New Timeline in Notice 2011-53 Is Intended to Respond to Concerns Expressed by Foreign Governments and Affected Entities Regarding New "FATCA" Rules

Many foreign financial institutions are affected by the new information reporting and withholding rules enacted as part of the so-called "Foreign Account Tax Compliance Act" ("FATCA") on March 18, 2010. Affected entities have made clear to the US Treasury Department their difficulty in complying with the new rules, especially by the statutory deadline of January 1, 2013.

In a notice issued on July 14, 2011, the IRS responds to these concerns by delaying certain FATCA deadlines, providing new guidance on implementation of certain FATCA rules, and setting forth a timetable of expected IRS actions. In its press release accompanying the notice, the IRS describes the notice as providing "a workable timeline for FFIs [Foreign Financial Institutions] and U.S. withholding agents to implement the various requirements of FATCA." There is no question that Notice 2011-53 provides a more reasonable period for implementation of the new rules, but it remains an open question as to how well the FATCA rules can be implemented, even under the revised timeline.

Summary of the Timeline Set Forth in Notice 2011-53

December 31, 2011

  • Action: Issuance of Proposed Regulations incorporating Notice 2010-60, Notice 2011-34, and Notice 2011-53.
  • Effect: Last opportunity to request changes or new guidance before issuance of final regulations.

Summer 2012

  • Action: Issuance of Final Regulations, FFI Agreements, and applicable forms.
  • Effect: Affected financial institutions cannot begin to implement compliance measures until final rules, forms, and agreements are promulgated.

December 31, 2012

  • Action: Automatic one-year extension of expiring Qualified Intermediary ("QI") agreements.
  • Effect: All QI agreements, withholding foreign partnership agreements, and withholding foreign trust agreements of entities qualifying as FFIs that expire on December 31, 2012, will be automatically extended until December 31, 2013.

January 1, 2013

  • Action: IRS to begin accepting FFI applications through its electronic submissions process no later than January 1, 2013.
  • Effect: First opportunity to apply to be a participating FFI; FFIs will have only a few months to analyze the final regulations before making a decision whether to become a participating FFI.

June 30, 2013

  • Action: FFIs entering into FFI Agreement.
  • Effect: An FFI that enters into an FFI Agreement by June 30, 2013, 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. FFI Agreements entered into by June 30, 2013, will have an effective date of July 1, 2013, regardless of actual submission date.

July 1 through December 31, 2013

  • Action: FFIs entering into FFI Agreement.
  • Effect: An FFI that enters into an FFI Agreement after June 30, 2013, but before January 1, 2014, will be a participating FFI in 2014, but may still be subject to withholding initially in 2014 due to delays in processing. The effective date of an FFI Agreement entered into after June 30, 2013, will be the date the FFI enters into the FFI agreement.

December 31, 2013

  • Action: QIs entering into FFI Agreement.
  • Effect: Any FFI that enters into an FFI Agreement on or before December 31, 2013, will be considered to have renewed its QI agreement, withholding foreign partnership agreement, or withholding foreign trust agreement, as the case may be.

January 1, 2014

  • Action: For payments made on or after January 1, 2014, withholding agents (whether domestic or foreign, including participating FFIs) will be obligated to withhold under FATCA only on U.S. source FDAP payments and participating FFIs will be obligated to withhold only on withholdable payments of U.S. source FDAP.
  • Effect: Despite the statutory deadline of January 1, 2013, the IRS is providing a 1-year delay in effective date for payments of U.S. source FDAP (e.g., dividends paid by U.S. corporations and interest paid by U.S. persons).

First calendar quarter of 2014

  • Action: Earliest that participating FFIs will be required to compute and publish their passthru payment percentage as set forth in Notice 2011-34.
  • Effect: Participating FFIs generally must publish passthru payment percentage so that other payors know what withholding percentage to apply.

September 30, 2014

  • Action: 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. Recalcitrant account holders identified by June 30, 2014, must be reported to the IRS by September 30, 2014 as well.
  • Effect: Reporting of specific information to the IRS is required for these accounts, although reduced reporting is applicable for non-recalcitrant U.S. accounts in the FFI’s first year as a participating FFI.

January 1, 2015

  • Action: 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") and participating FFIs will be obligated to withhold with respect to all passthru payments.
  • Effect: Despite the statutory deadline of January 1, 2013, the IRS is providing a 2-year delay in effective date for payments of gross proceeds (e.g., sale of stock).

