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The Foreign Account Tax Compliance Act: Privacy and Enforcement Challenges & the Implications For Your Client’s Financial Interests Sponsored by October 22, 2012 9am – 1pm
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The Foreign Account Tax Compliance Act: Privacy and Enforcement Challenges & the Implications For Your Client’s Financial Interests
Sponsored by
October 22, 2012 9am – 1pm
The Foreign Account Tax Compliance Act: Privacy and Enforcement
Challenges & the Implications For Your Client’s Financial Interests October 22, 2012
George Mason University School of Law
Agenda
8:15am Registration
Breakfast & Coffee
8:45am-9:00am Welcome
Professor James Byrne, George Mason University School of Law
9:00am-9:30am Keynote Address
Professor J. Richard Harvey, Jr., V illanova University School of Law
9:45am-11:00am Panel 1: International & Diplomatic Concerns Presented by
FATCA
Moderator
Michael Miles, Sutherland Asbill & Brennan LLP
Panelists
Jesse Eggert, United States Department of Treasury
Peter Deblon, Tax Counsellor, German Embassy
James Jatras, Squires Sanders Public Advocacy
11:00am-11:30am Coffee Break
11:30am-12:45pm Panel 2: Operational Challenges & Cost of Compliance of
FATCA
Moderator
Rachelle Perkins, George Mason University School of Law
Panelists
Kenneth Werner, Richards Kibbe & Orbe LLP
Carol Tello, Sutherland Asbill & Brennan LLP
Alan Granwell, DLA Piper
William Holmes, Internal Revenue Service
12:45pm-1:00pm Closing Remarks
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J. Richard (Dick) Harvey, Jr. Distinguished Professor of Practice
Villanova University School of Law/Graduate Tax Program
FATCA Background
George Mason Journal of International Commercial Law Fall Symposium
October 22, 2012
Agenda
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!! Reasons FATCA was adopted
!! Key design features
!! Major concerns during drafting
!! Key policy questions
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Major Reasons FATCA was Adopted
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!! Major loopholes in the Qualified Intermediary (QI) regime surrounding US taxpayers: !! No reporting of non-US source income/assets !! Not clear whether QI needed to look-through shell entities beneficially
owned by US taxpayers !! Could have undeclared accounts
!! Highly publicized cases of tax evasion (e.g., LGT and UBS)
!! Maintain integrity of US self-assessment system: !! Improved communication makes it much easier to establish offshore
accounts
!! Tax evasion on both principal and income in an offshore account
!! But you know something is going to be done when….
The Pope gets involved….
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Pope attacks Tax Havens for Robbing Poor Hard-hitting Vatican report lays blame for the global financial crisis at door of 'offshore centres'
The Observer, Saturday 6 December 2008
Pope Benedict XVI. Photograph: Max Rossi/Reuters
It is a message sent from on high to the world's financial and political elite. The Roman Catholic Church is calling for the effective closure of secretive tax havens as a 'necessary first step' to restore the global economy to health.
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FATCA Designed to Close QI Loopholes
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!! Requires participating FFIs to:
!! Report both US and non-US source income
!! Look through shell foreign entities to determine US beneficial owners
!! Review all customer accounts, including affiliates
!! 30% withholding tax adopted to encourage FFIs to
participate in FATCA (i.e., penalize FFIs that do not participate)
Misc. Other FATCA Provisions
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!! Requires tax specific FBAR (IRS Form 8938)
!! Extends statute of limitations for foreign accounts:
!! Generally from 3 years to 6 years
!! Suspends statute of limitations if tax specific FBAR not filed
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Major Concerns During FATCA Drafting
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!! Would US tax evaders find ways to easily avoid FATCA?
!! Would reputable FFIs decide not to participate in FATCA?
!! Would investments be shifted from private banks to mutual funds, insurance companies, etc…?
!! Would FATCA drive material foreign investment away from the US?
!! Could the US unilaterally adopt FATCA, or would
multilateral action be needed?
Other More Technical Concerns
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!! Would FFIs be willing to perform detailed customer due diligence on their entire customer base, including affiliates?
!! Would local law outside the US allow:
!! FFIs to close accounts of “recalcitrant” customers?
!! Report information to the US?
!! Would US taxpayers resident overseas have FFIs that would still service their financial needs?
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Key Policy Questions
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!! Fundamental Questions:
!! Should countries be allowed to adopt bank secrecy and favorable tax
laws?
!! Should other countries be allowed to take steps to prevent the use of offshore accounts to evade tax (e.g., FATCA)?
!! Should US citizens resident overseas be taxed on their worldwide income?
!! Should the US have acted unilaterally?
!! Can FATCA be successful without multilateral cooperation?
!! What types of multilateral action are possible? – see next slide
Multilateral Action
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!! Short-run - Likely aimed at overcoming local law issues surrounding FATCA (e.g., intergovernmental agreements)
!! Longer term - several countries could join in multilateral FATCA regime:
!! Benefits to both US and non-US countries. For example:
!! Reduce US tax evader’s investment options
!! Leverage US to accomplish non-US country’s goals
!! System can accommodate multiple design features:
!! If withholding model part of design, should apply to both new money and income in offshore accounts
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Contact Information
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J. Richard (Dick) Harvey, Jr.
Distinguished Professor of Practice
Villanova University School of Law and Graduate Tax Program
1-610-519-4474
Recent articles at!http://ssrn.com/author=1542659
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George Mason University School of Law, JICL Fall 2012 Symposium, October
22, 2012
The Foreign Account Tax Compliance Act (FATCA):
Privacy and Enforcement Challenges & the Implications For
Your Client’s Financial Interests
Panel 1: International & Diplomatic Concerns Presented by FATCA
James George Jatras, Squire Sanders Public Advocacy
I. Introduction: My presentation may be significantly different from others today. I am not taking
FATCA as a fait accompli set in stone, for which only conceivable response is compliance. Rather, I will look at it dynamically, from the point of view of a legislative and political specialist.
II. Primary baseline points:
A. There is no need for me to review the mechanics of FATCA, well enough known to this
audience, and which other speakers are likely to cover in greater detail from a compliance
perspective. Instead, I will address the broader political context, especially in international context.
B. FATCA was the wrong answer to a problem of questionable importance.
• The magnitude of offshore tax evasion is debatable. (Hundreds of billions vs. $1B
FATCA budget scoring).
• Fairness of placing burden on foreign industry rather than US taxpayer (note:
questionable aspects of US law taxing foreign assets, repatriation of assets).
• Invasiveness (“what have you go to hide?”). Presumes (or at least assumes)
taxpayers are bad actors, actual or potential “tax cheats,” FFIs actual or potential accomplices.
• Costs imposed on industry, passed on to consumers. Magnitude of costs: top 30
foreign banks alone will pay an aggregate of $7.5 billion, Toronto Dominion (one
example) $100 million; one article cites an unidentified US government source at $30 million per institution. This is just compliance, without taking into account possible
penalties, a real risk given the vagueness of the still-not-finalized pending
regulations.
• Breathtaking extraterritorial reach. United States is asserting authority to impose a
costly regulation on every financial institution – broadly defined – in the world. (cf.,
US response to hypothetical foreign extraterritorial mandate. “Because we can.”)
• Sledgehammer 30-percent withholding threat on “recalcitrant” FFIs guilty of nothing
but noncompliance with a foreign edict.
• Other costs: FFIS dumping US clients, withdrawal of foreign investment from US.
For example, $2B from China Development Bank to help fund San Francisco housing project is being delayed as a result of Chinese concerns about FATCA.
[“US tax policies delay $2bn Chinese loan,” FT, 9/26/12]
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III. FATCA as written is not enforceable on its face:
A. “Mark Matthews, . . . former head of the criminal investigation division at the Internal
Revenue Service. ‘It [the US-UK IGA] is clearly less airtight and bulletproof. But the (FATCA)
statute as written was wholly unachievable,’ he said.” [Patrick Temple-West, “U.S. overseas
tax dragnet refocuses on country partnerships,” Reuters, 9/18/12]
B. Professor J. Richard Harvey [“Offshore Accounts: Insider’s Summary of FATCA and Its
Potential Future,” Villanova Law Review, Vol. 57, Issue #3, Dec. 2011]: “The long-term success
of FATCA may depend upon whether the US can convince other countries to adopt a similar
system, or better yet, join with the US in developing a multilateral FATCA system. . . . The
major weakness of FATCA is that the US is attempting to unilaterally require FFIS to report
information to the US. . . . [T]he US could continue down the course of unilateral adoption of
FATCA with the hope that the US investment market is sufficiently large . . . If the US were to
abandon FATCA, it would be a serious long-term setback to addressing offshore tax evasion both
in the US and the world.” [emphasis added] -- in other words, FATCA could fail.
IV. International “partnership” (IGAs):
A. Initiative for IGAs coming from two directions: panicked FFIs telling their governments: “Do
something – go talk to the Americans!”
B. And from Treasury: Faced with an unachievable task (see above) of extraterritorial
enforcement on each and every financial firm (as broadly defined under FATCA) in the entire
world, Treasury already had delayed by over two months the release of draft FATCA regulations
last year - until it could unveil the joint statement in February with the five EU countries,
providing for a “partnership,” which in effect deputizes foreign governments to do IRS's job for
it. While it's possible the "partnership" may provide FFIs with some modest respite (and
eliminates their terror of FATCA's withholding provision), compliance costs - under domestic
laws and regulations that will parallel the IRS's pending 388 pages of regulations - may actually
turn out to be greater than just complying with the IRS's mandates. If, as described in the
"partnership" announcement, FATCA becomes the "common model for automatic data exchange
of information," – and if other countries consider adopting their own FATCA-like laws (e.g., UK)
– FFIs may face the prospect of reporting on assets from multiple countries, not just one.
C. There is also the possibility of a “two-tiered” compliance system of “partner” governments
starting with EU 5, vs. other governments (starting with China) that may not go along. How this
impacts FATCA’s viability is something we might want to address in discussion.
V. The most significant politically relevant impact of IGAs is that they repatriate FATCA’s costs to US:
A. Under “original FATCA,” American firms’ compliance mostly relates to costs of acting as a
withholding agent for “recalcitrant” FFIs (“foreign financial institution”). But, as intended first
for the five EU countries, a range of US domestic institutions would have to provide data for
transfer to FATCA partners under the draft “reciprocal” arrangement. This could be a very
significant burden, since US domestic firms would start with an obligation to report on residents
of at least five countries to start, and maybe many more if this model is expanded. Thus,
FATCA now promises to be quite costly and invasive for American institutions. This would
suggest the potential of costs for US domestic firms (in the tens of millions per institution, and
billions aggregate) comparable to those FFIs are facing. This could be particularly problematic
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for non-bank institutions (e.g., insurance companies, pension funds) that don’t routinely collect
the kind of AML and KYC information banks do.
B. Let’s add, by the way, the fact that compliance costs for US firms – and I think they will be
substantial – will be deductible against their otherwise existing tax liability. Especially given the
high US corporate income rate, one wonders how much money FATCA would have to “recover”
to offset the outflow from the treasury because of cost of domestic compliance for the purposes of
reporting foreign accounts – from which, of course, the US treasury derives no gain. (Send a
check to the accounting firms, eliminate the middleman.)
C. So on the one hand, FATCA can’t succeed without going down the international “partnership”
road. On the other hand, international “partnership” means FATCA costs that would in principle
be carried almost entirely by FFIs are now imposed here, and of course will be passed on to
consumers. That changes the political landscape to FATCA’s detriment.
VI. What can firms do to protect their financial interests?
A. We hear: “FATCA is not going away.” -- a constant refrain from practitioners (often non-
Americans, with no acquaintance with the US political system, and with pecuniary interest in
FATCA’s survival and the most expensive possible compliance regime). Perhaps whistling past
the graveyard?
1. The main reason FATCA looks so unassailable now is that no one has yet challenged
it in a meaningful way.
2. My top piece of advice is that firms that stand to be impacted make their own hard-
headed cost analysis between what FATCA compliance is likely to cost them – to the
extent possible, given the uncertainties I’ve identified – and the cost of exploiting
FATCA’s vulnerabilities in what will be a fluid environment for some time. The fact is
FATCA is not set in stone – yet.
B. At the same time, while the compliance regime is being worked out, firms should consider the
comparative cost of supporting a possible legislative solution to lessen or even eliminate what
upon examination may turn out to be a vulnerable and ultimately unviable regulatory scheme.
The difference for a large firm could be one between tens, maybe hundreds of millions of dollars
and tens of thousands of dollars to support a coalition of interests for an anti-FATCA lobbying
and media campaign.
1. While I certainly would not recommend that any company plan not to comply with
any FATCA-related regulations if and when they are finalized, rushing to do so now
could be wasteful (gearing a compliance regime to draft regulations that are later changed
or end up not going into effect) and counterproductive (inadvertently helping to lock into
place a regulatory regime that might otherwise have been avoidable). Futility of writing
comments to Treasury on draft regulations.
