(1) Withholding Regime and Reporting Requirements
The Act imposes a 30% withholding tax on "withholdable payments" made to FFIs (and their 50% affiliates) unless the payee agrees to (1) disclose the identity of any U.S. individual with an account at the institution (or the institution's affiliates); (2) withhold tax (or to elect to have tax withheld) on any withholdable payment that is made to a recalcitrant account holder or another FFI that does not meet the requirements of the Act; and (3) annually report on the account balance, gross receipts and gross withdrawals, and payments from such account. The Act also imposes a 30% withholding tax on "passthru payments" to a recalcitrant account holder (as defined below) or non-participating FFI. "Withholdable payments" means (i) fixed or determinable annual or periodical ("FDAP") payments, including payments of interest (including original issue discount), dividends, rents, salaries, wages, and other items of FDAP gains, profits and income, in each case, from sources within the United States, and (ii) gross proceeds from the sale of any property of a type that can produce interest or dividends from sources within the United States. Thus, the term "withholdable payments" does not include payments that are not U.S. source FDAP or gross proceeds from the sale of property that cannot produce U.S. source interest or dividends. A "passthru payment" means any withholdable payment or other payment to the extent attributable to a withholdable payment. The provisions regarding passthru payments uniformly have been viewed as the most cumbersome of the provisions applicable to FFIs. The term "recalcitrant account holder" means any account holder that fails to comply with reasonable requests for the information required to be reported by the FFI or that fails to provide a valid waiver of an applicable foreign law that would prevent the reporting of such information.
Notice 2011-34 states that Treasury intends to issue regulations providing that, subject to the exceptions described below or in future guidance, a payment made by an FFI (the "payor FFI") will be a passthru payment to the extent of: (i) the amount of the payment that is a withholdable payment; plus (ii) the amount of the payment that is not a withholdable payment multiplied by (A) in the case of a "custodial payment," the passthru payment percentage of the entity that issued the interest or instrument, or (B) in the case of any other payment, the passthru payment percentage of the payor FFI. A "custodial payment" is a payment with respect to which an FFI acts as a custodian, broker, nominee, or otherwise as an agent for another person.
In order to calculate its passthru payment percentage, Notice 2011-34 provides that an FFI must determine its total assets and U.S. assets on a quarterly basis. The FFI's passthru payment percentage will be determined by dividing the sum of the FFI's U.S. assets held on each of the last four quarterly testing dates, by the sum of the FFI's total assets held on those dates. An asset generally includes any asset includible on a balance sheet of an FFI prepared under the FFI's method of accounting for reporting to its interest holders. An asset will also include off-balance sheet transactions or positions to the extent provided in future guidance. Assets held in a custodial account of an FFI will not be considered assets of the FFI for purposes of computing its passthru payment percentage. All assets are includable for purposes of an FFI's passthru payment percentage calculations at their gross values, unreduced by liabilities or other associated obligations. Treasury intends to publish regulations defining a U.S. asset to include any asset to the extent that it is of a type that could give rise to a passthru payment. Notwithstanding the previous sentence, an FFI's debt or equity interest in a domestic corporation will be treated solely as a U.S. asset and an FFI's debt or equity interest in a non-financial foreign entity ("NFFE") shall be treated solely as a non-U.S. asset, regardless of whether the interest would otherwise be an asset of a type that could give rise to a passthru payment.
An alternative method is provided for an FFI to compute its passthru payment percentage in the first year of the agreement it enters into with the IRS (its "FFI Agreement"). Each participating FFI will be required within three months after its quarterly testing date to make available its passthru payment percentage information calculated for that testing date, for example, on a website or database readily searchable by the public. Any participating FFI which does not calculate and publish its passthru payment percentage will be deemed to have a passthru payment percentage of 100%.
