More FATCA Reporting Requirements Guidance for FFIs

More FATCA Reporting Requirements Guidance for FFIs

In April, the IRS issued Notice 2011-34, modifying and supplementing initial guidance provided by Notice 2010-60 on the future reporting, documentation, and withholding requirements for foreign financial institutions (FFIs) that have U.S. accounts. Notice 2011-34, 2011 IRB LEXIS 234; Notice 2010-60, 2010 IRB LEXIS 533. The notices provide key guidance following the addition of Chapter 4 (Taxes to Enforce Reporting on Certain Foreign Accounts) to the Internal Revenue Code in 2010. The Hiring Incentives to Restore Employment Act of 2010 (PL 111-147, 111th Cong, 2d Sess, § 501(a) (March 18, 2010)) added Sections 1471, 1472, 1473, 1474, and 6038D to the landscape of U.S. international tax law and imposed additional information reporting requirements on U.S. taxpayers with respect to foreign assets (in excess of $50,000) and additional reporting, documentation, and withholding requirements on FFIs with respect to certain U.S. accounts.

The new requirements under FATCA with respect to U.S. taxpayers with foreign financial assets and with respect to FFIs become effective go into effect in 2011 and 2013, respectively. (See "Foreign Account Tax Compliance Act (FATCA)" on the IRS website at http://www.irs.gov/businesses/corporations/article/0,,id=236667,00.html).

Notices 2010-60 and 2011-34. Notice 2010-60, issued last summer, provided the first round of guidance for FFIs on priority issues with respect to implementation of Chapter 4, and Notice 2011-34 now provides guidance on concerns that were raised following the issuance of Notice 2010-60. Notice 2011-34, 2011 IRB LEXIS 234.

Notice 2010-60 provides guidance on the scope of obligations exempt from Chapter 4 withholding under Section 501(d)(1) of the HIRE Act; the definition of a FFI under IRC Sections 1471 and 1472; the information that a FFI must report to the Service pursuant to an agreement under IRC Section 1471(b) (FFI agreement) with respect to their U.S. accounts; and the electronic filing requirements for FFIs. Notice 2010-60, 2010 IRB LEXIS 533.

Notice 2011-34 includes guidance on:

- The procedures that must be followed by participating FFIs in identifying U.S. accounts among their preexisting individual accounts (Section I);

- The definition of term "passthru payment" for purposes of Chapter 4 and on the obligation of participating FFIs to withhold on passthru payments (Section II);

- Certain categories of FFIs that will be deemed compliant under IRC Section 1471(b)(2) (Section III);

- The obligation of participating FFIs to report with respect to U.S. accounts (Section IV);

- The treatment under IRC Section 1471 of Qualified Intermediaries (Section V);

- The application of IRC Section 1471 to expanded affiliated groups of FFIs under IRC Section 1471(e) (Section VI); and

- The effective date of FFI Agreements (Section VII). Notice 2011-34, 2011 IRB LEXIS 234.

The discussion below highlights key provisions in this guidance.

Identifying U.S. Accounts. Section I of Notice 2011-34 modifies guidance provided by Notice 2010-60 relating to the procedures used by a participating FFI to identify U.S. accounts among its preexisting individual accounts. Section I also outlines a new procedure for participating FFIs to certify their completion of the requirements for determining the status of their preexisting individual accounts. Notice 2011-34, 2011 IRB LEXIS 234.

Preexisting Individual Accounts. With respect to the procedures used by a participating FFI to identify U.S. accounts among its preexisting individual accounts, Notice 2011-34 revises in its entirety the guidance provided in Notice 2010-60 on such procedures. Notice 2011-34, 2011 IRB LEXIS 234. The changes are in response to concerns and comments about the procedures in Notice 2010-60. These included concerns relating to the practicality of applying the exclusion in Notice 2010-60 for accounts of $50,000 or less because of restrictions on sharing account holder information and because of technological limitations, concerns about treating a non-U.S. P.O. box as an indication of U.S. status, comments requesting clarification of certain terms, and comments expressing concerns about the potential costs for participating FFIs if required to apply the new individual account identification procedures to preexisting individual accounts within five years after the effective date of the FFI's FFI Agreement. Notice 2011-34, 2011 IRB LEXIS 234; Notice 2010-60, 2010 IRB LEXIS 533.