2. The same could be said for foreign governments negotiating IGAs with the United
States. Foreign governments that may not be particularly happy about FATCA – and
whose own domestic institutions are distinctly unhappy – are not doing themselves or
their FFIs a favor by entering into IGAs with the US. To the contrary, whether or not it
is their intention or desire, they are helping to impose a foreign regime on themselves,
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largely due to the near-panic in foreign industry. Instead, they should be focusing on the
growing awareness of FATCA in the US and prospects for getting rid of it. (Problem:
there seems to be little foreign awareness of the fact that US is not a parliamentary
system. “We have a problem with an American law – so let’s talk to Treasury.” Instead,
the real target is Congress, which is likely to be more concerned about domestic impacts
than foreign ones.)
3. Meanwhile Treasury is in a race against time, to wrap up as many IGAs as possible
and lock in a global FATCA regime before a significant repeal effort is launched in the
US.
C. Prospects for repeal: As noted, a castle can’t be considered impregnable until someone
mounts a siege. That hasn’t happened yet.
1. A July 25 letter from Senators Rand Paul (R-KY), Jim DeMint (R-SC), Mike Lee (R-
UT), and Saxby Chambliss (R-GA), prior to the release of the “model” agreements, was
the first significant pushback against Treasury on FATCA from Capitol Hill, regarding
“reciprocal” rules. Treasury has not answered, but that kind of pressure is likely to
increase.
2. There are significant examples of the sudden house-of-cards collapse of what had
been considered unassailable initiatives, once an intelligent and active campaign was
launched.
a. The Medicare Catastrophic Coverage Act of 1988-89 (“Rarely has a
Government program that promised so much to so many fallen apart so fast. The
passage of the bill, in June 1988, was celebrated on both sides as a bipartisan
success story in which the White House and the Congress teamed up to provide
new medical benefits for the elderly: a ceiling on hospital and doctor bills,
expanded payments for nursing home care and prescription drugs, and much
more.” [MARTIN TOLCHIN, “Retreat in Congress; The Catastrophic-Care
Debacle - A special report.; How the New Medicare Law Fell on Hard Times in a
Hurry,” NYT, 10/9/89) Unlike FATCA, the Catastrophic Coverage Act – which
was repealed 17 months after it was enacted – had a clear and identifiable set of
beneficiaries.
b. Dubai Ports World debacle of 2005-2006 (something I had a hand in).
3. Will that happen? Frankly, it depends on what impacted industry wants to do.
D. Prediction: I don’t think FATCA will exist three years from now. One banking lobbyist said
to me, he expects FATCA to follow the trajectory of the Catastrophic Coverage Act controversy –
that once it turns into a big, expensive train wreck, it will be repealed or at least very significantly
modified. Alternatively, a lot of wasted time and money could be saved by addressing that task
now.
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FATCA
Foreign Account Tax
Compliance Act
Presentation Outline
Kenneth E. Werner
Richards, Kibbe & Orbe LLP
September 28, 2012
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Table of Contents
Page
I.! INTRODUCTION .................................................................................................................. 1!
II.! WHAT IS FATCA? ................................................................................................................ 1!
III.! SUMMARY OF PROPOSED REGULATIONS ............................................................... 1!
A. ! Statutory Provisions ..................................................................................................... 1!
IV.! WHO FATCA EFFECTS ................................................................................................... 3!
A. ! Financial Institution and FFI ..................................................................................... 3!
B. ! Non-Financial Foreign Entities (NFFEs) ............................................................... 4!
C. ! US Account ..................................................................................................................... 4!
D. ! Financial Account ......................................................................................................... 4!
E. ! US Owned Foreign Entity ........................................................................................... 4!
V.! HOW TO BECOME FATCA COMPLIANT......................................................................... 5!
A. ! The FFI Agreement ....................................................................................................... 5!
B. ! Withholding Requirements Under FFI Agreement .............................................. 6!
C. ! Grandfathered Obligations ......................................................................................... 6!
D. ! Deemed Compliant FFI ................................................................................................ 7!
E. ! NFFEs ............................................................................................................................... 9!
VI.! DUE DILIGENCE ............................................................................................................ 10!
A. ! Requirements for Identification of Account Holders ....................................... 10!
B. ! Standards of Knowledge ............................................................................................ 11!
C. ! Change in Circumstances .......................................................................................... 11!
D. ! Record Retention ......................................................................................................... 11!
E. ! Pre-Existing Accounts ............................................................................................... 12!
VII.! INTERGOVERNMENTAL APPROACH ....................................................................... 12!
A. ! Reciprocal Model Agreement .................................................................................. 12!
B. ! Nonreciprocal Model Agreement ............................................................................ 15!
C. ! Elements shared by both Reciprocal and Nonreciprocal Model Agreements
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D. ! Model II Agreements .................................................................................................. 16!
FATCA OUTLINE
I. INTRODUCTION
Since the U.S. Federal income tax system relies on voluntary compliance from
U.S. taxpayers, and recent improvements in international communications and the
associated globalization of the world economy have resulted in U.S. taxpayers’
investments becoming increasingly global in scope, there is a higher risk than
ever of some U.S. taxpayers’ attempting to evade U.S. tax by hiding money in
offshore accounts.
II. WHAT IS FATCA?
The Foreign Account Tax Compliance Act, commonly referred to as FATCA,
was enacted in 2010 as a part of the Hiring Incentives to Restore Employment, or
HIRE, Act. The provisions contained in FATCA have amended the US Tax Code
by adding “Chapter 4,” which is comprised of sections 1471-1474.
Chapter 4 is essentially the codification of FATCA, and is an extremely important
development in U.S. efforts to combat tax evasion by U.S. persons holding
investments in offshore accounts. To accomplish this, chapter 4 introduces
provisions that:
1. Extend the scope of the U.S. information reporting regime to include
Foreign Financial Institutions (FFIs) that maintain U.S. accounts,
2. Impose increased disclosure obligations on certain nonfinancial foreign
entities (NFFEs) that present a high risk of U.S. tax avoidance, and
3. Provide for withholding on FFIs and NFFEs that do not comply with the
reporting and other requirements of chapter 4.
Generally, FATCA requires non-US foreign financial institutions (FFIs) and non-
financial foreign entities (NFFEs) to identify and disclose their US account
holders and members or become subject to a 30% US withholding tax with
respect to any payment of US source income and proceeds from the sale of equity
or debt instruments of US issuers (referred to as “withholdable payments”).
III. SUMMARY OF PROPOSED REGULATIONS
A. Statutory Provisions
Under the FATCA provisions, a withholding agent is required to withhold 30% of
any withholdable payment to an FFI that does not become a participating FFI or
deemed-compliant FFI. A withholdable payment includes: any payment of
interest, dividends, rents, salaries, wages, premiums, annuities, compensations,
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remunerations, emoluments, and other fixed or determinable annual or periodical
(FDAP) gains, profits, and income, if such payment is from sources within the
United States as well as any gross proceeds from the sale or other disposition of
any property of a type which can produce interest or dividends from sources
within the US. A participating FFI has to:
1. Enter into an FFI agreement to identify its US accounts and comply with
verification and due diligence procedures described by the Secretary.
2. Report certain information on an annual basis to the IRS with respect to
any US account.
3. Withhold 30% of any passthru payment to a recalcitrant account holder or
to an FFI that is non-participating.
4. Apply the requirements of the agreement to the US accounts of the
participating FFI and to the US accounts of each other FFI that is a
member of the same expanded affiliated group.
5. Withhold 30% of any withholdable payment to a non-financial foreign
entity (NFFE) if the payment is beneficially owned by the NFFE or
another NFFE.
Additionally,
1. Certain payments beneficially owned by certain persons, including any
foreign government, international organization, foreign central bank of
issue, or any other class of persons identified by the Secretary as posing a
low risk of tax evasion are EXEMPT from withholding.
2. Withholding also does NOT apply to classes of payments identified by the
Secretary as posing a low risk of tax evasion.
3. Every person required to withhold and deduct any tax under FATCA is
made liable for such tax and is indemnified against the claims and
demands of any person for the amount of any payments made in
accordance with these provisions.
4. The beneficial owner of a payment is entitled to a refund for any
overpayment of tax actually due. However, with respect to any tax
properly deducted and withheld from a payment beneficially owned by an
FFI rather than a natural person, the FFI is not entitled to a credit or
refund, except to the extent required by a treaty obligation of the United
States.
5. Information provided under FATCA is confidential, except that the
identity of a participating FFI is not treated as “return information.”
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6. The Secretary will provide for the coordination of FATCA with other
withholding provisions in the US tax code, including for the proper
crediting of amounts deducted and withheld under FATCA against
amounts required to be deducted and withheld under other provisions.
IV. WHO FATCA EFFECTS
The proposed FATCA regulations are far reaching and can impact any person, US
or foreign, to the extent that such person is involved in making or receiving
payments that fall within the scope of FATCA. While FATCA certainly affects
US withholding agents and multinational companies, the greatest impact will be
to US accounts held at Foreign Financial Institutions (FFIs). However, non-
financial foreign entities (NFFEs) will also be affected.
A. Financial Institution and FFI
1. §1471(d)(4) and §1.1471-5(d) provide that an FFI means “any financial
institution that is a foreign entity.” This means any entity that:
a. Accepts deposits in the ordinary course of a banking or similar
business,
b. Holds as a substantial portion of its business financial assets for the
account of others, or
c. Is engaged (or holding itself out as being engaged) primarily in the
business of investing, reinvesting, or trading in securities,
partnership interests, commodities, or any interest in such
securities, partnership interests, or commodities.
2. Additionally, the Secretary has authority to “prescribe special rules
addressing circumstances in which certain categories of companies, such
as insurance companies, are financial institutions.”
3. An entity is considered to be engaged in banking or similar business if, in
the ordinary course of its business with customers, the entity engages in
one or more of the following activities:
a. Accepts deposits of funds
b. Makes personal, mortgage, industrial, or other loans
c. Purchases, sells, discounts, or negotiates accounts receivable,
installment obligations, notes, drafts, checks, bills of exchange,
acceptances, or other evidences of indebtedness
d. Issues letters of credit and negotiates drafts drawn thereunder
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e. Provides trust or fiduciary services
f. Finances foreign exchange transactions
g. Enters into, purchases, or disposes of finance leases or leased
assets
h. Provides charge and credit card services
B. Non-Financial Foreign Entities (NFFEs)
1. FATCA legislation defines a NFFE as “any foreign entity which is not a
financial institution.”
C. US Account
1. Paragraph (a)(2) of §1.1471-5 defines the term “US account” as “any
financial account maintained by a financial institution that is held by one
or more specified US persons or US owned foreign entities.” Generally, an
account is held by the person listed or identified as the holder of such
account with the financial institution that maintains the account, even if
that person is a “flow-through” entity.
D. Financial Account
1. §1471(d)(2) provides that except as provided by the Secretary, the term
“financial account” means, with respect to any financial institution, “any
depository account maintained by such financial institution; any custodial
account maintained by such financial institution; and any equity or debt
interest in such financial institution (other than interests which are
regularly traded on an established securities market).” These include:
a. Commercial, checking, savings, time, or thrift accounts; an account
evidenced by a certificate of deposit or similar instruments, and
any amount held with an insurance company under an agreement
to pay interest.
b. A “custodial account” is defined to include an account that holds
any financial instrument or contract held for investment for the
benefit of another person.
E. US Owned Foreign Entity
1. Paragraph (c) of §1.1471-5 defines “US foreign entity” as “any foreign
entity that has one or more substantial US owners. Additionally, an owner-
documented FFI will be treated as a US owned foreign entity if it has one
or more direct or indirect owners that are specified US persons, whether or
not it has a substantial US owner.
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V. HOW TO BECOME FATCA COMPLIANT
The 30% FATCA tax on any withholdable payment or foreign passthru payment
will be imposed on FFIs unless they become a participating FFI or qualify for an
exemption. An FFI that is neither deemed compliant nor exempt will have to enter
into a comprehensive FFI Agreement with the IRS, making them a participating
FFI (PFFI), in order to avoid the 30% withholding tax.
A. The FFI Agreement
1. FFIs, including those that are qualified intermediaries (QI), withholding
foreign partnerships, or withholding foreign trusts will be required to
become a PFFI by entering into a comprehensive agreement with the IRS.
a. An FFI Agreement will require a determination of which accounts
are United States accounts, compliance with verification and due
diligence procedures, annual reporting on those US accounts to the
US Treasury, compliance with additional IRS reporting requests,
and withholding 30% tax where applicable.
b. A draft model agreement has been released for an
“intergovernmental approach,” prepared with consultation with
France, Germany, Italy, Spain, and the United Kingdom, which
may allow FFIs in those countries, and others that enter into
similar agreements to avoid having to enter into an FFI Agreement.
2. FFIs that enter into an FFI agreement with the IRS will need to report the
following information on their US accounts:
a. Name, address, and Taxpayer Identification Number (TIN) of each
account holder which is a specified US person
b. Name, address, and TIN of each substantial US owner of a US
owned foreign entity
c. The account number
d. The account balance or value
e. Gross receipts and withdrawals from the account
i. Not required for first year of reporting (2013)
f. Gross dividends, interest, and other income paid or credited to the
account
i. Alternatively, a PFFI may elect to provide full IRS Form
1099 reporting on each account holder that is a specified
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US person or US owned foreign entity as if the holder were
a natural person and citizen of the US.