The term "foreign financial institution" is broadly defined to mean any entity that (A) accepts deposits in the ordinary course of a banking or similar business, (B) holds financial assets for the account of others as a substantial portion of its business, or (C) is engaged primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities. Thus, this definition includes hedge funds, private equity funds, and certain investment vehicles (including foreign issuers of collateralized debt obligations or collateralized loan obligations). In Notice 2010-60, Treasury stated its intention to issue regulations providing guidance on each of these three categories of financial institutions. With respect to the first and second categories of financial institutions described above, Treasury stated that the fact that an entity is subject to the banking and credit laws of the United States, a State, a political subdivision thereof, or a foreign country, or to supervision and examination by agencies having regulatory oversight of banking or similar institutions, is relevant to, but not necessarily determinative of, whether that entity qualifies as a financial institution under the FATCA provisions. Treasury also noted that although the FATCA provisions refer to the "business" of investing, reinvesting, or trading, such concept of "business" is different in scope and content from the concept of a "trade or business" as used in other sections of the Code. For example, isolated transactions that might not give rise to a trade or business for other purposes may cause an entity to be engaged primarily in the business of investing, reinvesting, or trading in securities, depending on such factors as the magnitude and importance of the transaction in comparison to the entity's other activities. Treasury anticipates that regulations will provide that whether an entity is engaged primarily in the business of investing, reinvesting, or trading in securities must be determined on the basis of all relevant facts and circumstances. Although the analysis is ultimately fact-specific, Treasury contemplates that future guidance will provide guidelines for determining what types of activity, carried on in whole or in part, constitutes the business of investing, reinvesting, or trading, and when an entity is primarily engaged in such a business.
Except as otherwise provided, the term "foreign financial institution" does not include a financial institution that is organized under the laws of any possession of the United States. Additionally, the IRS may provide exceptions for certain classes of financial institutions. Such exceptions may include entities such as certain holding companies, research and development subsidiaries, or financing subsidiaries within an affiliated group of nonfinancial operating companies. In Notice 2010-60, Treasury stated that it intends to issue regulations providing that in general, a foreign entity that otherwise satisfies the definition of a financial institution solely because it is primarily engaged in investing, reinvesting or trading in securities will not be treated as a financial institution if it falls within one of the following classes of foreign entities (because these entities are excluded from being FFIs, they will be NFFEs):
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Certain holding companies: A foreign entity the primary purpose of which is to act as a holding company for a subsidiary or group of subsidiaries that primarily engage in a trade or business other than that of a "financial institution" will be excluded from the definition of financial institution. Such holding companies would include, for example, a traditional holding company of a group of operating subsidiaries engaged primarily in a non-financial institution business. This class of excepted entities will not, however, include any entity functioning as an investment fund, such as a private equity fund, venture capital fund, leveraged buyout fund or any investment vehicle whose purpose is to acquire or fund the start-up of companies and then hold those companies for investment purposes for a limited period of time.
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Start-up companies: A foreign start-up entity that is investing capital into assets with the intent to operate a business other than that of a financial institution, but is not yet operating such a business, will be excluded from the definition of financial institution for the first 24 months after its organization. After such time, a foreign entity will no longer qualify for this particular exclusion from the definition of an FFI. For this purpose, the class of excepted foreign start-up entities will not include a venture fund or other investment fund that invests in start-up entities.
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Non-financial entities that are liquidating or emerging from reorganization or bankruptcy: A foreign entity that is in the process of liquidating its assets or reorganizing with the intent to continue or recommence operations as a non-financial institution may be excluded from the definition of financial institution if it was not a financial institution before beginning the process of such liquidation or reorganization.
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Hedging/financing centers of a non-financial group: A foreign entity that primarily engages in financing and hedging transactions with or for members of its expanded affiliated group (as defined in section 1471(e)(2)) that are not FFIs and that does not provide such services to non-affiliates may be excluded from the definition of financial institution, provided that the expanded affiliated group is primarily engaged in a non-financial institution business.
The Act provides for the promulgation of regulations by the IRS providing for the coordination of withholding under the Act with existing U.S. nonresident withholding rules, including providing for the proper crediting of amounts deducted and withheld under the Act against amounts required to be deducted and withheld under such other rules. Additionally, according to the Joint Committee Explanation, it is intended that any guidance provided by the IRS under this provision, including documentation and requirements to provide information, be consistent with existing income tax treaties. To the extent that withholding is not imposed by the Act, normal U.S. withholding rules continue to apply.
