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Editor's Note: This narrative is derived from Tax Controversies: Audits, Investigations, Trials § 17.04 (Matthew Bender) by Robert S. Fink, J.D., LL.M., Kostelanetz & Fink, LLP, New York, N.Y.
The Foreign Account Tax Compliance Act, or FATCA, enacted in March 2010 and codified at IRC §§ 1471-1474 requirements by investing in the United States through foreign bank accounts or foreign entities. It requires non-United States financial institutions to provide information about United States account holders to the United States government, or have 30% withheld at source on most United States-source, investment-related payments made to the institution (as well as some non-United States-source payments). The Act will apply to payments made on or after January 1, 2014 to "foreign financial institutions." [IRC § 1471] Thus, after that date, unless the foreign financial institution enters into an agreement with the Secretary of the Treasury, under which it will obtain and report information about United States account holders [IRC § 1471(b)(1)], "withholdable payments" to the institution for all of its customers (United States and non-United States) will be subject to 30% withholding at source. [IRC § 1471(a)]
The agreement that will take a foreign financial institution ("FFI") out of the mandatory 30% withholding category requires the financial institution to "obtain such information regarding each holder of each account maintained by such institution as is necessary to determine which (if any) of such accounts are United States accounts" [IRC § 1471(b)(1)(A)]; to "comply with such verification and due diligence procedures as the Secretary may require with respect to the identification of United States accounts" [IRC § 1471(b)(1)(B)]; and to report on an annual basis "[t]he name, address and TIN of each account holder which is a United States person and, in the case of any account holder which is a United States owned foreign entity, the name, address and TIN of each substantial United States owner of such entity," the account number, the account balance, and the gross receipts and withdrawals or payments from the account." [IRC § 1471(b)(1)(C)]. The agreement also requires the FFI to itself withhold 30% on passthru payments made to "a recalcitrant account holder," or to another foreign financial institution that does not meet the requirements of FATCA (i.e. non-participating FFIs) [IRC § 1471(b)(1)(D)] A recalcitrant account holder is one who fails to comply with requests for information that would establish whether that account holder is a United States taxpayer, or fails to provide a waiver to allow the institution to supply the United States with information that otherwise would be forbidden by foreign law. [IRC § 1471(d)(6)]
In the alternative, the foreign financial institution may elect to provide full IRS Form 1099 reporting with respect to each account holder that is a United States person or United States owned foreign entity, treating the account holder as if it is a United States citizen for this purpose. [IRC § 1471(c)(2)]
Because FATCA will require participating FFIs to withhold on passthru payments to non-participating FFIs, it will be virtually impossible for FFIs to avoid FATCA, even if they have no United States investments and no nexus with the United States. FATCA achieves this by defining a passthru payment as "any withholdable payment or other payment to the extent attributable to a withholdable payment." (Emphasis added.) Whether an "other payment" is "attributable" to a withholdable payment is not determined by tracing the payment; rather, pursuant to Notice 2011-34, 2011-1 C.B. 765, the IRS has instituted a regime under which a participating FFI must calculate and publish its "passthru payment percentage." This is a formula under which a percentage of non-United States source payments will be deemed attributable to United States sources in accordance with the ratio of the participating FFI's United States assets to its non-United States assets. Thus, the passthru payment percentage is the sum of the participating FFI's United States assets divided by the sum of its total assets. As a result, non-withholdable payments (i.e. payments deriving from non-United States sources) are deemed to be attributable to withholdable payments (i.e. payments deriving from United States sources) to the extent of a participating FFI's passthru payment percentage.
Notice 2011-34, a passthru payment made by a participating FFI to a non-participating FFI, subject to 30% United States withholding tax, is equal to the sum of the amount of the withholdable payment (from United States sources) plus the passthru payment percentage of the remaining amount of the payment (from non-United States sources).
In Notice 2010-60, 2010-2 C.B. 329 and Notice 2011-34, 2011-1 C.B. 765, the IRS provided FFIs with guidance on how to determine whether account holders are United States persons. An FFI may treat accounts with average balances that do not exceed $50,000 as non-United States accounts for purposes of FATCA. All accounts that are already documented as United States accounts for other United States tax purposes must be treated as such for purposes of FATCA. For all other accounts, the FFI must determine if the account holder is a United States person or a foreign person and request Forms W-9 or W8-BEN, along with documentation, as appropriate. The Notices provide that the following are indicia of United States status:
(a) Identification of an account holder as a United States resident or United States citizen;
(b) A United States place of birth for an account holder;
(c) A United States residence address or a United States correspondence address (including a United States. P.O. box);
(d) Standing instructions to transfer funds to an account maintained in the United States;
(e) An "in care of" address or a "hold mail" address that is the sole address shown in the FFI's electronically searchable information for the account holder; or
(f) A power of attorney or signatory authority granted to a person with a United States address.
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