3. Additionally, the FFI agreement will provide the IRS’s verification
process for determining a participating FFIs compliance. This will require
that the PFFI:
a. Adopt written policies/procedures governing its compliance with
its agreement responsibilities
b. Conduct periodic internal reviews of its compliance
c. Periodically provide the IRS with a certification and certain other
information that will allow the IRS to determine whether the
participating FFI has met its obligations
B. Withholding Requirements Under FFI Agreement
1. A PFFI is required to deduct and withhold a tax equal to 30% of any
withholdable payment made to a recalcitrant account holder or a
nonparticipating FFI after December 31, 2013. These include:
a. Any payment of interest, dividends, rents, royalties, salaries,
wages, annuities, licensing fees and other FDAP (fixed,
determinable, annual, periodical) income, gains, and profits if the
payment is from a US source.
b. Any gross proceeds from the sale of or disposition of US property
of a type that can produce interest or dividends.
i. Includes interest paid by foreign branches of US banks
c. Certain “passthru” payments that are “attributable” to a
withholdable payment. These include any portion of a payment
that is not withholdable multiplied by the entity’s “passthru
payment percentage.”
i. “Passthru payment percentage” is calculated by dividing
the FFI’s US assets by the sum of the FFI’s total assets held
on last four quarterly testing dates.
C. Grandfathered Obligations
1. Payments made under and proceeds from the disposition of an obligation
that is outstanding on January 1, 2013 will not be subject to the FATCA
withholding tax.
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2. “Obligation” refers to any legal agreement that produces or could produce a withholdable payment or passthru payment.
D. Deemed Compliant FFI
Certain types of FFIs will be treated as “deemed compliant” and will not be required to enter into a comprehensive FFI agreement in order to avoid the FATCA tax. There are three types:
1. Registered Deemed-Compliant FFIs
a. Local FFIs:
i. Banks or similar deposit-taking organizations, securities brokers, etc. that are licensed and regulated under the laws of its country and limits activities to that country.
b. Non-Reporting Members of Affiliated Groups:
i. Affiliated Group has one or more PFFIs and doesn’t directly or indirectly maintain accounts for US persons.
c. Qualified Collective Investment Vehicles:
i. Entities that are FFIs only because they are a Foreign Investment Entity if:
(a) Regulated as an investment fund in its country,
(b) Each holder of record of its equity interests, direct debt interests over $50,000 USD, and financial account it maintains is a PFFI, registered deemed-compliant FFI, exempt beneficial owner or US person, and
(c) All other FFIs in its Affiliated Group are either PFFIs or registered-deemed compliant FFIs.
d. Restricted Funds:
i. Entities that are FFIs only because they are Foreign Investment Entities if:
(a) Regulated as an investment fund in its country (which must be FATF-compliant),
(b) Interests in it are sold only through certain distribution channels and are not offered to US
8
persons, non-participating FFIs, or certain types of NFFEs,
(c) Complies with certain other requirements that make sure it maintains no accounts for specified US persons, and
(d) All other FFIs in its Affiliated Group are PFFIs or registered deemed-compliant FFIs.
2. Certified deemed-compliant FFI
a. Non-registering Local Bank:
i. FFI that operates and is licensed only as a bank in its country.
(a) Can’t have more than $175 million in assets.
(b) Affiliated Group can’t have more than $500 million in assets and consist only of other non-registering local banks.
b. Retirement Funds:
i. FFI that’s organized for the provision of retirement or pension benefits.
c. Non-Profits:
i. FFI that is:
(a) Established and maintained exclusively for religious, charitable, scientific, artistic, cultural, or educational purposes, and
(b) Is exempt from income tax in its country.
d. Low-Value Accounts:
i. FFI that is not a Foreign Investment Entity or Insurance FFI if:
(a) No financial account maintained by the FFI or its Affiliated Group has value over $50,000 USD, and
(b) Affiliated group has no more than $50 million in total assets.
9
3. Owner-documented FFIs
a. Entities that are FFIs solely because they are Foreign Investment Entities and DO NOT:
i. Affiliate with any other FFI other than those that are also only Foreign Investment Entity FFIs,
ii. Maintain a financial account for any non-participating FFI; or
iii. Issue debt to any person over $50,000.
E. NFFEs
1. Excepted NFFEs
For account holders that are non-financial foreign entities (NFFEs), some will be considered “excepted” or exempt from FATCA withholding.
a. Excepted by Statute
Some NFFEs will be excepted by statute from the withholding requirement, and include:
i. Publicly traded corporations
ii. Certain territory entities
iii. NFFEs with exempted beneficial owners, such as foreign governments
b. Active NFFE Exception
Active NFFEs are also excepted from FATCA withholding. An “Active” NFFE is an entity that derives less than 50% of its income from certain types of investments and holds less than 50% of assets that are a type that produce passive income. Active NFFEs will generally operate an active trade or business.
2. Non-Excepted NFFE
“Passive” NFFEs are not excepted from withholding by FFIs and US withholding agents. A passive NFFE is any NFFE that is not excepted.
a. Accounts less than $1 Million
If a passive NFFE account holder has a previous year-end balance of less than $1 million USD, the FFI conducting the analysis can rely on its local laws to identify beneficial ownership.
10
b. Accounts over $1 Million
If the balance or value of the account is over $1 million USD, the FFI has to identify substantial US owners, which means greater than 10% ownership by a US person.
VI. DUE DILIGENCE
A. Requirements for Identification of Account Holders
1. Determination of Status
a. A PFFI must base its determination of the identification of its US account holders on documentation that the PFFI can reliably associate with their payments and transactions.
b. A PFFI can reliably associate valid documentation with a US account holder when it does not know or have reason to know that any of the information, certifications, or statements in or associated with the documentation are unreliable or incorrect.
c. A PFFI is required to collect and/or review:
i. A Form W-9 or W-8 from each individual account holder in order to identify its US accounts.
ii. All information collected with respect to the opening or maintenance of each account to determine if the account holder has US indicia. For purposes of the account identification process, an account holder is treated as having US indicia if the information the PFFI reviews includes any of the following:
(a) Identification of account holder as a US resident or citizen,
(b) US place of birth,
(c) US resident address or US mailing address (including PO boxes),
(d) US telephone number,
(e) Standing instructions to transfer fund to an account maintained in the US,
(f) Power of attorney or signatory authority granted to a person with a US address, or
11
(g) An “in-care-of” address or “hold mail” address that
is the only address that can be identified.
B. Standards of Knowledge
1. A PFFI may rely on documentation maintained in its files unless it knows
that information to be unreliable or incorrect.
2. A PFFI will be liable for tax, interest, and penalties if it fails to withhold
the correct amount despite knowing or having reason to know the amount
required to be withheld.
3. A PFFI may not treat documentary evidence provided by an account
holder as valid if it does not reasonably establish the identity of the person
presenting it.
4. A PFFI that has received notification by the IRS that a claim of status of a
US person, or other entity entitled to a reduced withholding rate is
incorrect will be deemed to “know” that such claim is incorrect 30 days
after notice is received.
5. “Reason to Know.” A PFFI will be considered to have reason to know that
information is unreliable or incorrect if its knowledge of relevant facts or
statements contained in the withholding certificates or other
documentation is such that a reasonably prudent person in the position of
the withholding agent would question them.
C. Change in Circumstances
1. With respect to an account that meets the documentation requirements
previously described, but does not meet them in a subsequent year, this
will be treated as a change in circumstances and the PFFI must obtain the
appropriate documentation within 90 days after it requests it from the
account holder, after which the account will be treated as a recalcitrant
account holder.
D. Record Retention
1. A PFFI must retain either an original, certified copy, or photocopy of the
documentation collected to determine the FATCA status of its account
holders.
2. With respect to preexisting accounts, a PFFI must retain the
documentation collected, including requests made and responses to
inquiries, and all results from electronic searches, for six calendar years
following the year in which the account identification procedures were
performed.
12
E. Pre-Existing Accounts
1. In general, no due diligence will be required for pre-existing accounts with values up to $250,000 USD (if maintained for entities) or up to $50,000 USD (if maintained for individuals).
2. With respect to pre-existing accounts maintained for individuals outside the US with values up to $1 million USD, a PFFI will be permitted to rely primarily on electronically searchable information.
VII. INTERGOVERNMENTAL APPROACH
In February, 2012, the United States Treasury Department issued a joint statement from the United States, France, Germany, Italy, Spain, and the United Kingdom regarding an intergovernmental approach to improving international tax compliance and implementing FATCA. The proposed intergovernmental approach is intended to remove certain legal complications to FATCA compliance and reduce the financial burden to FFIs in the participating countries.
Since the joint statement was released in February, the Treasury Department has released a joint communiqué with France, Germany, Italy, Spain and the United Kingdom introducing two types of model agreements for the participating countries: reciprocal and nonreciprocal. Additionally, the Treasury Department has released joint statements with Japan and Switzerland announcing a forthcoming set of “Modell II” Agreements with them.
A. Reciprocal Model Agreement
The Reciprocal Model Agreement is for the partner countries with which the U.S. has already established income tax treaties or tax information exchange agreements. Additionally, these countries must have a record of stringent protections and practices to ensure that the information remains private and is only used for tax purposes. Whether the partner country’s protections are “robust” enough will be determined by the U.S. on a case by case basis.
1. Article 1 of the Reciprocal Model Agreement provides definitions.
2. Article 2 of the Reciprocal Model Agreement contains the “Obligations to Obtain and Exchange Information with Respect to Reportable Accounts.” It outlines that the information that is to be obtained and exchanged in the case of the reporting FATCA partner financial institutions (“RFPFIs”) as to their U.S. reportable accounts as well as that of the U.S. as to each RFPFI’s reportable accounts.
a. In the case of the RFPFI with respect to each U.S. Reportable Account:
13
i. Name, address, and U.S. TIN of each specified U.S. person
that is an account holder of such account
ii. Account number (or equivalent)
iii. Name and identifying number of the RFPFI
iv. Account balance or value (including the cash or surrender
value of cash value insurance or annuity contracts) as of the
end of the relevant calendar year or other appropriate
reporting period or, if account was closed during such year,
immediately before closure
v. For any Custodial Account:
(1) Total gross amount of interest, dividends,
and other income generated with respect to
the assets held in the account, paid or
credited to the account (or with respect to
the account) during the calendar year or
other appropriate reporting period.
(2) Total gross proceeds from the sale or
redemption of property paid or credited to
the account during the calendar year or other
appropriate reporting period with respect to
which the RFPFI acted as a custodian,
broker, nominee, or otherwise as an agent
for the account holder.
vi. For any Depository Account, the total gross amount of
interest paid or credited to the account during the calendar
year or other appropriate reporting period
vii. For any account not described in (v.) or (vi.), the total gross
amount paid or credited to the account holder with respect
to the account during the calendar year or other appropriate
reporting period with respect to which the RFPFI is the
obligor or debtor, including the total amount of any
redemption payments made to the account holder in the
specified reporting period.
b. In the case of the United States, with respect to each FATCA
Partner reportable account of each reporting U.S. financial
institution:
14
i. Name, address, and FATCA partner TIN of any person
who is a resident of FATCA partner and is an account
holder on the account
ii. Account number or equivalent
iii. Name and identifying number of reporting U.S. financial
institution
iv. Gross amount of interest paid on a Depository Account
v. Gross amount of U.S. source dividends paid or credited to
the account
vi. Gross amount of other U.S. source income paid or credited
to the account, to the extent they are subject to reporting
under Ch. 3 or 61 or subtitle A of U.S. Code.
3. Article 3 of the Reciprocal Model Agreement details the “Time and
Manner of Exchange of Information.” Notably:
a. The amount and characterization of the payments made regarding
U.S. reportable accounts can be determined by the tax law of the
FATCA partner country, and those made regarding FATCA
partner reportable accounts can be determined by U.S. tax law.
b. The currency in which the amount is denominated shall be noted.
c. All information to be obtained and exchanged begins for 2013 and
is for all subsequent years, with some exceptions detailed in the
agreement.
d. Neither the U.S. nor RFPFI are responsible for including the TIN if
it is not in the records, but should include the relevant person’s
date of birth if available.
e. The information from Article 2 needs to be exchanged within 9
months of the calendar year to which it relates, with the exception
of the information for calendar year 2013, which can be exchanged
no later than September 30, 2015.
f. FATCA partner country authorities will enter agreements with the
U.S. regarding the enactment of legislation and procedures for the
implementation of the Reciprocal Model Agreement.