(2) Deemed Compliant FFIs
Notice 2011-34 describes certain categories of FFIs that will be deemed compliant and therefore not subject to withholding under the Act. Unless provided otherwise, a deemed-compliant FFI will be required to: (1) apply for deemed-compliant status with the IRS; (2) obtain an FFI identification number from the IRS identifying it as a deemed-compliant FFI; and (3) certify every three years to the IRS that it meets the requirements for such treatment. The categories of FFIs that will be deemed compliant include (A) certain local banks, (B) local FFI members of participating FFI groups, and (C) certain collective investment vehicles and other investment funds. Treasury is also considering under what circumstances certain foreign entities, all the interests in which are regularly traded on an established securities market (e.g., exchange-traded funds), could be deemed compliant.
With respect to investment funds, Notice 2011-34 states that under guidance to be issued, a fund will be deemed-compliant if it meets the following three requirements: (1) all holders of record of direct interests in the fund (e.g., the holders of its units or global certificates) are participating FFIs or deemed-compliant FFIs holding on behalf of other investors, or entities described in section 1471(f); (2) the fund prohibits the subscription for or acquisition of any interests in the fund by any person that is not a participating FFI, a deemed-compliant FFI, or an entity described in section 1471(f); and (3) the fund certifies that any passthru payment percentages that it calculates and publishes will be done in accordance with Notice 2011-34. Due to the narrow scope of this provision, it will likely not be available to most funds. Treasury is also considering under what circumstances certain foreign entities, all the interests in which are regularly traded on an established securities market (e.g., exchange-traded funds), could be deemed compliant.
Notice 2010-60 states that Treasury intends to issue guidance under which certain foreign entities that are FFIs described in section 1471(d)(5)(C), but are not described in section 1471(d)(5)(A) or (B), (such as investment funds and other entities that may have only a small number of direct or indirect account holders, all of whom are individuals or NFFEs that will not be subject to withholding or reporting under sections 1471 or 1472; e.g., a small family trust settled and funded by a single person for the sole benefit of his or her children) would be treated as deemed-compliant FFIs if the withholding agent (i) specifically identifies each individual, specified U.S. person, or excepted NFFE that has an interest in such entity, either directly or through ownership in one or more other entities, (ii) obtains from each such person the documentation that the withholding agent would be required to obtain from such person under the FATCA guidance if such person were a new account holder or direct payee of the withholding agent, and (iii) the withholding agent reports to the IRS any specified U.S. person identified as a direct or indirect interest holder in the entity.
(3) The Effectively Connected Income Exclusion
For purposes of the Act, interest on deposits paid by a foreign branch of a U.S. financial institution (a "USFI") is considered to be from sources within the United States. However, the term "withholdable payments" does not include payments of income that are effectively connected with the conduct of a U.S. trade or business (the "ECI exclusion"). In Notice 2010-60, Treasury noted that the ECI exclusion does not cover all payments that may be made to an FFI's U.S. branch. For example, the ECI exclusion is generally inapplicable to withholdable payments that a U.S. branch of an FFI receives on behalf of its account holders, rather than for its own account. The ECI exclusion is also inapplicable to withholdable payments that a U.S. branch of an FFI is paid for its own account and that does not constitute effectively connected income under Code sections 871(b)(1) or 882(a). Treasury does not intend to exempt an FFI from the requirement to enter into an FFI Agreement, even if the FFI receives withholdable payments solely through its U.S. branch. Thus, where a U.S. branch of an FFI receives withholdable payments that are not eligible for the ECI exclusion, the FFI generally will be required to execute an FFI Agreement to avoid being subjected to withholding under the FATCA provisions. When a U.S. branch of an FFI receives a withholdable payment as an intermediary, however, Treasury is considering permitting the U.S. branch to document its account holders for withholding purposes under the requirements to be imposed on U.S. financial institutions.
