it was concerned that many FFIs that would be labeled deemed-compliant under Code Sec. 1471 would still be subject to responsibilities under Chapter 4. The resulting confusion could lead to administrative and compliance issues. For example, although an entity may be a deemed-compliant FFI, Notice 2011-34 requires that such an entity calculate its pass-through payment percentage (i.e. the sum of an FFIs U.S. assets divided by the sum of its total assets, determined on a quarterly basis) or be deemed to have a percentage of 100.
TEI recommended that such deemed-compliant FFIs be excluded from Chapter 4 requirements and be treated as excepted NFFEs. Entities to be covered by the exclusion should include not-for-profit entities, TEI said.
Treasury and IRS were encouraged to provide a summary listing all entities subject or potentially subject to FATCA, with their Chapter 4 duties, requirements and exceptions.
TEI also recommended that family trusts, testamentary trusts and personal investment companies that could be treated as FFIs should be treated as NFFEs because of their purpose, size and nature.
Additional time requested. O'Connor also asked the Treasury and IRS for more time to allow all parties to prepare for the implementation of FATCA, currently scheduled to be implemented on Jan. 1, 2013. TEI recommends that the effective date be delayed, at a minimum, to Jan. 1, 2014 and that the effective date should not be sooner than two years from the publication date of final regs.
Comments on Notice 2010-60. TEI also reiterated its previous comments on Notice 2010-60, in which it encouraged Treasury and IRS to: (1) maximize statutory-permitted carve-outs of entities required to comply with FATCA; (2) increase the permissible exemptions on withholdable payments; and (3) ease the reporting requirements imposed by the new law. O'Connor suggested that Treasury and IRS issue immediate interim guidance detailing which entities that will qualify for exceptions and FATCA requirements. TEI also suggested that they clarify that a financing affiliate may engage in engage in transactions with unrelated parties and still qualify for the exceptions to Code Sec. 1471 and Code Sec. 1472 as long as the primary purpose of the financing affiliate is to provide treasury services to the affiliated group and not to unrelated parties. In previous comments, TEI said that since U.S. branches are already U.S. withholding and reporting agents, it recommended that U.S. branches be permitted to make an election to be treated in the same manner as U.S. financial institutions for all chapter 4 obligations. TEI said that it now believed that IRS hadn't directed sufficient attention to this point and said that, at a minimum, it wanted Treasury and IRS to determine whether they believed an election to be treated in the same manner as a U.S. financial institution would be appropriate.
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.