4. Article 4 details the “Application of FATCA to the FATCA Partner
Financial Institutions.” Notably:
15
a. RFPFI will report all of the required information annually to their
own governmental tax agency as well as the name of and total
amount of payments made to Nonparticipating FFIs.
b. RFPFI must comply with registration requirements of their
respective jurisdictions.
c. RFPFI must withhold 30% of any U.S. source withholdable
payment to any Nonparticipating FFI when they are acting as a QI.
d. When acting as a QI in cases not described, a RFPFI must provide
any immediate payor that is a Nonparticipating FFI of any U.S.
source withholdable payment with the information required for
withholding and reporting.
e. Suspension of Rules relating to Recalcitrant accounts. The U.S.
will not require a RFPFI to withhold tax on any recalcitrant
account holder or to close the account if appropriate
documentation is provided.
B. Nonreciprocal Model Agreement
The Nonreciprocal Model Agreement, as its name suggests, differs from the
Reciprocal Model Agreement only in that it does not provide for the U.S. to send
certain information on U.S. Accounts held by residents of the partner country to
that FATCA partner. All reporting requirements for the RFPFIs obtaining and
exchanging of the necessary information on U.S. accounts remain the same, and
the RFPFIs in Nonreciprocal agreements also report to their own country’s tax
agency rather than to the IRS.
C. Elements shared by both Reciprocal and Nonreciprocal Model
Agreements
1. Both model agreements establish a framework for bilateral agreements
with other countries under which the FFI operating in that country may
report the required FATCA information to the relevant tax authority of the
FATCA partner instead of to the U.S. Internal Revenue Service, who will
then transmit this information to the IRS under their agreement.
2. In both agreements, the eligibility for home country reporting is based on
the location of a financial institution’s relevant branch, not where the
financial institution is incorporated or otherwise tax resident. I.e. a
German branch of a bank incorporated in France would report to the
German tax authority under an agreement with Germany rather than to the
French tax authority under an agreement with France.
3. Both agreements provide the benefits of:
16
a. Being treated as FATCA Compliant
b. Suspension of rules relating to Recalcitrant Account Holders
c. Relaxation of Related Entity requirements
D. Model II Agreements
At the end of June 20120, the U.S. Department of Treasury issued two joint
statements, one with Switzerland and one with Japan, that contemplate a third
approach for implementation of FATCA. Dubbed the “Modell II” Agreements,
this third approach is a hybrid between the straight FFI Agreement and the
Reciprocal and Nonreciprocal Intergovernmental Agreements. In the Model II
agreements, FFIs would satisfy their reporting requirements by reporting directly
to the U.S. Treasury, supplemented by exchange of information between the
relevant countries upon request, in the hopes of simplifying the implementation of
FATCA.
*Draft Modell II Agreements have not yet been released.
17
EXHIBIT A: TIMELINE
A. 2010
*March 18, 2010: FATCA provisions signed into law as part of the Hiring
Incentives to Restore Employment (HIRE) Act.
*August 27, 2010: IRS issues the first round of FATCA guidance.
- Notices 2010-60, which include definition of a FFI, certain exemptions,
and account documentation and reporting requirements.
B. 2011
*April 8, 2011: IRS issues the second round of FATCA guidance.
-Notices 2011-34, which revise certain requirements introduced in Notices
2010-60 and provide further guidance on “priority concerns,” including passthru
payments
*July 14, 2011: IRS issues Notice 2011-53
-Provides additional time for participating FFIs to enter into FFI
agreements and implement FATCA’s requirements associated with account
identification, information reporting, and withholding.
*July 25, 2011: IRS issues revised Notice 2011-53.
-Clarifies that the revised withholding timeline applies to payments made
by all withholding agents to both FFIs and NFFEs.
C. 2012
*February 8, 2012: IRS releases proposed regulation with significant changes and
clarifications to prior guidance, including updated timelines for grandfathered
debt obligations, reporting, and withholding.
*April 30, 2012: Due date for written comments to be submitted to Treasury
Department and the IRS on the proposed regulations.
*May 15, 2012: Public hearing on proposed regulations.
-Held in Washington, D.C.
*June 21, 2012: U.S. Treasury releases Joint Statement with Japan regarding
Model II Agreement framework.
18
*July 26, 2012: U.S. Treasury publishes Reciprocal and Nonreciprocal Intergovernmental Model Agreements to provide for alternative means of complying with FATCA.
*July 18, 2012: IRS releases draft Form W-8BEN incorporating FATCA classification.
*July 30, 2012: U.S. Treasury releases Joint Statement with Switzerland regarding Model II Agreement framework.
*August 14, 2012: IRS releases draft Form W-8IMY incorporating FATCA classification.
*September 12, 2012: US and UK enter into intergovernmental agreement for FATCA complience.
*Fall 2012: Final FATCA regulations expected to be released from IRS and Treasury Department.
D. 2013
*January 1, 2013: FATCA becomes effective for US institutions
-Accounts opened prior to January 1, 2013 will be considered “pre-existing” at United States Withholding Agents (USWAs). USWAs may begin entity account due diligence at any time.
-FATCA-compliant onboarding processes/systems must be operational
-FFI electronic application process expected to begin.
~Grandfathered obligations. FATCA withholding not required on obligations outstanding on January 1. 2013 unless materially modified.
*June 30, 2013: Cutoff for electronic applications
-Electronic FFI applications submitted by June 30, 2013 will be effective July 1. Applications submitted after June 30 will be effective as of date entered.
*July 1, 2013: Earliest possible effective date for FFI agreement to be effective.
-Any accounts opened prior to effective date of an FFI agreement will be considered “pre-existing” accounts. Effective date used to determine account balance/value for purposes of applying $50,000 USD “de minimis” rule for individual accounts, and $250,000 USD for entity accounts. FATCA-compliant onboarding systems must be in place.
*December 31, 2013: Deadline to receive documentation from certain pre-existing accounts.
19
-USWAs must complete due diligence review and obtain any necessary
additional documentation with respect to pre-existing accounts held by prima
facie FFIs.
E. 2014
*January 1, 2014: FATCA withholding begins.
-USWAs must withhold on US-sourced FDAP payments to new accounts
held by documented non-participating FFIs and presumed FFIs and on pre-
existing accounts held by undocumented prima facie FFIs.
-Participating FFIs must withhold on US-sourced FDAP payments to
undocumented new accounts, and new accounts held by non-participating FFIs.
*June 30, 2014: Cutoff for first FATCA reporting; High value and prima
facie account due diligence deadline, & Responsible officer certification.
-Participating FFIs must determine reporting population for 2013
information returns due on September 30, 2014 for US and recalcitrant accounts.
-Participating FFIs must complete due diligence review and receive
necessary documentation with respect to pre-existing high value individual
accounts and accounts of prima facie FFIs.
-A responsible officer of a participating FFI must certify, under penalty of
perjury, that pre-existing high-value individual account holder due diligence is
complete, and that policies preventing staff from aiding customers to avoid
FATCA are in place.
*July 1, 2014: Participating FFIs must complete classification of accounts and
begin withholding.
-FFIs must withhold on US-sourced FDAP payments made to pre-existing,
undocumented high value individual account holders, documented non-
participating FFIs, and prima facie FFI accounts.
*September 30, 2014: First participating FFIs report to IRS.
-Participating FFIs must report YE2013 balances and identifying
information for specified US accounts, and report YE2013 aggregate value for
recalcitrant accounts.
*December 31, 2014: US deadline to receive outstanding documentation for pre-
existing accounts.
-USWAs must complete review of pre-existing accounts and collection of
any additional documentation required.
20
F. 2015
*January 1, 2015: FATCA gross proceeds phased in.
-USWAs begin withholding on gross proceeds from the sale of property
that can produce US-source interest or dividends to all documented non-
participating FFIs.
-Participating FFIs begin withholding on payments of gross proceeds from
the sale of property that can produce US-source interest or dividends to pre-
existing, undocumented high value individual account holders, documented non-
participating FFIs, and prima facie FFI accounts as well as undocumented new
accounts, and new accounts held by non-participating FFIs.
*March 31, 2015: Second FFI annual report to IRS.
-Participating FFIs must report YE2014 balances and identifying
information for specified US accounts, and report YE2014 aggregate value for
recalcitrant accounts.
*June 30, 2015: FFI documentary deadline; Responsible officer certification.
-Participating FFIs must complete review and collection of any additional
documentation required with respect to all other (non-high value) pre-existing
individual and (non-prima facie) entity accounts.
-A responsible officer of a participating FFI must certify, under penalty of
perjury, to IRS that all pre-existing account due diligence has been completed.
*July 1, 2015: FATCA gross proceeds withholding phased-in.
-Participating FFIs must begin FATCA withholding on payments of gross
proceeds from the sale of property that can produce US-source interest or
dividends to all recalcitrant, documented non-participating FFIs and presumed
FFIs.
*September 20, 2015: All required FATCA reporting information for FATCA
partner countries in Reciprocal and Nonreciprocal agreements must be submitted
for the calendar year of 2013.
G. 2016
*January 1, 2016: Limited FFI exemption expires.
-Members of a participating FFI’s expanded affiliated group with local
law restrictions to compliance will no longer be able to claim the limited FFI
exemption from compliance.
21
*March 15, 2016: 1042-S reporting expands.
-USWAs and participating FFIs must report 2015 US-sourced FDAP and
gross proceeds paid to non-US accounts
*March 31, 2016: FATCA annual reporting adds income reporting.
-Participating FFIs must report 2015 income paid or credited to specified
US accounts in addition to data categories in previous years.
H. 2017
*January 1, 2017: Withholding on foreign passthru payments.
-Proposed regulations “reserved” on definition of foreign passthru
payments. Any required withholding on such payments will not occur before this
date.
*March 31, 2017: FATCA reporting adds gross proceeds.
-Participating FFIs must report gross proceeds in addition to all data fields
reported previously.
!
Reproduced with permission from Tax Management In-ternational Journal, 41 Tax Mgmt. Int’l J. 267,06/08/2012. Copyright ! 2012 by The Bureau of NationalAffairs, Inc. (800-372-1033) http://www.bna.com
FATCA ImplementationMoves Forward, but MuchRemains to Be Doneby Carol P. Tello, Esq.*
Sutherland Asbill & Brennan LLPWashington, D.C.
INTRODUCTIONWith the issuance of the proposed FATCA1 regula-
tions,2 the Joint Statement with the governments offive European Union (EU) countries, and the final de-posit interest reporting regulations,3 the U.S. Treasuryand Internal Revenue Service (IRS) have taken impor-
tant steps toward implementation of the FATCA pro-visions. This article first will examine the issues relat-ing to the implementation of FATCA and, in the sec-ond part, examine the most significant provisions ofthe proposed regulations under (§§1471–1474).
The long-awaited proposed FATCA regulationswere issued on February 8, 2012, along with the ac-companying Joint Statement. The proposed regula-tions are comprehensive and cover all aspects ofFATCA compliance. Importantly, the proposed regula-tions defer the effective dates of the Notice 2011-534
phased-in FATCA reporting and withholding provi-sions; leave open the definition of a foreign ‘‘passthrupayment’’; and set the effective date for withholdingon foreign passthru payments for January 1, 2017.
FATCA IMPLEMENTATION STEPS
Joint StatementThe Joint Statement essentially is an agreement
among the United States, France, Germany, Italy,Spain, and the United Kingdom to explore a commonapproach to FATCA implementation. The proposedapproach would be for each country to enter into anIntergovernmental Agreement (IGA) with the UnitedStates. Under such an IGA, FATCA would be imple-mented through local legislation in the foreign coun-try (‘‘the FATCA partner’’) that would permit the col-lection of the information required by FATCA.FATCA reporting would be channeled through theFATCA partner, which would then automatically
* Carol P. Tello is a partner in the Tax Practice Group of Suth-erland Asbill & Brennan LLP based in Washington, D.C. She isthe author of 915 T.M. (Bloomberg BNA Tax & Accounting),Payments Directed Outside the United States — Withholding andReporting Under Chapters 3 and 4; ‘‘Summer Brings FATCA Re-lief After an April Shower of FATCA Guidance: Notices 2011-34and 2011-53, 40 Tax Mgmt. Int’l J. 507 (Sept. 2011); ‘‘Summer’sLast Gasp: Notice 2010-60 — Preliminary Guidance UnderFATCA,’’ 39 Tax Mgmt. Int’l J. 760 (Dec. 2010), and ‘‘Reporting,Withholding, and More Reporting: HIRE Act Reporting and With-holding Provisions,’’ Tax Mgmt. Int’l J. 243 (May 2010).
1 FATCA refers to the Foreign Account Tax Compliance Act,codified as chapter 4 (§§1471–1474) of the Internal RevenueCode of 1986, as amended (‘‘Code’’). Except as otherwise speci-fied, all section references are to the Code and the underlyingTreasury regulations.
2 77 Fed. Reg. 9022 (2/15/12).3 77 Fed. Reg. 23991 (4/19/12). 4 2011-32 I.R.B. 124.
Tax Management
International Journal™
Tax Management International Journal! 2012 Tax Management Inc., a subsidiary of The Bureau of National Affairs, Inc. 1
ISSN 0090-4600
transfer that information to the United States underexisting bilateral treaties.
In exchange, the United States would agree toeliminate: (1) the Foreign Financial Institution (FFI)Agreement requirement for FFIs in a FATCA partner(provided that each FFI registers with the IRS); and(2) the withholding obligation. In addition, the UnitedStates would promise to reciprocate in collecting andexchanging, on an automatic basis, information on ac-counts held by U.S. financial institutions that areowned by residents of the FATCA partner.