Treasury anticipates that regulations will include rules coordinating the reporting required of FFIs with U.S. branches with other U.S. tax reporting obligations, so as to avoid duplicative reporting with respect to accounts maintained by the U.S. branch of the FFI. Treasury also intends to issue regulations regarding the application of the ECI exclusion by withholding agents making payments to U.S. branches of FFIs. Treasury does not intend that those regulations will incorporate the type of special presumption included for withholding purposes in Treasury Regulations section 1.1441-4(a)(2)(ii) for payments made to certain U.S. branches of regulated banks and insurance companies.
(4) Other Exemptions/Exclusions from Withholding Under the Act
Withholding under the Act does not apply to any payment to the extent that the beneficial owner of such payment is part of a class of persons identified by the Treasury as posing a low risk of tax evasion. It also is anticipated that the IRS may prescribe special rules addressing the circumstances in which certain categories of companies, such as certain insurance companies, are financial institutions, or the circumstances in which certain contracts or policies, for example annuity contracts or cash value life insurance contracts, are financial accounts or U.S. accounts for these purposes. In Notice 2010-60, Treasury stated that it does not view the issuance of insurance or reinsurance contracts without cash value as implicating the concerns addressed by the FATCA provisons. This would include, for example, most property and casualty insurance or reinsurance contracts or term life insurance contracts. Accordingly, Treasury plans to issue regulations treating entities whose business consists solely of issuing such contracts as non-financial institutions for purposes of FATCA. However, Treasury believes that other contracts such as life insurance (other than term life insurance contracts without cash value) or annuity contracts typically combine insurance protection with an investment component and, thus, such cash value insurance contracts or annuity contracts may present the risk of U.S. tax evasion that the FATCA provisions are designed to prevent.
Additionally, according to the Joint Committee Explanation, the IRS may determine that certain payments made with respect to short-term debt or short-term deposits, including gross proceeds paid, and other payments that pose little risk of U.S. tax evasion may be excluded from withholdable payments for purposes of this provision. In Notice 2010-60, Treasury stated that although a retirement plan may qualify as a financial institution under the FATCA provisions, Treasury intends to issue guidance providing that certain foreign retirement plans pose a low risk of tax evasion, and therefore payments beneficially owned by such retirement plans will be exempt from withholding under FATCA. Treasury anticipates that a foreign retirement plan will be identified as posing a low risk of tax evasion only if the retirement plan (i) qualifies as a retirement plan under the law of the country in which it is established, (ii) is sponsored by a foreign employer, and (iii) does not allow U.S. participants or beneficiaries other than employees that worked for the foreign employer in the country in which such retirement plan is established during the period in which benefits accrued.
Withholding under the Act applies to all withholdable payments without regard to whether the beneficial owner of the payment is a U.S. person or is otherwise entitled to an exemption from the imposition of withholding tax pursuant to an applicable tax treaty with the United States or pursuant to U.S. domestic law (for example, pursuant to the so-called "portfolio interest exemption"). The Act exempts any depository account maintained by a FFI if the holder of such account is a natural person, and, with respect to each holder of such account, the aggregate value of all depository accounts held (in whole or in part) by such holder and maintained by the same financial institution that maintains such account does not exceed $50,000. However, according to the Joint Committee Explanation, to the extent provided by the IRS, financial institutions that are members of the same expanded affiliated group may be treated as a single financial institution for purposes of determining the aggregate value of depository accounts maintained at the financial institution.
(5) Reporting Agreement With the IRS to Identify U.S. Account Holders
To avoid the imposition of the 30% withholding tax on "withholdable payments," the Act requires FFIs (and their 50% affiliates) to agree to disclose and report on U.S. persons that have accounts with the FFI and foreign entities that have accounts with the FFI and have substantial U.S. owners. The FATCA provisions generally require that FFIs enter into an FFI Agreement with the IRS, pursuant to which the financial institution agrees to: (i) perform due diligence to identify financial accounts of U.S. persons and of foreign entities with significant U.S. ownership; (ii) report certain information about its U.S. accounts annually to the IRS; (iii) close any U.S. account if the account holder refuses to waive foreign legal protections that would otherwise prevent reporting; and (iv) withhold on certain "passthru payments" that the foreign financial institution makes to "recalcitrant" account holders and to other foreign financial institutions that have not entered into FFI agreements.
