The IRS has announced a delayed phase-in of the Foreign
Account Tax Compliance Act ("FATCA") information
reporting and withholding tax requirements. FATCA requires foreign
financial institutions ("FFIs"), a broadly defined
category that includes many investment vehicles not ordinarily
thought of as financial institutions, including many Canadian
investment vehicles, to enter into an agreement with the IRS to:
(1) identify U.S. account holders (including foreign entities with
substantial U.S. owners); (2) annually report information on such
account holders to the IRS; and (3) withhold a 30 percent tax from
any U.S. source fixed annual and periodical payments
("FDAP") or the proceeds from the sale of U.S. securities
(as well as certain pass-thru payments) belonging to any account
holders that fail to cooperate with FATCA's disclosure
requirements. An FFI that fails to enter into the required
agreement will itself become subject to this 30 percent withholding
tax on all of its withholdable payments. FATCA also requires a
withholding agent that makes a payment to a foreign entity that is
not an FFI to obtain information on any U.S. substantial owners of
the payee or a certification that the payee has no U.S. substantial
owners.
The IRS, which is charged with implementing and administering this
separate and rather draconian set of rules, is moving forward to
issue guidance on the numerous aspects of this legislation that
Congress outlined but left for the IRS to fill in. FATCA's
enabling legislation, which was enacted in March, 2010, provides
that it is generally effective for any payment made after December
31, 2012. However, Treasury and the IRS have received numerous
comments concerning the practical difficulties in implementing
FATCA's information gathering and other requirements within
that time frame. These difficulties relate to the need to develop
compliance, reporting and withholding systems for large and complex
organizations that may have millions of account holders in
countries around the world. In addition, for many organizations,
complying with the information reporting provisions of FATCA may
require coordination with a number of foreign governments.
Moreover, the IRS has not published detailed guidance yet on many
aspects of FATCA.
In response to these complaints, the IRS issued Notice 2011-53,
which, among other things, gives FFIs additional time to prepare
and file an application for an FFI Agreement. Notice 2011-53
announced the following phased implementation timeline:
- The 30 percent withholding tax applicable to both FFIs and non-FFIs will be effective for U.S. source FDAP payments made beginning on January 1, 2014. The withholding tax on proceeds from sales of U.S. securities and on pass-thru payments will be effective for payments made beginning on January 1, 2015.
- The IRS will begin accepting applications to enter into FFI agreements no later than January 1, 2013. An FFI must enter into an FFI agreement by June 30, 2013, in order to be identified as a participating FFI and allow withholding agents to refrain from withholding beginning January 1, 2014. FFI's that enter into agreements after June 30, 2013, but before January 1, 2014, will be participating FFIs with respect to 2014, but might not be identified as such in time to prevent withholding beginning on January 1, 2014.
- An FFI will be required to put in place due diligence procedures for new account holders to identify U.S. accounts opened on or after the effective date of its FFI agreement. For existing accounts, the due diligence requirements will be phased in between one year and two years after the effective date of its FFI agreement, depending on whether the account is a private banking account and on the size of the account.
- The reporting requirements with respect to accounts open in 2013 will begin to take effect on September 30, 2014 (for new accounts or other accounts for which the FFI has obtained an IRS Form W-9 by June 30, 2014). For 2013, the IRS will require a reduced amount of information to be reported, including the identifying information of the U.S. account holder (or substantial U.S. owner of the account holder), the account balance as of December 31, 2013, and the account number. For 2014 and later calendar years, the full information reporting requirements described in IRS Notice 2011-34 will be required.
Notice 2011-53 also provides a timeline for future published guidance under FATCA. Treasury and the IRS anticipate issuing proposed regulations (along with draft forms of the FFI agreement and reporting forms) by December 31, 2011, and, after consideration of any comments they receive, finalizing the regulations and forms in the summer of 2012.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