The Joint Statement is important for several rea-sons. First, without foreign government cooperation,FATCA cannot be implemented due to the conflict oflaws issue. Under EU law, for example, data privacylaws prohibit the collection of the information neces-sary for EU FFIs to satisfy the FATCA reporting pro-visions. Even if EU FFIs could collect the informa-tion, under existing law EU FFIs cannot provide suchinformation to the IRS. Thus, the first prong of the in-tergovernmental approach, i.e., the agreement to pro-vide local implementing legislation that would allowlocal FFIs to collect and report the required FATCAinformation to local governments, is essential toimplementation of FATCA.
The second reason the Joint Statement is crucial isbecause it was made between the United States andthe top five countries by GDP5 of the 27-member EU.Although the Joint Statement is only with EU coun-tries (and not Switzerland), it is important from aneconomic perspective that the U.S. Treasury hasachieved an agreement in principle with the most sig-nificant EU countries. Moreover, the Joint Statementgovernment-to-government approach can build on theexisting EU Saving Directive.6 Significantly, Switzer-land and four other non-EU banking centers have en-tered into bilateral agreements with the EU in whichthose countries are permitted to withhold tax ratherthan to report information. Because Swiss financialinstitutions have traditionally maintained a large num-ber of nonresident accounts, this may be important tobuild on these relationships.
More recently, the Irish Funds Industry Association(IFIA) announced that the Irish Revenue Commis-sioners confirmed that they are in contact with U.S.Treasury officials to discuss a common approach toFATCA. An IFIA April 23, 2012, news release reportsthat a model global agreement is being consideredthat would be adopted under exchange of informationprovisions contained in tax treaties or would be a free-
standing agreement. The IFIA news release suggeststhat a model agreement is expected by June 30, 2012,which would contain automatic exchange of informa-tion provisions.
Other countries have reportedly begun engaging intalks with the U.S. Treasury Department concerningFATCA. Representatives of the Russian Federal TaxService held discussions with the Treasury during avisit to Washington, D.C. on April 11 and 12, 2012.7
Canada, not unsurprising, is also reported to havebegun negotiations with the Treasury.8 Although therehave been no official or even unofficial announce-ments about what China will do, Manal Corwin,Deputy Assistant Secretary for International Tax Af-fairs, was quoted as saying: ‘‘We look forward toholding discussions with China. . . and exploring thepossibility of a government-to-government approachto FATCA implementation.’’9
Final Deposit Interest ReportingRegulations
The third major step toward FATCA implementa-tion was the issuance of the final deposit interest re-porting regulations on April 17, 2012, which requireU.S. banks, U.S. middlemen, and other U.S. payors ofdeposit interest to report deposit interest earned bynonresident alien individuals who reside in a countrywith which the United States has in force anexchange-of-information agreement.10 Significantly,unlike other types of interest paid to foreign persons,reporting is not required on deposit interest earned bycorporations and foreign governments.11
Issued simultaneously with the final deposit interestreporting regulations was Rev. Proc. 2012-24,12
which provides a list of countries with which theUnited States has in effect an exchange-of-
5 See International Monetary Fund, World Economic OutlookDatabase, April 2011 edition.
6 See remarks of Michael Caballero, Treasury International TaxCounsel, Mar. 6, 2012, at the annual Institute of InternationalBankers Conference.
7 See 87 Bloomberg BNA Daily Tax Rpt. I-1 (5/7/12). The DailyTax Report also included a letter from the Russian Finance Min-istry, Letter No. 03-08-07 (released May 4, 2012), in which theFinance Ministry stated that FATCA violates the principle of sov-ereign equality of nations and that mandatory enforcement ofFATCA is not contemplated. However, the letter (in Russian) isreported to state that any exchange of information must be recip-rocal and based on the 1992 U.S.-Russia income tax treaty. Not-withstanding the apparent firm stand on FATCA compliance, theRussian Finance Ministry and Federal Tax Service plan to engagein negotiations once the Joint Statement countries provide a modelagreement.
8 The Globe and Mail (Ottawa) (5/9/12).9 Wall St. J. at A2 (May 12–13, 2012).10 Prop. Regs. §1.6049-8(a). Note that aggregate amounts of
less than $10 are not required to be reported.11 This is because corporations and foreign governments are
‘‘exempt recipients’’ for purposes of §6049. See Prop. Regs.§1.6049-4(c)(1)(ii)(A) and (c)(1)(ii)(F).
12 2012-20 I.R.B. 913 (5/14/12).
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information agreement, either as part of an income taxtreaty or as a separate agreement. Financial institu-tions that maintain deposits of customers who areresident in those countries will be required to reportto the IRS on Form 1042-S for interest paid on thosedeposits beginning on January 1, 2013. Rev. Proc.2012-24 also lists countries with which the UnitedStates automatically exchanges information. Atpresent, automatic information exchanges occur onlywith Canada.13 Presumably, the five EU countries thatjoined in the Joint Statement will be added in the nearfuture, assuming that each concludes an IGA with theUnited States.
The issuance of the final deposit interest reportingregulations is a necessary (but perhaps insufficient)step in FATCA implementation because of the prom-ise by the United States under the Joint Statement toreciprocate in exchanging information on U.S. ac-counts owned by FATCA partner residents.14 Informa-tion exchange on deposit interest may not be sufficientbecause FATCA applies to a broader range of income.It is not clear how much ‘‘reciprocity’’ will be re-quired by FATCA partners.
However, reciprocity may not mean an equalamount of exchange between the U.S. and its FATCApartners. In remarks to the May ABA Tax Sectionmeeting, a Treasury official discussed the meaning ofreciprocity and stressed that information sharing onthe part of the United States will occur only where itis ‘‘appropriate.’’ Accordingly, the threshold require-ment will be an IGA. The Treasury official said thatreciprocity may not be part of all of the IGAs andonly where appropriate. Even where reciprocity is in-cluded in an IGA, item-by-item information sharingwill not necessarily be required.15
Although all U.S.-source interest other than depositinterest has been subject to reporting (and withhold-ing to the extent it is not portfolio interest or exemptunder a treaty) under §§1441 and 1442, deposit inter-est of nonresident aliens has not been subject to re-porting other than for deposit interest paid to Cana-
dian residents since 2002.16 Deposit interest (includ-ing interest paid on an account with a bank, a savingsinstitution, or an insurance company), although U.S.-source interest, is not subject to U.S. tax when paid toa foreign person under §871(i)(2)(A) or §882(d) andis not subject to §1441.17 However, under currentregulations, a foreign person must provide a FormW-8BEN in order to avoid reporting or backup with-holding under §6049. The final deposit interest report-ing regulations permit a U.S. financial institution toreport a customer’s country of residence based on thecustomer’s permanent address listed on FormW-8BEN. Forms W-8BEN are required to be signedunder penalties of perjury.
The Preamble to the final deposit interest reportingregulations addresses the major issues raised by com-mentators who object to the reporting of deposit inter-est. Although it is clear that business concerns areparamount to U.S. banks, particularly those banks lo-cated in border regions,18 the commentators expressedconcerns about confidentiality and protection of infor-mation and use of the information for other than taxpurposes.19 These concerns from various bankingtrade groups had successfully caused the withdrawalof the 2001 deposit interest reporting regulations thatwould have applied to all nonresident aliens, and in
13 Mexico has requested automatic information exchanges withthe United States. See the Feb. 9, 2009 letter from the MexicoMinistry of Finance to Secretary Geithner. Although the UnitedStates has not instituted an automatic bank deposit interest infor-mation exchange with Mexico, Mexico and Canada have insti-tuted an automatic exchange of information.
14 The Preamble to the final deposit interest reporting regula-tions expressly notes that the regulations will ‘‘facilitate intergov-ernmental cooperation on FATCA implementation by better en-abling the IRS, in appropriate circumstances, to reciprocate by ex-changing information with foreign governments for taxadministration purposes.’’ 77 Fed. Reg. 23392.
15 Reported remarks of Michael Plowgian, Attorney-Advisor,Treasury Office of Tax Policy, 92 Daily Tax Rpt. G-10 (5/14/12).
16 Former Prop. Regs. §1.6049-8.17 §1441(c)(10). The Foreign Investors Tax Act of 1966, P.L.
89-809, 89th Congress, 1966-2 C.B. 656, amended §861(a)(1)(A)of the Code. Effective after 1966, §861(a)(1)(A) provided that in-terest described in subsection (c) received by a nonresident alienindividual or a foreign corporation, if such interest is not effec-tively connected with the conduct of a trade or business within theUnited States, shall not be treated as income from sources withinthe United States. Thus, until 1986, deposit interest was treated asforeign-source income by statute, which, of course, removed itfrom the application of §1441.
18 See Statement of J. Thomas Cardwell before the House Fi-nancial Services Committee, Subcommittee on Financial Institu-tions and Consumer Credit, on Oct. 27, 2011, and House Com-mittee on Ways and Means News Release on a request to the Sec-retary of the Treasury by Oversight Subcommittee ChairmanCharles Boustany (R-La.) to ‘‘suspend’’ the proposed deposit in-terest reporting regulations on the basis that the regulations couldhurt the economy by driving foreign investment out of the UnitedStates. Rep. Boustany continues to pursue the issue. In a May 11,2012 letter to Secretary Geithner, Rep. Boustany asks that theTreasury respond ‘‘in full’’ to his earlier letter, which requested allcorrespondence and other documents that bear on the conclusionthat neither the Administrative Procedures Act nor Executive Or-der 12866 apply to the regulations. See also S. 1506 (Sen. Rubioon 8/2/11) and H.R. 2568 (Rep. Posey on 7/15/11) to prohibit de-posit interest reporting. All of this opposition overlooks the factthat reporting on deposit interest of Canadian individuals has beenin effect since 2002 without apparent economic repercussions.
19 See, for example, the Aug. 5, 2011 letter to all Senators fromthe American Bankers Association, the Credit Union Association,the Financial Services Roundtable, the Independent CommunityBankers of America, and the National Association of FederalCredit Unions.
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2002 their replacement with a proposed reporting re-quirement that would have required reporting on resi-dents of 16 designated countries or, at the option ofthe reporting entity, to all nonresident aliens.20
In the Preamble, Treasury responded to the com-mentators in a lengthy discussion, stating that auto-matic information exchanges would occur only withcountries with which the United States has an infor-mation exchange agreement, if certain legal safe-guards and other protections are provided, and thenonly if the country imposes tax on the interest whenpaid to its residents. Curiously, Bermuda, but not theCayman Islands, is on the list. See §3 of Rev. Proc.2012-24. Although both countries have in forceexchange-of-information agreements, neither imposesan income tax. As a result, neither jurisdiction shouldbe on the list. Thus, if Bermuda is retained on the list,deposit interest paid to residents of Bermuda will berequired to be reported, notwithstanding that the re-ported information will not be provided to Bermuda.
Timing of the Implementation ofFATCA
Although the proposed FATCA regulations furtherdefer the implementation of FATCA for FFIs, it is dif-ficult to see how even those deadlines can be met. Un-til an FFI knows whether its country of residence willenter into an IGA, and what the terms of that IGA willbe, an FFI cannot prepare for FATCA implementation.The major impediment continues to be the conflict oflaws that, without an IGA, will require an FFI to ei-ther violate local privacy laws or be non-compliantwith FATCA. Moreover, even if an FFI wants toimplement FATCA, an FFI wants to incur implemen-tation costs only once. Thus, until an FFI knows itsobligations under an IGA, an FFI will not want to pro-ceed with FATCA implementation.
Because of the complicated issues involved inimplementing IGAs, it is hard to see how FATCAimplementation can actually begin on January 1,2013, as planned. Although the reporting and with-holding provisions are deferred until later years, bothU.S. withholding agents and FFIs have much work todo to implement FATCA, as does the IRS, which mustbe ready to receive the required information electroni-cally. In addition to revising, designing, or acquiringnew information technology systems, many FFIs willneed to revise their account opening documents, trainstaff, perhaps obtain regulatory permission to collectthe information, potentially withhold on payments,
and even close accounts in the case of recalcitrant ac-count holders.
Other Steps — More Time NeededBefore the FATCA provisions can be implemented,
the IRS must issue a draft model FFI Agreement anda draft revised Form W-8BEN and provide a commentperiod. Although first reports from the governmentsuggested an end of April release date for the draftFFI Agreement and the draft revised Form W-8BEN,that date has come and gone and the documents likelywill be released by the end of June.21 Allowing for amodest comment period of two months and the timeneeded to review the comments, it is estimated the fi-nal FFI Agreement and Form W-8BEN will be re-leased sometime in November 2012 at the earliest.
Additionally, the final regulations must be promul-gated before implementation can begin. As ambitiousas the Treasury and IRS were about issuing proposedregulations by the end of 2011, the actual issue datewas February 8, 2012. With much work remaining, itis questionable whether the effective dates proposedby the proposed regulations can be met even if IGAswere not needed prior to implementation.
