Sutherland Legal Alert: It’s Just a Phase: The “Phased Implementation” of FATCA Under Notice 2011-53

Sutherland Legal Alert: It’s Just a Phase: The “Phased Implementation” of FATCA Under Notice 2011-53

By Carol Tello, Michael Miles, William Pauls, Robb Chase and Dwaune Dupree

On July 14, 2011, Treasury and the Internal Revenue Service (IRS) released Notice 2011-53 (the Notice), which provides transition rules for implementation of the Foreign Account Tax Compliance Act (FATCA). Although the statutory effective date of the FATCA provisions is January 1, 2013, the transition rules provide for phased implementation of the withholding and reporting requirements imposed by the law. The tables set forth below summarize the phased implementation provided by the Notice.

In general, no withholding will be required under FATCA until January 1, 2014, and even then withholding will be required only with respect to payments that constitute U.S. source fixed or determinable, annual or periodic (FDAP) income. Withholding on gross proceeds from the sale of an asset that produces U.S. source FDAP and passthru payments will not begin until January 1, 2015 (unless a passthru payment includes U.S. source FDAP, in which case the U.S. source FDAP portion of the passthru payment will be subject to withholding on January 1, 2014). Other transition rules are summarized in the tables below.

Although the purpose of the Notice is to provide transition implementation rules, the Notice also provides some substantive guidance as to the application of the rules. For example, certain obligations are grandfathered with respect to the withholding tax requirements under FATCA, and the Notice specifically indicates that legal agreements that produce passthru payments are included in the grandfathering provisions. For insurance companies, this likely means that passthru payments made with respect to qualifying grandfathered policies and annuities should be eligible for the exemption from withholding. (Information reporting still will be required for all grandfathered obligations, however.)

Part III of the Notice announces that proposed regulations will incorporate the guidance provided in Notice 2010-60, as amended and supplemented by Notice 2011-34. The implication is that the procedures provided in that guidance may not be substantially changed in the proposed regulations; consequently, the regulations may not offer a more limited review of account files, as some foreign financial institutions (FFIs) had requested. The implications of this portion of the Notice with respect to requests by the insurance industry to limit electronic searches to policies and annuities with a cash value of $1 million or more are not clear.

Further guidance on the scope of the private banking procedures and the associated required searches of account holder files is to be provided in regulations. The scope of the current definition of "private banking account" in Notice 2011-34 has been criticized as too broad, and government officials have publicly stated that the definition will be revised.

The Notice also announces that proposed regulations implementing FATCA are expected to be issued by December 31, 2011, with final regulations following in the summer of 2012. Additionally, draft versions of FFI Agreements and reporting forms also are slated to be released in the summer of 2012.

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For additional background to the Notice, our previous commentary concerning FATCA can be accessed using the following links:

If you have any questions about this Legal Alert, please feel free to contact any of the attorneys listed below or the Sutherland attorney with whom you regularly work.

Carol P. Tello 202.383.0769
Michael R. Miles 202.383.0204
Robert S. Chase II 202.383.0194
William R. Pauls 202.383.0264
Dwaune L. Dupree 202.383.0206

© 2011 Sutherland Asbill & Brennan LLP. All Rights Reserved.
This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Sutherland and the recipient.


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