The Treasury Department and the IRS issued a notice announcing plans to “phase in” the requirements of FATCA in response to numerous comments regarding the practical difficulties of implementing FATCA, including the time required to develop the necessary compliance, reporting and withholding systems and possible coordination with various foreign governments.

FATCA was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, and requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. To avoid FATCA withholding, a participating FFI must enter into an agreement with the IRS to identify U.S. accounts, report certain information to the IRS regarding U.S. accounts, and withhold a 30% tax on certain payments to non-participating FFIs and account holders who are unwilling to provide the required information. 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 fixed or determinable, annual, or periodical (FDAP) payments, including interest and dividends, gross proceeds from the disposition of U.S. securities and passthru payments.

Notice 2011-53, summarized below, describes the timeline for the phase in of the FATCA requirements.  

  • Registration of FFIs Beginning in 2013: An FFI must enter into an agreement with the IRS 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 January 1, 2014. The effective date of an FFI Agreement will be July 1, 2013 for agreements entered into before such date. 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: A participating FFI will be required to put in place account opening procedures to identify U.S. accounts among accounts opened on or after the effective date of its FFI Agreement. A participating FFI will be required to have completed the private banking procedures (as described in Step 3 of Section 1.A.2 of Notice 2011-34) for all preexisting private banking accounts that have a balance or value of at least $500,000 within one year of the effective date of its FFI Agreement. A participating FFI will be required to complete the private banking procedures for pre-existing private banking accounts with a balance or value of less than $500,000 by the later of December 31, 2014 or one year after the effective date of its FFI Agreement. For all other pre-existing accounts, a participating FFI must complete the required due diligence procedures within 2 years of the effective date of its FFI Agreement.
  • Reporting: 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 the IRS as a U.S. account by September 30, 2014. A participating FFI that does not elect to be subject to the same reporting standards as a U.S. financial institution with respect to such accounts will not be required to report the gross receipts and gross withdrawals or payments from the account for the first year of reporting. A participating FFI that elects to be subject to the same reporting standards as a U.S. financial institution for such accounts does not have to report the gross receipts and gross withdrawals or payments from the account or the account balance as of December 31, 2013 (or the account balance immediately before closure if the account was closed after the effective date of the FFI Agreement). For each account for which the participating FFI is not able to report the required information (e.g., because the account holder has not waived any applicable reporting restrictions), the FFI will report the account among its recalcitrant account holders. The reporting with respect to recalcitrant account holders identified by June 30, 2014, will be required to be filed with the IRS by September 30, 2014.
  • Withholding: For payments made on or after January 1, 2014, withholding agents will be obligated to withhold only on U.S. source FDAP payments. For payments made on or after January 1, 2015, withholding agents will be obligated to withhold on all withholdable payments (including both U.S. source FDAP payments and gross proceeds from the disposition of U.S. securities). Participating FFIs will not be required to withhold with respect to passthru payments made before January 1, 2015 and the obligations to compute and publish such participating FFI’s passthru payment percentage will not begin before the first calendar quarter of 2014.
  • Published Guidance: Treasury and the IRS anticipate issuing proposed Treasury regulations implementing FATCA by December 31, 2011 and publishing final Treasury regulations implementing FATCA and final versions of the associated FFI Agreement and reporting forms for use by withholding agents in the summer of 2012.