Precedent for DelayThere is precedent for delaying implementation fur-
ther until it becomes clear how the IGAs will impactthe final regulations and other FATCA documents thatneed to be issued. The §1441 regulations were de-layed twice in order to assure an orderly transition tothe new requirements.22 At this point, until the Trea-sury provides guidance as to how FFIs in IGA coun-tries will be impacted and issues final regulations, theFATCA effective dates should be delayed so that FFIswill know with certainty what their FATCA obliga-tions will be.
PROPOSED REGULATIONSThe proposed regulations, consisting of 388 pages,
provide a comprehensive set of guidance for bothFFIs and U.S. withholding agents. In addition to de-ferring the effective dates, the highlights of the pro-posed regulations include relief from the prior duediligence account identification requirements, furtherrelief for pre-existing account due diligence, tempo-rary relief for expanded affiliated groups, new catego-
20 67 Fed. Reg. 50386 (8/2/02). The 2002 proposed regulationswere never finalized and were withdrawn by the 2011 proposedregulations (76 Fed. Reg. 1105 (1/7/11)), which proposed to rein-state reporting on all nonresident aliens.
21 On May 19, 2012, Jesse Eggert, Associate International TaxCounsel, Treasury Office of Tax Policy, indicated that a modelagreement for IGAs and a draft PFFI Agreement could be releasedin a couple of months. 97 Daily Tax Rpt. G-4 (5/20/12).
22 The §1441 regulations originally were scheduled to becomeeffective as of Jan. 1, 1999. However, the effective date was de-layed until Jan. 1, 2000, by T.D. 8804, and then to Jan. 1, 2001,by T.D. 8856.
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ries of deemed compliant FFIs, relief for retirementand other government-sponsored savings plans, relieffor ‘‘ordinary course’’ payments and payments to ‘‘ac-tive’’ Non-Financial Foreign Entities (NFFEs), andthe deferral of withholding on FFI passthru payments.
The proposed regulations demonstrate that Treasuryand the IRS have thoughtfully listened and respondedto the overwhelming number of detailed commentsfrom various industries about how to streamlineFATCA compliance procedures.23 Although additionalrefinements are needed, the proposed regulations rep-resent a leap forward in making FATCA compliancepossible from a practical perspective, assuming thatthe conflict of laws issue will be resolved by IGAs orother means.
Extensions of Effective Dates24
Limited Reporting of U.S. AccountsThe proposed regulations extend the Notice
2011-53 effective dates provided for reporting andwithholding. The limited reporting required under No-tice 2011-53 has been extended for an additional yearso that limited reporting is available for calendaryears 2013 and 2014. Limited reporting means onlythe name, address, the U.S. TIN of each U.S. accountholder, the account balance, and the account numberare required to be reported.25
Reporting of FDAP Income and Gross Proceedsfrom the Sale of FDAP-Producing Property
Reporting of amounts paid that consist of fixed ordeterminable annual or periodical (FDAP) income as-sociated with U.S. accounts, in addition to the abovelimited information, will be required beginning in cal-endar year 2015.26 Reporting of gross proceeds fromthe sale of property that produces FDAP income be-gins with calendar year 2016.27
Withholding Extensions on Foreign PassthruPayments
Withholding on foreign passthru payments will be-gin for payments made on or after January 1, 2017.28
However, for calendar years 2015 and 2016, FFIs will
be required to report separately the aggregate amountof payments made to recalcitrant account holders withU.S. indicia and such account holders without U.S. in-dicia.29 Separate reporting will also be required ondormant recalcitrant accounts.30
Grandfathered Obligations
The proposed regulations expand the statutorygrandfather exemption from FATCA withholding byincluding obligations outstanding on January 1,2013.31 However, if a material modification is made,the obligation will lose its grandfather status if thatmaterial modification is made after January 1, 2013.Material modifications that occur after January 1,2013, will constitute the creation of a new obligationthat would be subject to FATCA withholding.
Additionally, the proposed regulations provide newexamples of obligations that qualify for the extendedeffective date, including revolving credit facilities andcertain life insurance contracts.32 Notably, the grand-father provision exempts qualifying obligations fromwithholding, but not from the FATCA due diligence orreporting requirements.
Pre-Existing Account Due DiligenceUnder the due diligence requirements, an FFI must
identify each account holder as a U.S. account holderor a non-U.S. account holder.33 For those accountholders for which U.S. indicia exist,34 an FFI mustobtain information from the account holder that docu-ments the account holder’s status.35 For entities, an
23 According to the GAO report on FATCA, the Treasury re-ceived 278 public comments and held 45 meetings with stake-holders. See GAO-12-484 Foreign Account Reporting Require-ments (Apr. 2012).
24 See the Appendix for a chart that details the extensions madeby the proposed regulations as compared to the extensions pro-vided by Notice 2011-53.
25 Prop. Regs. §1.1471-4(d)(7)(ii)(A).26 Prop. Regs. §1.1471-4(d)(7)(ii)(B).27 Prop. Regs. §1.1471-4(d)(4)(iv).28 Prop. Regs. §1.1471-4(d)(4)(iv)(C). However, the Preamble
states that withholding on foreign passthru payments would beginat the earliest on Jan. 1, 2017, and expresses some hope that theremay not be a need to not only define a foreign passthru payment,but require withholding on such payments. Certainly, the JointStatement provides that under an IGA, there will be no withhold-ing on FATCA partner FFIs. See §B.2.d. Additionally, as experi-ence is gained with the implementation of FATCA, Treasury sug-gested that there may be ways to simplify passthru payments. Ac-cordingly, Treasury wants to delay the date as of whichwithholding on passthru payments will be required.
29 Prop. Regs. §1.1471-4(d)(6).30 Id.31 Prop. Regs. §1.1471-2(b)(2)(iii).32 Prop. Regs. §1.1471-2(b)(2)(ii).33 Prop. Regs. §1.1471-4(c)(2).34 Prop. Regs. §1.1471-4(c)(4)(i)(A). U.S. indicia include iden-
tification of an account holder as a U.S. resident or citizen, a U.S.place of birth, a U.S. address, a U.S. telephone number, standinginstructions to transfer funds to a U.S. account, a power of attor-ney or signatory authority granted to a person with a U.S. address,or an ‘‘in-care-of’’ address or ‘‘hold mail’’ instruction where noother address is provided.
35 Prop. Regs. §1.1471-4(c)(4)(i)(B).
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FFI must determine whether any of the shareholdersor interest owners are U.S. citizens or residents.36
The proposed regulations made significant changesto the Notice 2011-3437 due diligence procedures ap-plicable to pre-existing individual accounts. This is animportant change for FFIs because having to docu-ment all pre-existing accounts presented an enormousadministrative challenge and costly burden on FFIs.Moreover, serious questions were raised as to whetherFFIs could obtain the necessary information from ac-count holders. If the information could not be ob-tained, an FFI would be required to withhold on those‘‘recalcitrant’’ accounts, which may be prohibited un-der foreign law, leaving the FFI to bear the cost of the30% withholding. Obviously, to the extent that anFFI, rather than a recalcitrant account holder, bearsthe withholding cost, the policy goal of penalizing ac-count holders who will not identify their status is notmet. The reduced due diligence procedures provide acorresponding reduction in burden and recognize thefact that the prior due diligence procedures simplywere impossible to execute.Individual Pre-Existing Accounts
Under the proposed regulations, pre-existing ac-counts of individuals with a balance or value of$50,000 or less (not limited to statutory depository ac-counts) are exempt from review.38 For certain cashvalue insurance contracts and annuity contracts, thisexclusion is increased to $250,000.39 Most signifi-cantly, the proposed regulations permit one-time-onlyelectronic searches for U.S. indicia for pre-existingaccounts that exceed the $50,000 or $250,000 thresh-old, but the value of which is $1 million or less.40
For high-value accounts of more than $1 million,an FFI must perform an ‘‘enhanced review,’’ whichmeans that the FFI must also search its paper files andmake an inquiry of the relationship manager.41 How-ever, the paper file search is limited to the ‘‘customermaster file,’’ i.e., the primary customer file that main-tains account holder information such as informationto contact customers and to satisfy anti-money-laundering law (AML) requirements. This search is
limited to the past five years.42 If the FFI maintainselectronic files that contain certain specified informa-tion, such as the account holder’s nationality or resi-dence status, the FFI is not required to conduct an en-hanced review.43
Entity Pre-Existing AccountsUnder the proposed regulations, pre-existing ac-
counts of entities of $250,000 or less as of the effec-tive date of the FFI Agreement are not subject to re-view until the account exceeds $1 million.44 For en-tity accounts of more than $1 million, an FFI mustreport all substantial U.S. owners or obtain a certifi-cate that the entity does not have any substantial U.S.owners.45 For the remaining entity accounts, an FFIgenerally may rely on its know your customer (KYC)/AML documentation to identify U.S. owners.46
New Account Due DiligenceNew individual accounts are subject to review of
the information obtained under local KYC/AML rulesat opening, and FFIs generally may rely on suchdocumentary evidence. If U.S. indicia are present, theFFI must obtain additional documentation as to thestatus of the individual.47 If such documentation is notprovided, the account must be treated as a recalcitrantaccount subject to withholding.48
For new entity accounts, the key is to obtain certi-fication of the entity’s FATCA status.49
Expanded Affiliated Group IssuesThe statutory requirement under §1471(e)50 that
each member of an expanded affiliated group (EAG)be a participating FFI is problematic for multinationalFFIs, which may have affiliates located in jurisdic-tions where either an IGA will not be executed or civiland regulatory sanctions (and possibly criminal sanc-tions as well) prevent an FFI from collecting FATCA-required information and reporting it to the IRS. If norelief is provided, one EAG affiliate could prevent ev-ery other member of the EAG from becoming a Par-ticipating FFI (PFFI) (an FFI that enters into an FFI
36 Prop. Regs. §1.1471-4(d)(3).37 2011-19 I.R.B. 765.38 Prop. Regs. §1.1471-4(c)(4)(iii)(A). Note that accounts must
be aggregated for this purpose to the extent that an FFI’s comput-erized systems link accounts.
39 Prop. Regs. §1.1471-4(c)(4)(iv).40 Prop. Regs. §1.1471-4(c)(7). Notice 2010-60 had required
that the due diligence procedures for new accounts be applied topre-existing accounts within one or two years of the FFI Agree-ment, which would have required continual redocumentation ofaccount holders — an expensive and onerous administrative re-quirement.
41 Prop. Regs. §1.1471-4(c)(8).
42 Prop. Regs. §1.1471-4(c)(8)(iii)(A).43 Prop. Regs. §1.1471-4(c)(8)(iii)(B).44 Prop. Regs. §1.1471-4(c)(3)(ii)(B).45 Prop. Regs. §1.1471-3(d)(11)(vi)(D)(1).46 Prop. Regs. §1.1471-3(d)(11)(vi)(D)(2).47 Prop. Regs. §1.1471-4(c)(4)(i).48 Id.49 See Prop. Regs. §1.1471-4(c)(3)(i).50 Prop. Regs. §1.1471-4(e)(1) provides that each member of an
EAG must be either a participating FFI or a deemed-compliantFFI.
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Agreement with the IRS), even if it could otherwisedo so under local governing law. To solve this di-lemma, as well as to provide relief to smaller FFIsthat engage in only a purely local business, the pro-posed regulations provide a new category, the ‘‘lim-ited FFI,’’ as a transition for a limited two-year period.Additionally, the categories of ‘‘deemed-compliant’’FFIs (DCFFIs) are expanded. DCFFIs do not have toenter into an FFI Agreement with the IRS.
During the transition period, ‘‘limited FFIs’’ withinan EAG do not disqualify other affiliates as PFFIs. If,after the transition period, each member of an EAGwould be either a PFFI or a DCFFI, no member of theEAG would be denied PFFI status.
‘‘Limited FFI’’In providing the transitional ‘‘limited FFI’’ provi-
sion, Treasury tacitly acknowledges these difficultiesand permits the other members of an EAG to bePFFIs. Members that are unable to become PFFIs dueto local restrictions (such as privacy laws) applicableas of February 15, 2012, may be ‘‘limited FFIs.’’Similar rules apply to ‘‘limited’’ branches.51 The tran-sition period ends on December 31, 2015, which maynot be enough time for a jurisdiction to amend locallaws in order that local FFIs may be PFFIs.52
To qualify as a ‘‘limited FFI,’’ an FFI must agree toclose any U.S. accounts or transfer its U.S. accountsto a PFFI member of the EAG and, with respect to re-calcitrant account holders, withhold on their accounts,block or close such accounts, or transfer such ac-counts to a PFFI.53 In addition, the ‘‘limited FFI’’must register with the IRS, identify its account hold-ers, and report U.S. account holders to the IRS to theextent allowed by local law. Finally, a ‘‘limited FFI’’must agree not to open any new U.S. accounts. Be-cause a ‘‘limited FFI’’ is not a PFFI, it will be subjectto FATCA withholding on any ‘‘withholdable pay-ments’’ it receives from a U.S. withholding agent.
