In response to widespread concern about the feasibility of timely compliance, the Treasury Department released Notice 2011-53 on July 14, which gives foreign financial institutions (FFIs) and U.S. withholding agents temporary relief from the fast approaching January 1, 2013 deadline for implementing the withholding and reporting requirements enacted in the Foreign Account Tax Compliance Act (FATCA).
FATCA was enacted as part of the 2010 Hiring Incentives to Restore Employment Act and is designed to target tax avoidance by U.S. taxpayers through the use of foreign accounts. FATCA is a complex law that imposes significant reporting and information gathering obligations on FFIs, which are enforced through new withholding taxes and substantial penalties. You can access our previous analysis of FATCA here.
Participating FFIs will be required to enter into an agreement (FFI Agreement) with the IRS to report and withhold on U.S. accounts. Absent such FFI Agreement, FFIs will be subject to withholding on certain types of payments, including U.S. source fixed or determinable annual or periodic (FDAP) income and gross proceeds from the disposition of any property that can produce U.S. source FDAP such as interest or dividends.
The FFI Agreements will require an FFI to identify U.S. accounts, report certain information to the IRS regarding the U.S. accounts, and withhold a 30-percent tax on certain payments to non-participating FFIs and account holders who are unwilling to provide the required information. FATCA also imposes withholding on certain payments made to non-financial foreign entities (NFFEs) that do not provide certain information regarding their beneficial owners.
Notice 2011-53 provides a “phased implementation” approach, under which FFIs and U.S. withholding agents are given additional time to implement the systems needed to comply with FATCA. The notice phases in FATCA implementation as follows:
FFI Agreements must be entered into by June 30, 2013, to ensure that an FFI will be identified as a participating FFI in sufficient time to avoid withholding beginning on January 1, 2014.
- Participating FFI status will prevent FFIs from being subject to withholding on payments made to them by U.S. withholding agents.
- FFIs that do not enter into the FFI Agreement before June 30, 2013, but do so before January 1, 2014, will be considered participating FFIs for 2014; however, they may be subject to FATCA withholding due to the lack of time to identify them as participating FFIs before FATCA withholding begins on January 1, 2014. Presumably, the IRS will provide guidance that would allow these FFIs to obtain a refund for FATCA withholding on payments made to them during 2014.
- Participating FFIs’ withholding obligations on U.S. source FDAP income paid to non-participating FFIs will begin on January 1, 2014, and withholding on all passthru payments (including on gross proceeds) will be fully phased in no earlier than January 1, 2015.
- FFI due diligence requirements for identifying new and pre-existing U.S. accounts (including private accounts with a minimum balance of $500,000) will begin in 2013.
- Reporting of gross receipts and gross withdrawals or payments from U.S. accounts is not required for 2013; however, an FFI will be required to report any U.S. account holder identified by June 30, 2014 for which the FFI has not received certain required information.
While Notice 2011-53 provides significant relief for FFIs, the notice does not indicate whether a similar extension for the rules requiring withholding on payments made to NFFEs will be announced. Accordingly, it is uncertain whether withholding on such payments will begin on January 1, 2013.
Final regulations are planned for the summer of 2012, along with draft and final versions of the FFI agreements and reporting forms for use by withholding agents and participating FFIs.
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IRS Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.