On July 14, 2011, the Internal Revenue Service issued Notice 2011-531announcing plans to phase in the requirements of the Foreign Account Tax Compliance Act ("FATCA"), which targets noncompliance by U.S. taxpayers holding foreign accounts. The Notice addresses certain compliance, reporting, and withholding deadlines and discusses substantive and procedural matters that will be addressed in future regulations.2
The IRS will begin accepting the applicable registration applications from foreign financial institutions ("FFIs"), including non-U.S. investment funds, no later than January 1, 2013, and FFIs must enter into FFI agreements with the IRS by June 30, 2013, to avoid withholding that would otherwise begin on January 1, 2014. FFIs that enter into FFI agreements after June 30, 2013, but before January 1, 2014, will qualify as participating FFIs with respect to 2014, but are not guaranteed to be identified as such so as to avoid withholding beginning on January 1, 2014.
Diligence requirements accompany the FFI agreements. Once FFI agreements become effective beginning on July 1, 2013, FFIs must institute account opening procedures to identify new U.S. accounts. Within one year of their FFI agreements becoming effective, FFIs must also institute procedures to determine the identities of preexisting accounts over $500,000. For preexisting accounts under $500,000, an FFI must institute the same procedures, but will have until one year after its FFI agreement becomes effective or until December 31, 2014, whichever is later, to do so. Future regulations will address procedures for all other accounts. By September 30, 2014, FFIs must begin reporting taxpayer information and account balances to the IRS for certain accounts identified as associated with U.S. taxpayers.
According to the Notice, future regulations will provide that withholding agents should begin withholding payments on U.S.-source dividends and interest paid to nonparticipating FFIs (and non-financial foreign entities that have not met the requirements to be exempt from withholding)on January 1, 2014. Withholding obligations on all withholdable payments (including on gross proceeds) will apply beginning on January 1, 2015. Passthru payments made before January 1, 2015 will not be subject to withholding, and obligations to compute and publish passthru percentages will not begin before 2014. The Notice also provides additional guidance on qualified intermediary withholding agreements and the scope of grandfathered obligations.
FATCA was enacted in 2010 as part of the Hiring Incentives to Restore Employment ("HIRE") Act. FATCA imposes withholding, documentation, and reporting requirements on FFIs with respect to U.S. accounts and certain payments made to foreign entities. In order to comply with FATCA and to avoid withholding, FFIs are required generally to identify U.S. accounts, report certain information to the IRS regarding such accounts, and withhold a 30 percent tax on certain payments to nonparticipating FFIs and account holders that are unwilling to provide required information. FFIs that do not enter into agreements with the IRS by specified deadlines risk being subjected to withholding on certain types of payments, including U.S.-source interest and dividends, gross proceeds from the disposition of U.S. securities, and passthru payments.
According to the Notice, the IRS expects to publish proposed regulations by December 31, 2011. Final regulations are expected in the summer of 2012. In conjunction with these regulations, the Treasury Department and the IRS anticipate issuing draft and final versions of the associated FFI agreement and reporting forms for use by withholding agents and participating FFIs in the summer of 2012.
1 IRS Notice 2011-53 may be viewed at http://www.irs.gov/pub/irs-drop/n-11-53.pdf.
2 IRS Notice 2011-53 supplements IRS Notices 2010-60 and 2011-34. IRS Notice 2010-60 may be viewed at http://www.irs.gov/pub/irs-drop/n-10-60.pdf. IRS Notice 2011-34 may be viewed at http://www.irs.gov/pub/irs-drop/n-11-34.pdf.
Joseph A. Riley is a Partner in the Tax Department of Willkie's New York office.