Section I of Notice 2011-34 also provides definitions for key terms, such as, "preexisting individual account," "private banking account," "private banking department," "private banking relationship", "documentary evidence," and "documentation". Notice 2011-34, 2011 IRB LEXIS 234.

Procedures for Identification. As to the procedures for a participating FFI to identify preexisting individual accounts, Notice 2011-34 states that a participating FFI must determine whether such accounts are to be treated as U.S. accounts, recalcitrant accounts (i.e., accounts of recalcitrant account holders), or non-U.S. accounts (i.e., accounts that are other than U.S. accounts) according to six steps outlined  in the notice. Notice 2011-34, 2011 IRB LEXIS 234. The steps are identified as follows and provide guidance to a participating FFI as to how a particular account is to be treated:

Step 1: Documented U.S. Accounts

Step 2: Accounts of $50,000 or Less

Step 3: Private Banking Accounts

Step 4: Accounts with U.S. Indicia

Step 5: Accounts of $500,000 or More

Step 6: Annual Retesting

Per Step 1, account holders already documented as U.S. persons for other tax purposes will be treated as specified U.S. persons, and their financial accounts will be treated as U.S. accounts. However, Step 1 also provides that, unless an FFI elects otherwise, an account will be considered a non-U.S. account if is a depository account, each holder of such account is a natural person, and the account balance or value at the end of the calendar year before the effective date of the FFI's FFI Agreement does not exceed $50,000 (or the equivalent in foreign currency). Notice 2011-34, 2011 IRB LEXIS 234.

Per Step 2, a FFI may treat an account not identified as a U.S. account in Step 1 as a non-U.S. account if the balance or value of the account does not exceed $50,000 (or the equivalent in foreign currency) at the end of the calendar year preceding the effective date of the FFI's FFI Agreement.  The notice provides that a FFI may elect not to apply Step 2. Notice 2011-34, 2011 IRB LEXIS 234.

Per Step 3, applicable to private banking accounts maintained by the FFI and not addressed in Step 1 or 2, a FFI must ensure that all of its private banking relationship managers perform certain identification, review, and other action steps relating to their clients' accounts. Notice 2011-34, 2011 IRB LEXIS 234.

Per Step 4, applicable to accounts not identified in Steps 1, 2, or 3, the FFI must determine whether the electronically searchable information it maintains and associated with those accounts or account holders includes any of the U.S. indicia listed under Step 4, such as, identification of an account holder as a U.S. resident or U.S. citizen or a U.S. place of birth for an account holder. Notice 2011-34, 2011 IRB LEXIS 234.  If the FFI identifies an account as having U.S. indicia, the FFI must request, within one year of the effective date of the FFI's FFI Agreement, certain documentation to establish whether the account is a U.S. account. Notice 2011-34, 2011 IRB LEXIS 234.

Per Step 5, applicable to accounts of $500,000 or more that are not identified in Steps 1, 2, 3, or 4, the FFI must perform a "diligent review" of the account files associated with the account. Notice 2011-34, 2011 IRB LEXIS 234.  If the account files contain any of the U.S. indicia identified in Step 4, the FFI must obtain the documentation described in Step 4 within two years of the effective date of the FFI's FFI Agreement. Notice 2011-34, 2011 IRB LEXIS 234.  Failure to do so results in the account holders of such accounts being classified as recalcitrant account holders until the FFI receives the documentation from the account holder. Notice 2011-34, 2011 IRB LEXIS 234.