Additional Guidance Provided in Notice 2011-53 Due Diligence Required by Participating FFIs with Respect to Accounts

New Accounts

  • Guidance: A participating FFI will be required to put in place account opening procedures described in Notice 2010-60, as implemented in regulations, to identify U.S. accounts among accounts.
  • Effective Date: Accounts opened on or after the effective date of the FFI Agreement.

Pre-existing Private Banking Accounts

  • Guidance: A participating FFI will be required to have completed Step 3 of the pre-existing account due diligence procedures described in Section I.A.2 of Notice 2011-34 (the private banking procedures), for all accounts opened before the effective date of its FFI Agreement that are associated with a private banking relationship (including individual and entity accounts). Future regulations will provide guidance on the scope of the private banking procedures and the associated search of account holder files. Future regulations will also provide that, for purposes of applying the private banking procedures: (1) although private banking relationship managers must identify any client for which such relationship managers have actual knowledge that the client is a U.S. person and request a Form W-9 from such person, as set forth in Notice 2011-34, the review of account files may be completed by any person designated by the participating FFI; and (2) accounts subject to due diligence procedures and identified as either U.S. accounts or non-U.S. accounts will not be subject to additional due diligence procedures in subsequent years unless the account undergoes a change of circumstance.
  • Effective Date: For private banking accounts that have a balance or value of at least $500,000 on the effective date of the FFI Agreement, the FFI must take the required actions within one year of the effective date of its FFI Agreement. For private banking accounts that have a balance of less than $500,000 on the effective date of the FFI agreement, a participating FFI will be required to take the required actions by the later of December 31, 2014, or the date that is one year after the effective date of its FFI Agreement.

Other Pre-existing Accounts

  • Guidance: A participating FFI must complete due diligence procedures as prescribed in Notice 2010-60, Notice 2011-34, and forthcoming regulations.
  • Effective Date: For all non-private banking accounts, the participating FFI must take the required actions within two years of the effective date of its FFI Agreement.

Reporting

Identified U.S. Accounts

  • These accounts generally will include (1) private banking accounts identified as U.S. accounts under the procedures set forth in Notice 2011-53 and for which a Form W-9 has been collected by June 30, 2014; (2) new U.S. accounts opened
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  • after the effective date of the FFI’s FFI Agreement and for which a Form W-9 has been collected; (3) documented U.S. accounts described in Section I.A.2 Step 1 of Notice 2011-34; and (4) existing U.S. accounts documented pursuant to Section 1.A.2 Steps 4 and 5 of Notice 2011-34 for which a Form W-9 is obtained by June 30, 2014.
  • Guidance: For these identified U.S. accounts, unless a participating FFI has elected to be subject to the same reporting as a U.S. financial institution, the participating FFI must report in accordance with Notice 2011-34, except that for the first year of reporting, the participating FFI will only be required to report the following information: (i) the name, address, and U.S. TIN of each specified U.S. person who is an account holder and, in the case of any account holder that is a U.S. owned foreign entity, the name, address, and U.S. TIN of each substantial U.S. owner of such entity; (ii) the account balance as of December 31, 2013, or, if the account was closed after the effective date of the FFI’s FFI Agreement, the balance of such account immediately before closure; and (iii) the account number. For a participating FFI that elects to be subject to the same reporting as a U.S. financial institution, the FFI may report only the items listed in (i) and (iii), above, for its report filed by September 30, 2014.
  • Effective Date: Reduced reporting generally applies only during first year of reporting. For FFIs that make election to be subject to same reporting as a U.S. financial institution, the reduced reporting applies only to report filed by September 30, 2014.

Grandfathered Obligations

Definition of "Obligation" for Purposes of Passthru Payments

  • Guidance: In response to questions regarding whether legal agreements that give rise to passthru payments other than withholdable payments are excluded from the definition of "obligation" for purposes of the grandfather rule, the Notice states that Treasury and the IRS intend to issue regulations clarifying that, for purposes of section 501(d)(2) of the Act, the term "obligation" means any legal agreement that produces or could produce passthru payments (including withholdable payments), but not including any instrument treated as equity for U.S. tax purposes, or any legal agreement that lacks a definitive expiration or term.
  • Effective Date: Section 501(d)(2) of the Act includes a "grandfather rule" that provides that the FATCA withholding rules do not apply to any payment under any obligation outstanding on March 18, 2012, or from the gross proceeds of any disposition of such an obligation.