Notice 2010-60 states that a participating FFI must report the following information pursuant to an FFI Agreement with respect to each U.S. account:
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the name, address and taxpayer identification number (TIN) of each account holder which is a specified U.S. person;
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in the case of any account holder which is a U.S.-owned foreign entity, the name, address, and TIN of each substantial United States owner of such entity;
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the account number;
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the account balance or value (determined at such time and in such manner as the Secretary may provide); and
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except to the extent provided by Treasury, the gross receipts and gross withdrawals or payments from the account (determined for such period and in such manner as the Secretary may provide).
The IRS is developing a new form for reporting the information required. This form will be filed electronically. The account number to be reported with respect to an account may be an actual account number, or, if no account number is used by the FFI, a serial number or other number the FFI assigns to the financial account that is unique and will distinguish the specific account. Treasury intends to issue guidance coordinating the reporting provisions of the Act with other U.S. tax reporting obligations. Treasury also intends to issue guidance that will provide that all account balance amounts must be reported in U.S. dollars and will provide the appropriate method for currency translation. With regard to the account balance of deposit and custodial accounts, Treasury is considering requiring reporting of the highest of the month-end balances during the year (or, if the balance is determined less frequently than monthly—e.g., quarterly—for purposes of reporting to the account holder, the highest of the balances as determined for purposes of reporting to the account holder during the year). In addition, the FFI will be required to provide additional account-related information (e.g., copies of account statements including monthly or quarterly balances and daily receipts and withdrawals) to the IRS upon request.
Notice 2011-34 states that Treasury intends to issue regulations limiting FFIs' account balance reporting obligations to year-end account balances or values. Treasury also intends to issue regulations providing that an FFI must annually report the following information with respect to gross receipts and gross withdrawals or payments made to and from U.S. accounts: (i) the gross amount of dividends paid or credited to the account; (ii) the gross amount of interest paid or credited to the account; (iii) other income paid or credited to the account; and (iv) gross proceeds from the sale or redemption of property paid or credited to the account with respect to which the FFI acted as a custodian, broker, nominee, or otherwise as an agent for the account holder.
Notice 2011-53 states that the IRS will begin accepting FFI Agreement applications no later than January 1, 2013. An FFI must enter into an FFI Agreement 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.
Foreign entities with substantial U.S. owners include foreign partnerships and corporations with a U.S. owner that owns (directly or indirectly) more than a 10% interest (by vote or value), foreign grantor trusts with owners that are U.S. persons, and, to the extent provided in regulations or other IRS guidance, other trusts where a U.S. person holds (directly or indirectly) more than 10% of the beneficial interests of such trust. In the case of an FFI, such as a hedge fund or a private equity fund, that is engaged (or holds itself out as engaged) in the business of investing; reinvesting; or trading in securities, partnership interests or commodities (or any interests therein); such institution will be treated as having a substantial U.S. owner if any U.S. person holds an interest in such entity. FFIs are not required to disclose and report on publicly traded corporations (or their 50% affiliates), tax-exempt organizations, certain banks, real estate investment trusts, and regulated investment companies.
Notice 2010-60 provides procedures for participating FFIs to identify U.S. accounts among their preexisting individual accounts. Notice 2011-34 modifies the procedures provided in Notice 2010-60 for a participating FFI to identify U.S. accounts among its preexisting individual accounts and describes a new procedure for participating FFIs to certify their completion of the requirements for determining the status of their preexisting individual accounts.