Deemed-Compliant FFIsAs noted above, the category of DCFFI is very im-
portant. The members of an EAG will not be disquali-fied as PFFIs because an EAG may be composed ofPFFI and DCFFI members.54 Significantly, a DCFFIincludes any FFI that is deemed to meet the FFI re-quirements under §1471(b) under an IGA.55 Themembers of an EAG that qualify as DCFFIs will notbe required to enter into an FFI Agreement with the
IRS, but will be deemed to have met the requirementsof §1471(b).56
The proposed regulations greatly expand the cat-egory of DCFFI set forth in Notice 2011-34. In orderto ease the burden on local banks, multijurisdictionalbanks, and certain funds, the proposed regulations de-scribe various types of FFIs that have been deter-mined to present a low risk of tax avoidance. How-ever, the proposed regulations do not include a typeof DCFFI designed for insurance companies, althoughthe Preamble announced that Treasury is consideringwhether additional types of DCFFIs should be added.Treasury stated that consideration is being given to alocal FFI category applicable to companies that issuecertain insurance or annuity contracts.57
DCFFIs are subdivided into two subcategories: (1)registered DCFFIs; and (2) certified DCFFIs.
Registered DCFFIsA registered DCFFI must perform due diligence
procedures with respect to its accounts and certify tothe IRS that it qualifies for DCFFI status under the ap-propriate type of registered DCFFI prior to registra-tion with the IRS as a DCFFI. The certification mustbe renewed every three years. A registered DCFFImust also obtain confirmation of its DCFFI statusfrom the IRS; obtain an FFI-EIN in order to identifyitself to PFFIs and U.S. withholding agents; and re-register with the IRS every three years.58
The proposed regulations provide four types of reg-istered DCFFIs: (1) local FFIs;59 (2) nonreportingmembers of PFFI groups;60 (3) qualified investmentvehicles;61 and (4) restricted funds.62 Each type ofregistered DCFFI has unique requirements for an FFIto qualify and is targeted to certain types of low-riskentities such as a local FFI, which conducts its busi-ness in one jurisdiction, although the EU is treated asone jurisdiction for this purpose.63 The type of ‘‘non-reporting FFI’’ permits a bank or other FFI to groupits U.S. accounts into one reporting PFFI. Thus, theEAG would include one or more PFFIs, while the re-maining affiliate members of the EAG would be non-reporting DCFFIs. The other types of registeredDCFFIs pertain to certain funds that are held by low-
51 Prop. Regs. §1.1471-4(e)(2).52 Accord, Comments of Barclays (4/20/12).53 Prop. Regs. §1.1471-4(e)(3).54 Prop. Regs. §1.1471-4(e)(1).55 Prop. Regs. §1.1471-5(f)(1).
56 Prop. Regs. §1.1471-5(f).57 77 Fed. Reg. 9041.58 Prop. Regs. §1.1471-5(f)(1)(ii).59 Prop. Regs. §1.1471-5(f)(1)(i)(A).60 Prop. Regs. §1.1471-5(f)(1)(i)(B).61 Prop. Regs. §1.1471-5(f)(1)(i)(C).62 Prop. Regs. §1.1471-5(f)(1)(i)(D).63 Prop. Regs. §1.1471-5(f)(1)(i)(A)(5). The Preamble notes
that this rule is provided because FFIs located in the EU havecommon tax reporting or withholding obligations with respect toEU residents. See 77 Fed. Reg. 9035.
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risk investors or have other safeguards built into thedefinition. Although the proposed regulations do notprovide a type of registered DCFFI targeted towardinsurance companies, the Preamble asks for sugges-tions as to how a rule for insurance companies maybe structured.
Certified DCFFIsCertified DCFFIs have even fewer requirements
than registered DCFFIs and generally are targeted tosmaller FFIs. Certified DCFFIs are not required toregister with the IRS. Instead, an FFI must provideeach withholding agent with certain documentationapplicable to the type of certified DCFFI for whichthe FFI believes that it qualifies.64 The types of certi-fied DCFFIs provided by the proposed regulationsare: (1) nonregistering local banks;65 (2) small retire-ment funds;66 (3) certain nonprofit organizations;67
and (4) FFIs with low value accounts.68 A final cat-egory, owner-documented FFIs,69 which is neither aregistered nor a certified DCFFI, seems to be thesmall DCFFI or family trust first described in Notice2010-60.70 Qualification for this type of DCFFI islimited to payments made by a ‘‘designated’’ with-holding agent that agrees to perform the due diligenceand reporting that is required.
U.S. Nonfinancial Withholding AgentsU.S. nonfinancial companies that routinely make
payments that potentially are subject to FATCA willhave reduced burdens under the proposed regulationscompared to U.S. financial institutions. In general, aU.S. corporation that makes a withholdable paymentis a withholding agent for purposes of chapter 4 andtherefore must comply with FATCA. However, theproposed regulations provide a number of very help-ful exceptions.71
‘‘Ordinary Course’’ Payments and Certain OtherPayments
Certain payments will not be treated as ‘‘withhold-able payments’’ and, therefore, will not be subject toFATCA reporting or withholding. For such payments,a withholding agent will not be required to obtain a
Form W-8BEN for FATCA purposes. However, to theextent that a Form W-8BEN is required for §1441 pur-poses, the U.S. withholding agent will be required toobtain a Form W-8BEN from the payee.
A payment made in the ‘‘ordinary course’’ of busi-ness for nonfinancial services, goods, and the use ofproperty is not a ‘‘withholdable payment.’’72 Mostvendor payments will fall into this category, includingpayments for goods and other tangible property, soft-ware licenses, wages, transportation, freight, and of-fice and equipment leases, and payments of interest onoutstanding payables arising from the acquisition ofnonfinancial services. Not included are dividends, in-terest, or dividend equivalent payments when thewithholding agent acts as a custodian, intermediary, oragent. No special documentation is required to dem-onstrate that a payment is an ‘‘ordinary course’’ pay-ment, but a withholding agent should maintain sometype of documentation as proof that the paymentqualifies as an ‘‘ordinary course’’ payment. Presum-ably, the documentation maintained by an accountspayable department will suffice, but it would be help-ful if the final regulations would confirm this assump-tion or otherwise provide guidance.
In addition to ‘‘ordinary course’’ payments, interestand OID on short-term obligations, i.e., with a term of183 days or less, are not ‘‘withholdable payments.’’73
This is an important exception for U.S. multinationalcorporations that raise working capital through the is-suance of commercial paper to foreign persons innon-U.S. financial markets.
Also, payments consisting of effectively connectedincome, unless the income is exempt under an incometax treaty permanent establishment provision, are notconsidered withholdable payments.74
The final category of excluded payments consists ofgross proceeds from the sale of property that producesFDAP income that is excluded under one of the fore-going categories.75
Excepted NFFEs1) Payments to ‘‘Active’’ NFFEs. Payments made to
an ‘‘active’’ NFFE will require only that the ‘‘active’’NFFE provide the U.S. withholding agent sufficientdocumentation to permit the U.S. withholding agentto treat the NFFE as ‘‘active.’’ An NFFE qualifies as‘‘active’’ if less than 50% of its gross income (mea-sured as of the preceding calendar year) is passive in-come and less than 50% of the assets of the NFFE(also measured during the past calendar year) are as-
64 Prop. Regs. §1.1471-5(f)(2).65 Prop. Regs. §1.1471-5(f)(2)(i).66 Prop. Regs. §1.1471-5(f)(2)(ii).67 Prop. Regs. §1.1471-5(f)(2)(iii).68 Prop. Regs. §1.1471-5(f)(2)(iv).69 Prop. Regs. §1.1471-5(f)(3).70 2010-37 I.R.B. 329.71 However, see the very detailed comments of the Tax Execu-
tives Institute (TEI) dated Apr. 30, 2012, in which TEI expressedconcern about the impact of FATCA on its members, most ofwhich are not financial institutions.
72 Prop. Regs. §1.1473-1(a)(4)(iii).73 Prop. Regs. §1.1473-1(a)(4)(i).74 Prop. Regs. §1.1473-1(a)(4)(ii).75 Prop. Regs. §1.1473-1(a)(4)(iv).
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sets that produce or are held for the production of pas-sive income.76 No withholding will be required if anNFFE establishes its FATCA status as an ‘‘active’’NFFE.77 Additionally, no due diligence is required ofthe owners of the ‘‘active’’ NFFE and, therefore, noreporting to the IRS of any U.S. owners is required.78
2) Publicly Traded Nonfinancial Companies orTheir Affıliates.79 This category includes not onlypublicly traded nonfinancial companies but their 50%-or-more-owned subsidiaries.80
3) Territory Entities.81 To qualify, an entity must bedirectly or indirectly wholly owned by one or morebona fide residents of the same U.S. possession underwhich the entity is organized.
4) Exempt Beneficial Owners.82 This category in-cludes certain foreign retirement plans (discussed be-low), foreign governments, and central banks of issue,as well as other similar low-risk entities.
5) Excluded FFIs/Exempted NFFEs.83 For nonfi-nancial U.S. companies, this is an extremely impor-tant category because an entity that is treated as an ex-cluded FFI/exempted NFFE is not subject to FATCAreporting or withholding. This category recognizesthat such entities represent a low risk of tax avoid-ance. For U.S. multinational companies, most ofwhom maintain foreign holding companies to hold thestock of their active operating companies, the excep-tion for nonfinancial holding companies is very im-portant.84
A second important subcategory is the TreasuryCenter exception for nonfinancial groups.85 However,a Treasury Center affiliate may not provide services tononaffiliates to qualify.86 Start-up companies of nonfi-nancial companies with no prior operating history also
may be treated as excluded FFIs/exempted NFFEs,but only for 24 months.87 Finally, any nonfinancialentity in bankruptcy, liquidation, or reorganization istreated as an excepted FFI.88 This last category willbe helpful when a multinational company is restruc-turing its internal organization.Effect of FATCA on U.S. Nonfinancial Companies
As a result of the exclusions from the definition of‘‘withholdable payments,’’ the ‘‘active’’ NFFE andpublicly traded exceptions, and the excluded FFI/exempted NFFE provisions, U.S. nonfinancial compa-nies will have considerably less FATCA complianceburden than their counterpart U.S. financial withhold-ing agents. A significant number of payments made bysuch companies will not be subject to FATCA underthese provisions.
Retirement and Other Government-Sponsored Savings Plans
Relief for retirement and other government-sponsored savings plans is very important due to thenumber of arrangements sanctioned by foreign laws.These accounts generally are small accounts and holdassets designed to provide income upon retirement ordisability, or are designated for educational or othersocietal goals. These plans should be exempt fromFATCA because they pose a de minimis risk of U.S.tax avoidance.
The proposed regulations attempt to provide broadrelief to qualifying retirement and other government-sponsored savings plans, but it is a difficult task dueto the varying requirements of such plans under othercountries’ laws. Because of the restrictions imposed,it would appear that the proposed regulations do notachieve the goal of removing such retirement and sav-ings plans from the operation of FATCA.89
Clearly, it is impractical for the regulations to iden-tify plans in each jurisdiction that would qualify forexemption from FATCA. The proposed regulationsprovide specific requirements that must be met in or-der for a pension or other government-sponsored sav-ings plan to qualify for an exemption, but those testsappear to be modeled on U.S. requirements. Broaderrules of application clearly are required, although itmay be easier said than done to draft such broad rulesthat limit the exclusion to low-risk cases.
This issue should be addressed in an IGA as acountry-specific attachment, similar to the country-
76 Prop. Regs. §1.1472-1(c)(1)(v). The Preamble describes aconjunctive test. See 77 Fed. Reg. 9037. Although the proposedregulations currently use the disjunctive ‘‘or,’’ IRS officials havepublicly announced that the definition will be clarified that bothtests must be met by substituting ‘‘and’’ for the ‘‘or.’’ See the re-marks of Danielle Nishida, Attorney-Advisor, Office of AssociateChief Counsel (International), before the D.C. Bar InternationalTax Committee Meeting on Mar. 7, 2012. See 2012 TNT 46-2(3/8/12).
77 Prop. Regs. §1.1472-1(c)(1).78 Prop. Regs. §1.1472-1(e)(2).79 Prop. Regs. §1.1472-1(c)(1)(i).80 Prop. Regs. §1.1472-1(c)(1)(ii).81 Prop. Regs. §1.1472-1(c)(1)(iii).82 Prop. Regs. §1.1472-1(c)(1)(iv).83 Prop. Regs. §1.1472-1(c)(1)(vi) and Prop. Regs. §1.1471-
5(e).84 Prop. Regs. §1.1471-5(e)(5)(i).85 Prop. Regs. §1.1471-5(e)(5)(iv).86 The TEI comments, above at fn. 67, request that a Treasury
center be permitted to perform de minimis services for unrelatedparties without disqualification.
87 Prop. Regs. §1.1471-5(e)(5)(ii).88 Prop. Regs. §1.1471-5(e)(5)(iii).89 See, for example, the comments of the American Council of
Life Insurers (Apr. 23, 2012), the Hong Kong Federation of Insur-ers (Apr. 30, 2012), and the Canadian Life and Health Insurers(Apr. 5, 2012).