Per Step 6, the FFI, beginning in the third year after the effective date of the FFI Agreement, must re-test, applying Step 5 annually to all preexisting individual accounts that did not previously satisfy the requirements to be treated as high value accounts, but that would be high value accounts under Step 5 if the account balance or value of the account were tested on the last day of the preceding year. Notice 2011-34, 2011 IRB LEXIS 234. Of the accounts identified each year under this test, the FFI must treat any account for which the required documentation has not been provided by the end of the year as a recalcitrant account. Notice 2011-34, 2011 IRB LEXIS 234.

In addition, Section I of Notice 2011-34 states that in applying the procedures detailed under the six steps, certain rules apply, including the rule that a FFI may rely upon the documentation collected under the procedures or that is otherwise maintained in an account holder's files, unless the FFI knows or has reason to know that the documentation is not reliable. See Section I.A.2 of Notice 2011-34 for the other rules. Notice 2011-34, 2011 IRB LEXIS 234.

Passthru Payments. Section II of Notice 2011-34 provides guidance on the definition of the term "passthru payment" for purpose of Chapter 4 and guidance addressing a participating FFI's obligation to withhold on passthru payments. Section II also provides guidance on the exemption from withholding for grandfathered obligations. Notice 2011-34, 2011 IRB LEXIS 234.

Section II states the general rule that, subject to certain exceptions, a payment made by an FFI (the payor FFI) will be a passthru payment to the extent of:

(i) the amount of the payment that is a withholdable payment; plus

(ii) the amount of the payment that is not a withholdable payment multiplied by (A) in the case of a custodial payment, the passthru payment percentage of the entity that issued the interest or instrument, or (B) in the case of any other payment, the passthru payment percentage of the payor FFI. Notice 2011-34, 2011 IRB LEXIS 234.

In addition, Section II provides guidance on calculating the passthru payment percentage, the definition of "U.S. Asset"(see Section II.B.), and the definition of the term "custodial payment" as used above (see Section II.C.). Section II also provides guidance as to grandfathered obligations (See Section II.D.) and requests comments on possible exemptions from the definition of passthru payments (see Section II.E.). Notice 2011-34, 2011 IRB LEXIS 234.

Deemed-Compliant FFIs. Section III of Notice 2011-34 describes certain categories of FFIs that will be deemed compliant pursuant to IRC Section 1471(b)(2). In general, a FFI with deemed-compliant status will be required to: (1) apply for such status with the Service; (2) obtain from the Service an FFI identification number (FFI-EIN) identifying it as a deemed-compliant FFI; and (3) certify to the Service every three years that it meets the requirements for deemed-compliant treatment. Notice 2011-34, 2011 IRB LEXIS 234.

U.S. Account Reporting. Section IV of Notice 2011-34 modifies certain proposed U.S. account reporting requirements for FFIs provided in Notice 2010-60. In general, Section IV lightens the reporting requirements first outlined in Notice 2010-60 with respect to a participating FFI's U.S. accounts. Essentially, Notice 2011-34 decreases the frequency of account balance reporting initially required in Notice 2010-60 and states that the Treasury and Service intend to issue regulations limiting a FFI's account balance reporting obligations to year-end account balances or values, as determined for purposes of reporting to the account holder. Notice 2011-34, 2011 IRB LEXIS 234.

Per Section IV, regulations will also limit a FFI's account balance reporting obligations in the case of a U.S. account that is an interest in an entity described in IRC Section 1471(d)(5)(C) to year-end account balances or values,  as determined for the purpose that requires the most frequent determination of value. Notice 2011-34, 2011 IRB LEXIS 234.

With respect to a participating FFI's obligation to report gross receipts and gross withdrawals or payments made to and from U.S. accounts, as required by IRC Section 1471(c)(1)(D), Notice 2010-60 requested comments on how to minimize the burdens these requirements place on participating FFIS. Notice 2011-34, 2011 IRB LEXIS 234. In response to such comments, Notice 2011-34 announces the Service and Treasury's intention to issue regulations providing that a FFI must report certain information with respect to a U.S. account described in IRC Section 1471(d).

