The Foreign Account Tax Compliance Act (FATCA) provisions were included in the Hiring Incentives to Restore Employment (HIRE) Act, which was enacted on March 18, 2010. FATCA represents a complex new reporting regime for foreign financial institutions (FFIs) intended to identify the financial accounts of U.S. persons held in such institutions. On August 27, 2010, the Internal Revenue Service published Notice 2010-60 to provide preliminary guidance regarding issues raised by the FATCA provisions. The IRS has now provided additional guidance in Notice 2011-34, which was issued April 8, 2011 (the “New Notice”).
Background on FATCA. At its core, FATCA imposes a 30% withholding tax on payments to an FFI to the extent attributable to U.S. assets (excluding payments with respect to U.S. assets grandfathered under the provisions of FATCA), unless the FFI enters into an agreement with the IRS under which the FFI will adopt procedures to identify and report on any U.S.-owned accounts and the FFI will withhold 30% on payments that are attributable to U.S. assets and that are made to accounts with respect to which it cannot obtain the requisite information (so-called recalcitrant holders). To accomplish the foregoing goals, the FATCA provisions use broad language to determine what constitutes a “financial account,” potential ownership by U.S. persons, and an FFI. A “financial account” includes not only a depository account and a custodial account, but also any equity or debt interest in the FFI (other than such interests regularly traded on established securities markets). A U.S. account includes accounts held not only by U.S. persons, but also by non-U.S. persons that have direct or indirect U.S. ownership. An FFI includes not only entities that engage in a traditional banking business and act as custodians or trustees of assets for others, but also investment entities. For these purposes an investment entity is an entity that is primarily engaged in the business of investing or trading in securities, partnership interests, commodities, or interests — including futures, forward contracts or options — in securities, partnership interests or commodities. The provisions of FATCA will apply to certain payments beginning January 1, 2013, a date that is approaching all too quickly.
The New Notice. The guidance provided by the New Notice relates to: (i) identification procedures for pre-existing accounts that have been revised from the identification procedures provided by Notice 2010-60; (ii) the manner to calculate the amount of a payment that is a “passthru” payment subject to withholding; (iii) deemed-compliant status for certain limited classes of FFIs; and (iv) reporting requirements for U.S. accounts, affiliated FFIs and qualified intermediaries.
Revised Identification Procedures. The revised identification procedures in the New Notice vary from those provided in Notice 2010-60 with respect to pre-existing accounts largely insofar as greater diligence is required for a new sub-category of accounts — “private banking accounts” — to determine whether they have indicia of U.S. ownership. Previously, the IRS allowed FFIs to limit their searches to electronically searchable information maintained by the FFI. For private banking accounts under the New Notice, however, the FFI must perform a diligent review of paper and electronic files and other records for each client determined based on the best of the knowledge of the private banking relationship manager for each client. A “private banking account” is an account the FFI treats as a private banking account or for which the FFI provides personalized services such as investment advisory, trust and fiduciary, estate planning, philanthropic, or other services not generally provided to account holders. The New Notice also provides some additional administrative rules relating to pre-existing accounts with a balance of $500,000 or more, as well as the need for written policies being certified by the chief compliance officer.
Calculation of “Passthru” Payment Percentage. Under FATCA, an FFI is required to withhold on any “passthru” payment it makes to a recalcitrant account holder (as defined above). A passthru payment is a payment that relates to a U.S. asset. Rather than limiting passthru payments to payments directly related to U.S. assets, an FFI must treat all payments it is making as coming proportionately from all of its assets unless it is a payment for which the FFI acts as a custodian, broker or nominee or otherwise as an agent for another person. The New Notice provides that the proportionate determination is made using the gross values of the FFI’s assets (i.e., not reduced by liabilities or other associated obligations). The FFI generally uses the value shown on its balance sheet or provided to holders in their account statements. The New Notice also makes clear that grandfathered obligations (generally obligations originated before March 18, 2012) are not treated as U.S. assets for this purpose.
Deemed Compliant Entities. The New Notice provides that certain entities can be deemed to be compliant if such entity (i) applies for deemed compliant status with the IRS (ii) obtains an FFI number from the IRS, and (iii) certifies every three years to the IRS that it meets the requirements for such treatment. Essentially these procedures, contrary to what the name may suggest, create a streamlined agreement procedure for FFIs the IRS considers unlikely to have U.S. accounts. The entities listed in the New Notice that can qualify for this streamlined procedure are (i) local banks that, among other requirements, have procedures in place to not open or maintain accounts for non-residents or non-participating FFIs (i.e., FFIs without an agreement with the IRS), ii) local FFI members of participating FFI groups (those FFI groups that have an agreement with the IRS), and (iii) investment funds that are open only to participating FFIs and deemed-compliant FFIs. All in all, it is a pretty select group of entities.
Reporting Requirements. The New Notice also modifies certain U.S. account reporting procedures from those outlined in Notice 2010-60 so as to simplify some of requirements relating to the frequency of reporting and the amounts to be reported, to confirm that tax basis reporting will not be required, and to allow branch reporting. In addition, the New Notice requires qualified intermediaries to also have a reporting agreement for purposes of FATCA information and procedures relating to agreements required of FFI affiliates.
The comment period for written comments on the New Notice is until June 7, 2011. If you have question about the New Notice or the FATCA requirements, please contact any of the lawyers listed below:
This article was originally published by Bingham McCutchen LLP.