On July 14, 2011 the IRS and Treasury issued Notice 2011-53, which (i) describes a timeline for the implementation of the information reporting and withholding requirements provided in the recently enacted Foreign Account Tax Compliance Act (FATCA) and (ii) discusses certain substantive and procedural matters, all to be addressed in regulations issued by Treasury and the IRS. This Notice, and the regulations to be promulgated, appear to address concerns raised in comments received on the ability of companies to develop the necessary compliance, reporting and withholding systems, as well as the potential need to coordinate with foreign governments, in order to comply with the FATCA rules.


FATCA was enacted March 18, 2010, as part of the Hiring Incentives to Restore Employment (HIRE) Act, which added Sections 1471 through 1474 of the Code.1 Initial FATCA guidance was provided in Notice 2010-60 and in Notice 2011-34. As originally enacted, all foreign financial institutions (FFIs),2 and non-financial foreign institutions (NFFIs), must comply with FATCA by January 1, 2013, or be subject to withholdings. Notice 2011-53 and regulations to be issued are intended to allow FFIs and withholding agents the time necessary to comply with the FATCA rules, because such compliance will generally necessitate significant modification of information management systems currently in place.

As discussed in the Pepper Hamilton’s March 3, 2011 Tax Update, "IRS Temporarily Suspends Penalties for New Basis Reporting", the FATCA rules impose a 30 percent withholding requirement on withholdable payments made to FFIs unless certain requirements are met. In order to avoid withholding under FATCA, a participating FFI will be required to enter into an agreement with the IRS to: (i) identify U.S. accounts, (ii) report certain information to the IRS regarding U.S. accounts, and (iii) withhold a 30-percent tax on certain payments to non-participating FFIs and account holders who are unwilling to provide the required information (pass-through payments, as more fully described in Notice 2011-34). FFIs that do not enter into an agreement with the IRS will be subject to withholding on certain types of payments, including U.S. source interest, dividends, royalties, rents and other fixed or determinable and periodic income (FDAP), and gross proceeds from the disposition of U.S. securities that produce interest and dividends. Similar rules apply for NFFIs.

Phased Implementation

Pursuant to Notice 2011-53, various provisions of FATCA will be phased in, instead of being subject to an overall compliance mandate, by 2013. The phased-in timeline for FATCA implementation of FFIs includes several components:


In order to ensure classification by January 1, 2014 and prevent withholding beginning on that date, an FFI must enter into an FFI agreement with the IRS by June 30, 2013.

  • the additional time allows the IRS to process FFI applications and withholding agents to verify whether a payee is a participating FFI
  • FFIs that enter into FFI Agreements after June 30, 2013, but before January 1, 2014, will be participating FFIs with respect to 2014, but might not be identified as such in time to prevent withholding beginning on January 1, 2014.


Withholding by withholding agents will be implemented in two phases.

  • withholding on FDAP payments made to non-participating FFIs will begin on or after January 1, 2014
  • withholding on all withholdable payments (including on gross proceeds) made to non-participating FFIs will begin on or after Jan. 1, 2015
  • computation and publication obligations of participating FFIs with respect to pass-through payment percentages (as described in Notice 2011-34) should not begin before April 1, of 2014.

Due Diligence and Reporting

  • participating FFI due diligence requirements for identifying new accounts and pre-existing U.S. accounts (including private banking accounts with a balance that is equal to or greater than $500,000) will begin in 2013 and are clarified or expanded under Notice 2011-53
  • reporting requirements will begin in 2014. Some flexibility is afforded with respect to the ability of an FFI to satisfy the reporting requirements in the first year of reporting.

Pepper Perspective

Notice 2011-53 provides some indication that the Treasury and IRS will take into account compliance challenges when implementing the FATCA rules. Notwithstanding the additional time provided under Notice 2011-53 and the regulations to come, companies need to have the process underway for bringing their information management systems into compliance. Even with the extra time and phased-in approach, many companies will struggle to meet the compliance requirements. In addition, the IRS and Treasury will need to release the regulations on which the phased-in time line is based or many areas will remain unclear and burdensome. Whether the regulations will mirror the prior guidance or will provide additional relief and flexibility remains to be seen.