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specific attachments for QI Agreements. Alternatively,in a number of U.S. treaties, government-regulatedpension and savings plans, entitled to treaty benefitsunder the residence article, are identified either by anExchange of Notes90 or by some other means. Poten-tially, plans identified for treaty purposes by the treatypartner’s Competent Authority could also qualify forexemption from FATCA.91
The exclusions are found in various parts of theproposed regulations, depending on the status of theplan or account. Accounts (i.e., those plans that arenot entities) are excluded from the definition of finan-cial account. The first exclusion applies to specifiedgovernment-regulated retirement or pension plans.92
A second exclusion applies to specified government-regulated savings plans.93
Certain funds that are entities, such as trusts,qualify as exempt beneficial owners. An exempt ben-eficial owner is not subject to FATCA withholding andreporting. Exempt beneficial owners will be requiredto identify their FATCA status by providing an appro-priate Form W-8BEN to a withholding agent.94
A retirement fund qualifies as an exempt beneficialowner if the fund: (1) is established in a country withwhich the United States has an income tax treaty, andthe fund is exempt from tax in that treaty country; (2)is operated principally to administer or provide pen-sion or retirement benefits; and (3) is entitled to treatybenefits on income it receives and satisfies the limita-tion on benefits (LOB) provision of the treaty.95
Finally, as noted above in the DCFFI discussion,two types of certified DCFFIs are retirement funds.96
The first type does not limit the number of partici-pants, but limits to 5% the amount of the FFI’s assetsto which any one participant is entitled. Additionally,50% of the contributions to the fund must come fromthe government and the employer.
The second type is for smaller funds. It is limitedto 20 participants and must not be sponsored by anFFI that is an asset manager (investment fund) or apassive NFEE. Nonresident participants of the coun-try in which the fund is organized are limited to nomore than 20% of all participants and no nonresidentparticipant may be entitled to more than $250,000 ofthe FFI’s assets. For both types of retirement funds,contributions must be measured by earned income.
The requirements for both types of DCFFI retire-ment plans are very narrowly drafted, resulting invery few, if any, retirement plans that would qualifyunder either category. It is not clear what the model isfor DCFFI retirement plans and exactly what type ofretirement plans the model is intended to benefit, asdistinguished from other retirement plans excludedelsewhere.
Passthru PaymentsThe proposed regulations bifurcate the definition of
‘‘passthru payment’’ into: (1) any withholdable pay-ment; and (2) any foreign passthru payment.97 Thedefinition of ‘‘foreign passthru payment,’’ however, isreserved.98 Presumably, the withholdable payment isthe payment of U.S.-source income or gross proceedspaid by a U.S. withholding agent, while a foreignpassthru payment is a foreign-to-foreign paymentmade by a PFFI.
Withholding on U.S.-source FDAP withholdablepayments does not begin until January 1, 2014,99
while withholding on gross proceeds begins a yearlater on January 1, 2015.100 The proposed regulationsreserve on withholding on foreign passthru pay-ments.101 However, the Preamble states that withhold-ing on foreign passthru payments will begin nosooner than January 1, 2017, explaining that Treasuryis considering ways to ease the compliance burdensthat arise as a result of the passthru payment con-
90 See, for example, the Exchange of Notes Setting Forth Addi-tional Agreements Regarding the U.S.-U.K. Treaty (July 24,2001).
91 Assuralia, the Belgian Insurance Association, made this pointin its comment letter dated Apr. 26, 2012.
92 Prop. Regs. §1.1471-5(b)(2)(i)(A)(2). To qualify, the accountmust be: (1) subject to foreign government regulation in the coun-try where the FFI that maintains the account operates; (2) tax-favored, i.e., contributions are deductible or the tax on investmentincome is deferred; (3) limited to contributions from an employer,the foreign government, or the employee, determined by referenceto earned income; (4) subject to an annual contribution limit; and(5) subject to legal penalties for early withdrawals or excess con-tributions.
93 Prop. Regs. §1.1471-5(b)(2)(i)(B). This category is forgovernment-sponsored plans other than for retirement. The re-quirements are similar to those for specified government-regulatedretirement or pension plans, including that contributions be lim-ited (here to no more than $50,000 annually) and be determinedwith reference to earned income.
94 Prop. Regs. §1.1471-3.95 Prop. Regs. §1.1471-6(f). Most LOB provisions contained in
U.S. treaties require that 50% or more of the members, partici-pants, or beneficiaries of the retirement plan be residents of theUnited States or the treaty country. See Article 22(2)(d) of the2006 U.S. Model Income Tax Treaty.
96 Prop. Regs. §1.1471-5(f)(2)(ii)(A) and (B).97 Prop. Regs. §1.1471-5(h)(1).98 Prop. Regs. §1.1471-5(h)(2).99 Prop. Regs. §1.1471-4(b)(1).100 Prop. Regs. §1.1473-1(a)(1)(ii). Although this rule provides
that the definition of ‘‘withholdable payment’’ does not apply togross proceeds until after Dec. 31, 2014, its effect is that no with-holding is required until the definition is effective.
101 Prop. Regs. §1.1471-4(b)(3).
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cept.102 The Preamble suggests a safe harbor passthrupercentage and a rounding convention to limit thenumber of passthru percentages that could apply.103
Before withholding begins on foreign passthru pay-ments, FFIs will be required to annually report aggre-gate amounts paid to accounts of recalcitrant accountholders with U.S. indicia and those without U.S. indi-cia, as well as dormant accounts held by recalcitrantaccount holders.104 The Preamble explains that re-porting is required to reduce incentives for NPFFIs touse PFFIs as ‘‘blockers.’’105
For FFIs located in a country with an IGA, passthrupayments may not be an issue. The Preamble statesthat Treasury will try to work with other governmentsto develop practical alternative approaches that willachieve the same policy objectives as withholding onforeign passthru payments.106
Apparently the final FATCA regulations will not fi-nalize any approach to passthru payments, which isnot surprising because the proposed regulations didnot address such payments. Recently, a Treasury offi-cial explained that there may be a different approachbased upon the execution of IGAs and worldwide par-ticipation in FATCA implementation, suggesting thata different system could be used to address FATCAblockers.107
FATCA HEARING, MAY 15, 2012The Treasury and IRS held a hearing on the pro-
posed FATCA regulations on May 15, 2012. The hear-ing, which lasted approximately 31⁄2 hours, was im-pressive in that there were 21 speakers from all overthe world.108 Although each speaker addressed spe-cific issues of importance to their company or indus-try, a number of significant themes emerged.
• More time is needed for implementation.
•• Banks in particular stressed the im-possibility of implementation in 6–14months due to IT, training and proce-dural issues and uncertain timing ofIGAs and requested an implementationdate of 18–24 months following the ex-ecution of an FFI’s FFI Agreement withthe IRS.
•• Speakers called for a uniform begin-ning of implementation for both USFIsand FFIs.
• Align the due diligence account identifica-tion procedures with local KYC/AML rules.
•• Almost every speaker mentioned thispoint.
•• Delete the redocumentation require-ment for accounts with no U.S. indicia.
•• Delete the document retention re-quirement and only require a notationthat documentation was reviewed.
•• Simplify and streamline the entityclassification rules.
• The IGA concept generally was praised, butconcerns were expressed over coordinationwith non-IGA countries, particularly for verylarge, global companies that have affiliates innumerous countries, some of which will notbe able to enter into an IGA.
•• A transition period is needed so thatFFIs do not have to undergo implemen-tation twice.
• In conjunction with the IGA discussion, anumber of speakers voiced concerns overEAGs with nonparticipating FFIs and the endof transition rule for ‘‘limited’’ branches andaffiliates, which would mean under the pro-posed regulations that otherwise compliant af-filiates within an EAG may not qualify forparticipating FFI status.
•• Many speakers requested that thedeemed-compliant FFI categories be ex-panded to resolve some of the issueswith the EAG rule.
• Many speakers cited the fact that the pro-posed rules concerning government-sponsored pension and savings plans are toonarrow and need to treat such plans asdeemed-compliant or as otherwise exemptfrom FATCA.
CONCLUSIONThe proposed regulations represent a monumental
amount of work by the Treasury and IRS FATCAteams. Although more refinements and further defer-ral of the effective dates are needed, the proposedregulations introduce much-needed practicality. Theproposed regulations focus on applying FATCA tohigh-risk accounts while providing exemptions forlow-risk accounts. As commentators have advised, thescope of low-risk accounts needs to be expanded.From a policy perspective, this is the right path. From
102 77 Fed. Reg. 9041.103 Id.104 Prop. Regs. §1.1471-4(d)(6)(i).105 77 Fed. Reg. 9026.106 Id.107 See remarks of Jesse Eggert, above fn. 21.108 An informal transcript may be obtained at 2012 TNT 95-28
(5/16/12).
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a practical compliance perspective, this is also the right path, as well as a necessary path.
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APPENDIXTRANSITION RULES
Due Diligence (Account Identification)
Statutory Requirement andCategory of Accounts
Transition Date Under Proposed Regulations
Section 1471(b) provides that anFFI must enter into an FFI Agree-ment with the IRS and report onU.S. accounts, which requires theidentification and documentationof account holders.
Date by which due diligence requirements for the particular type of ac-count must be completed:
• Pre-Existing Individual Ac-counts
Within one year of FFI Agreement for high value accounts (>$1M); 2 yrsfor other payees
• Pre-Existing Entity Accounts Within one year of FFI Agreement for prima facie FFIs; 2 yrs for otherpayees
• Foreign Passthru Payments No sooner than 1/1/2017
Affiliated Group with Member Legally Prohibited from Compliance
Statutory Requirement andAffiliate Rule Under Notice
2011-34
Transition Date Under Prop.Regs.
Transitional Period Rule
Section 1471(e) provides thatthe requirements of the FFIAgreement shall apply to theU.S. accounts of the participat-ing FFI and, except as other-wise provided by the Secretary,to the U.S. accounts of eachother FFI that is a member ofthe same expanded affiliatedgroup.
Two-year transition, until Janu-ary 1, 2016, for the full imple-mentation of this requirement.
Between January 1, 2014, and January 1,2016, an FFI affiliate in a jurisdiction thatprohibits the reporting or withholding re-quired by chapter 4 will not prevent theother FFIs within the same expanded affili-ated group from entering into an FFI Agree-ment, provided that the FFI in the restrictivejurisdiction agrees to perform due diligenceto identify its U.S. accounts, maintain cer-tain records, and meet certain other require-ments.
Notice 2011-34 states that theTreasury Department and theIRS intend to require that eachFFI that is a member of anexpanded affiliated group be aparticipating FFI or deemed-compliant FFI in order for anyFFI in the expanded affiliatedgroup to become a participat-ing FFI.
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Reporting of U.S. Accounts (Phased in from 2013 through 2016)
Reporting Requirements Current Effective Date Former Effective Date
• Name, address, and U.S. TIN of each U.S.person who is an account holder or, if theaccount is owned by a U.S.-owned foreignentity, name, address, and U.S. TIN of eachsubstantial U.S. owner;
• The account balance at the end of theyear, or, for closed accounts, the balanceimmediately before closure; and
• The account number
This limited reporting also applies to an FFIthat elects to report as a U.S. FFI under§1471(c)(2).
May elect to report under Notice 2011-34.
Must report any recalcitrant account holders.
Applicable for calendar years2013 and 2014
Prop. Regs. §1.1471-4(d)(7)(ii)(A)
Form W-9 received by June 30,2014, must be reported to IRS
by September 30, 2014
Notice 2011-53
Calendar year 2013 only
Notice 2011-53 §II.B.1
Above, plus:• FDAP income associated with U.S. ac-counts
Calendar year 2015
Prop. Regs. §1.1471-4(d)(7)(ii)(B)
Calendar years after 2013
Notice 2011-53 §II.B.2
Above, plus:• Gross proceeds from sale of FDAP-producing property
Calendar year 2016
Prop. Regs. §1.1471-4(d)(4)(iv)
Calendar years after 2013
Notice 2011-53 §II.B.2
Withholding
Types of Withholdable Payments Current Effective Date Former Effective Date
U.S.-Source FDAP Payments(e.g., interest, dividends, royalties,rent, etc.)
Payments made on or after January1, 2014
Notice 2011-53 §II.C.1
—
Gross Proceeds (i.e., gross pro-ceeds from the sale of assets thatproduce or may produce U.S.-source FDAP income)
Payments made on or after January1, 2015
Notice 2011-53 §II.C.1
—
Foreign Passthru PaymentsNote that a U.S.-source FDAP pay-ment that also would be a foreignpassthru payment is subject to theJanuary 1, 2014 effective date.
Payments made on or after January1, 2017 (at the earliest)
However, for calendar years 2015and 2016, participating FFIs mustreport annually to the IRS the ag-
gregate amount of certain paymentsmade to each nonparticipating FFI
Prop. Regs. §1.1471-4(d)(iv)(C)
Payments made on or after January1, 2015
Notice 2011-53 §II.C.2
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