The provision requiring withholding on payments made to a recalcitrant account holder is not intended to create an alternative to information reporting according to the Joint Committee Explanation. It is anticipated that the IRS may require that a participating FFI achieve certain levels of reporting and make reasonable attempts to acquire the information necessary to comply with the requirements of this provision or to close accounts, where necessary, to meet the purposes of this provision. Notice 2010-60 states that Treasury intends to require a participating FFI to report the number and aggregate value of financial accounts held by recalcitrant account holders and the number and aggregate value of financial accounts held by related or unrelated non-participating FFIs. In addition, Treasury intends to require a participating FFI to report the number and aggregate value of financial accounts held by recalcitrant account holders that have U.S. indicia. Notice 2011-34 states that Treasury continues to consider what measures should be taken to address long-term recalcitrant accounts, including whether, and in what circumstances, FFI Agreements should be terminated due to the number of recalcitrant account holders remaining after a reasonable period of time. It is also anticipated that the IRS may require that, in the case of new accounts, the FFI may not withhold as an alternative to collecting the required information.
According to the Joint Committee Explanation, it is expected that in complying with the requirements of this provision, the FFI (and other members of an affiliated group) comply with know-your-customer, anti-money laundering, anti-corruption, or other similar rules to which they are subject, as well as with such procedures and rules as the IRS may prescribe, both with respect to due diligence by the FFI and verification by or on behalf of the IRS to ensure the accuracy of the information, documentation, or certification obtained to determine if the account is a U.S. account. The disclosure and reporting requirements described above are in addition to any requirements imposed under the qualified intermediary program. The Act does not change the rules applicable to qualified intermediaries. Additionally, the Act permits an FFI to comply with its information reporting requirements by electing to be subject to the same reporting requirements as a USFI.
(6) Refunds and Credits of Taxes Withheld
A beneficial owner generally will be able to obtain a refund or credit of taxes withheld pursuant to the Act (to the extent that such refund or credit would be permitted under existing withholding rules) by filing a U.S. federal income tax return. No refund or credit will be allowed or paid with respect to any tax properly withheld under the Act unless the beneficial owner of the payment provides such information as the IRS may require to determine whether such beneficial owner is a U.S.-owned foreign entity and the identity of any substantial U.S. owners of such entity. Additionally, no refund or credit will be available for withholding on payments to a beneficial owner that is an FFI that is not eligible for benefits under an applicable tax treaty with the United States.
The grace period for which the U.S. government is not required to pay interest on an overpayment is increased from 45 days to 180 days for overpayments resulting from excess amounts deducted and withheld. The increased grace period applies to refunds of withheld taxes with respect to (1) returns due or filed after March 18, 2010 and (2) IRS-initiated adjustments if the refunds are paid after March 18, 2010. In no event will interest be allowed or paid with respect to any credit or refund of tax properly withheld on a payment to a beneficial owner that is an FFI. According to the Joint Committee Explanation, it is anticipated that the IRS may specify the proper form and information required for a claim for refund and may provide that a purported claim that does not include such information is not considered filed.
According to the Joint Committee Explanation, if tax is withheld under the provision, this credit and refund mechanism ensures that the provisions are consistent with U.S. obligations under existing income tax treaties. U.S. income tax treaties do not require the United States and its treaty partners to follow a specific procedure for providing treaty benefits. For example, in cases in which proof of entitlement to treaty benefits is demonstrated in advance of payment, the United States may permit reduced withholding or exemption at the time of payment. Alternatively, the United States may require withholding at the relevant statutory rate at the time of payment and allow treaty country residents to obtain treaty benefits through a refund process. The credit and refund mechanism ensures that residents of treaty partners continue to obtain treaty benefits in the event tax is withheld under the provision.
(7) Recent Treasury Comments
In remarks to the New York State Bar Association Tax Section 2012 Annual Meeting, the Acting Assistant Secretary for Tax Policy at Treasury stated that proposed regulations implementing the FATCA provisions will build upon prior Notices in seeking to minimize the administrative burden on FFIs and better focus application of the provisions on circumstances that present a higher risk of tax evasion. In recognition that global financial institutions face a variety of obstacles in bringing all of their affiliates into compliance, proposed regulations will provide temporary relief from the requirement that all members of an affiliated group be participating or deemed compliant FFIs. The rules regarding pass thru payments will be subject to a delayed implementation.
