... [Notice 2011-34 FATCA] guidance comes in the form of another voluminous notice... which, in addition... Notice 2010-60, comes to a... possible 100-150 page proposed regulation, counting the preamble. It seems paradoxical... when everybody is talking about simplifying the Tax Code. I'd venture to say that the proposed regulations in their final form would equal the entire tax code of some nations... [F]oreign institutions... at some point... will... say that it is not worth the hassle to deal with the US. After all, comparable, if not better returns, could be found elsewhere.
...[W]hat's in the notice? ...Passthrough payments are finally clarified. That said, the IRS' thinking appears to diverge from that of practitioners. I... expected that the "attributable" part of a passthrough payment will be defined based on some tracing formula... If a foreign fund-of-funds (FoF) invests in a fund with US exposure, I would have expected that the passthrough payment comes into play if in fact the FoF is actually being paid from investments that come from the US. Well, the IRS decided that this... does not comport to the spirit of FATCA. In other words, a foreign FoF may be subject to withholding if it invests in a participating fund even if the FoF actually is not paid from US investments. So the IRS... rule... provides that a passthrough payment will be tied to the FFI's passthrough percentage. The passthrough percentage is based on the ratio of the FFI's US assets and total assets. So, as long as the FFI has some US assets, the foreign nonparticipating FoF will be subject to 30% withholding...
The other major part in the notice that deals with funds is the "deemed compliant" guidance. Everybody has been waiting for some clear indication that some funds would not be subject to the FATCA rules, such as publicly traded funds, funds without US investors etc. I personally did not find Section III.C of the Notice (dealing with investment vehicles) to be too helpful... It appears that Treasury is not even certain whether publicly traded funds such as ETFs will be deemed compliant...
...[W]hile the IRS has made some concessions, it still misses the mark of achieving its objective while promulgating an administrable rule of law.
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