Timeline Extended for Implementation of FATCA

The Foreign Account Tax Compliance Act (FATCA), the government’s tool against offshore tax evasion, was scheduled to become effective on January 1, 2013. However, in reaction to comments from the financial industry about the difficulty of complying with these new rules, especially by the statutory deadline, the Treasury and IRS have given financial institutions relief on the timeline for the implementation of FATCA.

FATCA generally requires foreign financial institutions (FFIs), as well as nonfinancial foreign entities (NFFE), to submit to complex due diligence and information reporting on their U.S. accounts or suffer a penalty of a 30 percent withholding tax on certain withholdable and pass-thru payments.

On July 14, 2011, the Treasury and IRS published Notice 2011-53, which provides for a phased-in timeline for implementing FATCA and updates previous guidance provided in Notice 2010-60 and Notice 2011-34.

FFI Agreements

An FFI must enter into an FFI Agreement with the IRS by June 30, 2013, to ensure it is a participating FFI and to ensure that it will not be withheld upon beginning on January 1, 2014. If an FFI enters into an FFI agreement after June 30, 2013, but before July 1, 2014, it will be a participating FFI, but may be withheld upon beginning on January 1, 2014. Unfortunately, this means that FFIs will have little time to analyze the final regulations before deciding whether to become a participating FFI.

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.

Further, any FFI that enters into a FFI Agreement on or before December 31, 2013, will be considered to have renewed its Qualified Intermediary agreement, withholding foreign partnership agreement or withholding foreign trust agreement, as the case may be.

Due Diligence

The time period to complete due diligence on pre-existing accounts was extended. Specifically, due diligence rules (detailed in Notice 2010-60) for identification of new and pre-existing U.S. accounts (including high-risk private banking accounts) must be completed (i) by December 31, 2014, or within one year of the effective date of the FFI Agreements (whichever is later) for private banking accounts with balances of less than $500,000, (ii) within one year of the effective date of their FFI Agreements for existing private banking accounts with balances of more than $500,000 and (iii) within two years of the effective date of FFI Agreements for all other pre-existing accounts.

This gives FFIs more time to meet the due diligence component, which was originally required to be completed by the end of the first year in which the FFI Agreement was in effect. Further, any person designated by the participating FFI may complete the due diligence as opposed to only the private banking manager, which was originally required.


No withholding will be required before January 1, 2014, a one-year delay from the original effective date. After that date, withholding is phased in until January 1, 2015. Specifically, the timeline for withholding is divided into three categories. All U.S. source passive-type income will become withholdable payments on January 1, 2014, while gross proceeds from the sale of stock or debt will not become withholdable until January 1, 2015. Pass-thru payments will not become withholdable payments until some point on or after January 1, 2015, a two-year delay in effective date.

Certain obligations that are outstanding on March 18, 2012, or gross proceeds from the sale of such obligations, will not be subject to withholding. Notice 2011-53 makes clear that this rule applies to all obligations even if the withholdable payment is a pass-thru payment.


Registration and reporting requirements are also delayed. FFIs must report, by September 30, 2014, accounts for which they have received a form W-9 prior to June 30, 2014 (identified U.S. accounts). In addition, recalcitrant account holders identified by June 30, 2014, also must be reported by September 30, 2014. Reporting specific information to the IRS is required for these accounts, although Notice 2011-53 provides for reduced reporting for non-recalcitrant U.S. accounts in the first year of reporting.

Future Guidance

Proposed regulations are anticipated to be issued by December 31, 2011; final regulations by summer of 2012; and draft and final versions of the FFI Agreement and reporting forms are expected to be issued by summer of 2012.

Stop Tax Haven Abuse” Legislation Reintroduced

On July 12, 2011, Senator Carl Kevin once again introduced his latest version of the Stop Tax Haven Abuse Act (“Bill”). Representative Lloyd Doggett (D-TX) recently introduced the same legislation in the House.

The Bill no longer contains the list of tax haven countries. In its place, however, are a host of increased reporting provisions imposed on taxpayers and financial institutions alike, as well as provisions that build upon the Hire Act and, in particular, FATCA.

As to the Hire Act and FATCA, the Bill proposes to clarify certain definitions and requirements of the FATCA disclosure legislation—i.e., inclusion of checking accounts within the disclosure requirements of financial institutions, as well as assets in the form of derivatives and swap agreements; limiting the ability of the IRS to waive compliance by certain entities to only those that present a “low risk” of tax evasion; and a host of others.

In addition, the IRS would be given the authority to issue increased sanctions against foreign jurisdictions and foreign financial institutions, especially toward non-FATCA compliant institutions— e.g., limiting such an institution’s access to the U.S. markets through U.S. correspondent banks and prohibiting U.S. institutions from conducting transactions with such foreign institutions. There would also be imposed various rebuttable evidentiary presumptions against U.S. taxpayers, themselves, who form, maintain or transfer assets to offshore accounts with non-FATCA institutions.

Two interesting ‘loopholes” are also targeted. The first, involving credit default swaps, would treat payments made from the United States by counterparties on credit default swap payments as U.S. source payments subject to withholding. The second, referred to as the “foreign subsidiary deposits” loophole, would treat offshore funds of controlled foreign corporations as a Sec. 956 deemed dividend to the extent that the funds are parked in U.S.-located bank accounts held in the name of the CFC.

There are also numerous other provisions in the Bill designed to enhance anti-money laundering programs and to deal with summons enforcement, tax shelters (and their promoters) and Circular 230 standards.

Perhaps the most substantive and far-reaching provision is the one dealing with corporations “managed and controlled” in the United States. As in prior versions, the Bill would treat as a domestic corporation any foreign corporation that is publicly traded or that has aggregate gross assets of $50 million or more, if it is managed and controlled in the United States. The Bill clearly targets, but it is by no means limited to, hedge funds with addresses outside the United States whose key personnel or investment advisors are located in the United States.

The future of the legislation is still unclear. While many Republicans will be opposed to many (but not all) of the provisions, its continued introduction could pave the way for it to eventually become law.