Laura D. Warren
On July 14, 2011 the IRS and Treasury issued Notice 2011-53, which
(i) describes a timeline for the implementation of the information
reporting and withholding requirements provided in the recently enacted
Foreign Account Tax Compliance Act (FATCA) and (ii) discusses certain
substantive and procedural matters, all to be addressed in regulations
issued by Treasury and the IRS. This Notice, and the regulations to be
promulgated, appear to address concerns raised in comments received on
the ability of companies to develop the necessary compliance, reporting
and withholding systems, as well as the potential need to coordinate
with foreign governments, in order to comply with the FATCA rules.
FATCA was enacted March 18, 2010, as part of the Hiring Incentives to
Restore Employment (HIRE) Act, which added Sections 1471 through 1474
of the Code.1
Initial FATCA guidance was provided in Notice 2010-60 and in Notice
2011-34. As originally enacted, all foreign financial institutions
and non-financial foreign institutions (NFFIs), must comply with FATCA
by January 1, 2013, or be subject to withholdings. Notice 2011-53 and
regulations to be issued are intended to allow FFIs and withholding
agents the time necessary to comply with the FATCA rules, because such
compliance will generally necessitate significant modification of
information management systems currently in place.
As discussed in the Pepper Hamilton's March 3, 2011 Tax Update, "IRS Temporarily Suspends Penalties for New Basis Reporting",
the FATCA rules impose a 30 percent withholding requirement on
withholdable payments made to FFIs unless certain requirements are met.
In order to avoid withholding under FATCA, a participating FFI will be
required to enter into an agreement with the IRS to: (i) identify U.S.
accounts, (ii) report certain information to the IRS regarding U.S.
accounts, and (iii) withhold a 30-percent tax on certain payments to
non-participating FFIs and account holders who are unwilling to provide
the required information (pass-through payments, as more fully described
in Notice 2011-34). FFIs that do not enter into an agreement with the
IRS will be subject to withholding on certain types of payments,
including U.S. source interest, dividends, royalties, rents and other
fixed or determinable and periodic income (FDAP), and gross proceeds
from the disposition of U.S. securities that produce interest and
dividends. Similar rules apply for NFFIs.
Pursuant to Notice 2011-53, various provisions of FATCA will be
phased in, instead of being subject to an overall compliance mandate, by
2013. The phased-in timeline for FATCA implementation of FFIs includes
In order to ensure classification by January 1, 2014 and prevent
withholding beginning on that date, an FFI must enter into an FFI
agreement with the IRS by June 30, 2013.
Withholding by withholding agents will be implemented in two phases.
Due Diligence and Reporting
Due Diligence and Reporting
Notice 2011-53 provides some indication that the Treasury and IRS
will take into account compliance challenges when implementing the FATCA
rules. Notwithstanding the additional time provided under Notice
2011-53 and the regulations to come, companies need to have the process
underway for bringing their information management systems into
compliance. Even with the extra time and phased-in approach, many
companies will struggle to meet the compliance requirements. In
addition, the IRS and Treasury will need to release the regulations on
which the phased-in time line is based or many areas will remain unclear
and burdensome. Whether the regulations will mirror the prior guidance
or will provide additional relief and flexibility remains to be seen.
1 All references to the Code shall be to the Internal Revenue Code of 1986, as amended.
2 For purposes of the FATCA rules, FFIs include hedge and private equity funds.
material in this publication was created as of the date set forth above
and is based on laws, court decisions, administrative rulings and
congressional materials that existed at that time, and should not be
construed as legal advice or legal opinions on specific facts. The
information in this publication is not intended to create, and the
transmission and receipt of it does not constitute, a lawyer-client
article is republished with permission of Pepper Hamilton LLP. Further
duplication without the permission of Pepper Hamilton LLP is prohibited.
All rights reserved.
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