Per Section IV, a FFI must report the following information annually with respect to a U.S. account described in IRC Section 1471(d)(2)(A) (pertaining to depository accounts) or (B) (pertaining to custodial accounts):

(1) the gross amount of dividends paid or credited to the account;

(2)  the gross amount of interest paid or credited to the account;

(3) other income paid or credited to the account; and

(4) gross receipts from the sale or redemption of property paid or credited to the account with respect to which the FFI acted as a custodian, broker, nominee, or otherwise as the account holder's agent. Notice 2011-34, 2011 IRB LEXIS 234.

In addition, in the case of a U.S. account that is described in IRC Section 1471(d)(2)(C), Section IV states that a FFI must report the gross amount of: (1) all distributions, interest, and similar amounts credited during the year, and (2) each redemption payment made during the year. Notice 2011-34, 2011 IRB LEXIS 234.  IRC Section 1471(d)(2)(C) pertains to any equity or debt interest in a FFI, other than interests which are regularly traded on an established securities market, and the provision states that any equity or debt interest which constitutes a financial account under Section 1471(d)(2)(C) with respect to any financial institution will be treated for purposes of Section 1471 as maintained by such financial institution. Notice 2011-34, 2011 IRB LEXIS 234.

Moreover, in the case of a U.S. account closed or transferred in its entirety by an account holder during the year, Section IV of the notice states that the FFI will be required to report the income paid or credited to the account for the year until the date of transfer or closure. Notice 2011-34, 2011 IRB LEXIS 234. In addition, the FFI must report the amount or value withdrawn or transferred from the U.S. account as a gross withdrawal and must also report the U.S. account as closed or transferred. Notice 2011-34, 2011 IRB LEXIS 234.

Section IV further requires that the FFI agreement of a FFI provide that, if the FFI retains copies of statements sent to U.S. account holders in the ordinary course of its business, the FFI must retain such statements for a period of five years and must provide them to the IRS upon request. Notice 2011-34, 2011 IRB LEXIS 234.

Section IV of the notice also announces the Service and Treasury's intention to issue guidance allowing an FFI to elect to have each branch report information regarding the U.S. accounts the branch maintains and to make the election under IRC section 1471(c0(2) with respect to each of the FFI's branches. Notice 2011-34, 2011 IRB LEXIS 234.

Qualified Intermediaries, Expanded affiliated Groups, Effective Date of FFI Agreements. Guidance in Notice 2011-34 also includes guidance with respect to qualified intermediaries and expanded affiliated groups of FFIs. Section V provides the requirements for qualified intermediaries. Notice 2011-34, 2011 IRB LEXIS 234. Section VI provides guidance on the application of IRC Section 1471(e) with respect to expanded affiliated groups of FFIs. Notice 2011-34, 2011 IRB LEXIS 234.  Finally, Section VII states that FFI Agreements become effective on the later of: (i) the date they are executed, or (ii) the effective date of section 501 of HIRE Act. Notice 2011-34, 2011 IRB LEXIS 234.  

 

Future Guidance. Following the issuance of Notice 2011-34, commentators have suggested that more guidance is necessary as the effective date of the FATCA requirements approaches. See 2011 TNT 77-2,  "Latest FATCA Guidance is a Mixed Bag, Practitioners Say," Tax Notes Today (Tax Analysts, April 15, 2011). Notice 2011-34 states that the IRS and Treasury intend to issue regulations incorporating the guidance in the notice and providing additional guidance "necessary to implement chapter 4", but the notice does not specify what additional guidance is forthcoming. The notice does state the Service's intention to issue draft FFI agreements and draft information reporting and certification forms, and Service and Treasury officials reiterated the same goals of proposed regulations and draft forms in recent comments. Notice 2011-34, 2011 IRB LEXIS 234; see also 2011 TNT 77-2, "Proposed Regs on FATCA to Come, IRS and Treasury Officials Say," Tax Notes Today (Tax Analysts, April 21, 2011).

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