With respect to the appropriate standards for due diligence review of pre-existing accounts, Treasury intends to set a higher dollar threshold and a more limited scope for manual review of individual account records. For pre-existing entity accounts, the proposed regulations will focus review on passive investment entities with significant account balances and permit substantial reliance on documentation previously collected during account opening procedures. Treasury is proposing a higher threshold for further investigation into potential U.S. ownership. For new accounts, both individual and entity-owned, proposed regulations will seek to align the review required for purposes of the FATCA provisions with the procedures that financial institutions already follow to comply with anti-money laundering and know-your-customer rules.
Treasury expects to issue regulations implementing the FATCA provisions in the very near future.
A major point of concern that was identified in connection with underreporting of income by taxpayers was the use of foreign corporations to hold assets offshore. Some of the foreign corporations were set up with the cooperation of foreign bankers. The Act requires NFFEs to provide withholding agents with the name, address, and taxpayer identification number of any substantial U.S. owner (e.g., an owner that owns more than 10% of a foreign corporation's stock (by vote or value)). Withholding agents are required to report this information to the IRS. Under the Act, any withholding agent making a withholdable payment to a NFFE and that does not comply with these disclosure and reporting requirements will be required to withhold tax at a rate of 30%. Similar rules would also apply to foreign trusts. The Act exempts publicly held corporations, entities organized under the laws of a possession of the United States that are wholly owned by one or more bona fide residents of such possession, and certain other foreign entities from these reporting and withholding requirements, and provides the IRS with the regulatory authority to exclude other recipients that pose a low risk of tax evasion. The Act does not include language contained in FATCA legislation as originally proposed that would have required tax or investment advisers to disclose the identities of any clients they assist in buying offshore assets, as well as the assets purchased.
C. Effective Date.
Notice 2011-53 provides that for withholdable payments made on or after January 1, 2014, withholding agents (whether domestic or foreign, including participating FFIs) will be obligated to withhold under the Act only on U.S. source FDAP payments. For payments made on or after January 1, 2015, withholding agents will be obligated to withhold under the Act on all withholdable payments (including both U.S. source FDAP payments and gross proceeds). With respect to passthru payments, participating FFIs will be obligated to withhold on withholdable payments of U.S. source FDAP under the Act for payments made on or after January 1, 2014, but will not be required to withhold with respect to other passthru payments made before January 1, 2015. Accordingly, the obligations of participating FFIs with respect to computing and publishing their passthru payment percentage as set forth in Notice 2011-34 will not begin before the first calendar quarter of 2014.
However, withholding under the Act will not apply to any payment under any obligation outstanding on March 18, 2012, or to the gross proceeds from any disposition of such an obligation. In Notice 2010-60, Treasury indicated its intent to issue regulations providing that the term "obligation" means any legal agreement that produces or could produce withholdable payments. Regulations will provide, however, that an obligation for this purpose does not include any instrument treated as equity for U.S. tax purposes, or any legal agreement that lacks a definitive expiration or term. Thus, for example, savings deposits, demand deposits, and other similar accounts are not obligations for this purpose. Additionally, for this purpose, a legal agreement that produces withholdable payments does not include brokerage, custodial and similar agreements to hold financial assets for the account of others and to make and receive payments of income and other amounts with respect to such assets. Notice 2011-53 states that Treasury intends to issue regulations clarifying that 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.
Treasury and the IRS also intend to issue regulations providing that an obligation entered into on or before March 18, 2012 will be treated as outstanding on March 18, 2012, and that any material modification of an obligation will result in the obligation being treated as newly issued for purposes of the Act as of the effective date of such modification. In the case of an obligation that constitutes indebtedness for U.S. tax purposes, a material modification means any significant modification of the debt instrument as defined in Treasury Regulations section 1.1001-3. In all other cases, whether a modification of an obligation is material will be determined based on all relevant facts and circumstances.
