M E M O R A N D U M
July 15, 2011
TO: Distribution
FROM: Burt, Staples, Maner, LLP
RE: FATCA Transition Relief: Notice 2011-53
The IRS has responded to industry and foreign government concerns
regarding the January 1, 2013, effective date of the chapter 4
provisions of FATCA (Internal Revenue Code sections 1471-1474) by
providing phased implementation procedures in Notice 2011-53 (the
"Notice"), issued July 14, 2011. The Notice can be found in the FATCA
section of the BSM website,
http://www.bsmlegal.com. This client memorandum offers some
preliminary observations on the Notice.
It is a positive
development that the government recognized the need for extensions for
FATCA compliance beyond the January 1, 2013, statutory effective date
and that, in general, the extensions reflect the 18- to 24-month
implementation period that the financial industry has told Treasury and
the IRS is the minimum amount of time required to develop the necessary
operational and information systems needed to comply with the statute.
It is unfortunate, however, that the government adopted an
implementation timeline that binds itself as well as financial
institutions to specific dates rather than keying implementation off of
the issuance of final regulations. This approach creates its own set of
problems. Another unfortunate aspect of the Notice is that it refers to
Notices 2010-60 and 2011-34 as providing the general standards for
implementation. This leaves one wondering to what extent Treasury and
the IRS are willing to consider changes suggested by the financial
industry to reduce costs and burdens on financial institutions while
maintaining the statute's compliance goals.
Timeline for Published Guidance
The
Notice states that Treasury anticipates issuing proposed regulations
incorporating the guidance provided in the Notice and Notices 2010-60
and 2011-34 by December 31, 2011, and final regulations in the summer of
2012. This leaves only a 6- to 9-month period for the financial industry
to analyze and comment on the proposed regulations and for Treasury and
the IRS to analyze the comments and incorporate them in final
regulations. This is an ambitious schedule, and any failure by Treasury
and the IRS to meet the time frame would undermine the transitional
rules contained in the Notice.
Participating FFIs, Withholding Timelines, and Reporting
Withholding will begin on U.S. source income payments (but not gross
proceeds or passthru payments) made to non-participating FFIs on January
1, 2014. To avoid withholding, an FFI must be a participating FFI, or a
member of an expanded affiliated group of which at least one FFI is a
participating FFI, by that date. The IRS will begin accepting FFI
applications no later than January 1, 2013, but to be certain that an
FFI is a participating FFI on January 1, 2014, it must apply for
participating FFI status through an electronic submission process and
enter into an FFI Agreement by June 30, 2013. Any FFI that enters into
an FFI Agreement after that date but before January 1, 2014, will be a
participating FFI for 2014 but may not be identified as a participating
FFI in time to prevent withholding.
The Notice establishes a
time period for implementing new account procedures that is particularly
problematic. If an FFI enters into an FFI Agreement by June 30, 2013,
the effective date of its FFI Agreement will be July 1, 2013. The
effective date of an FFI Agreement entered into after June 30, 2013, is
the date the FFI enters the FFI Agreement. The Notice requires a
participating FFI to have in place the new account opening procedures
described in Notice 2010-60 to identify U.S. accounts opened on or after
the effective date of the FFI Agreement. A participating FFI and its
affiliates must, therefore, begin development of operational and
informational systems for new accounts before the effective date of the
FFI Agreement. Assuming the regulations are finalized on December 31,
2012, this leaves an FFI with only 6 months to develop systems compliant
with the final regulations to avoid withholding on new accounts. The
Notice rule may actually force some potential participating FFIs to
delay entering into an FFI Agreement while they develop the necessary
account opening systems.
The feasibility of the June 30, 2013,
date will depend on when final regulations are issued, the complexity of
the application process, and how quickly the IRS can process
applications. The Notice implies that the application process may take
up to 6 months. The IRS will most likely request a significant amount of
information. For example, it will want information not only about the
FFI applying for participating FFI status but for all of its affiliates
as well, including information about whether the affiliates are
deemed-compliant FFIs, and if so, what type of deemed-compliant FFI, or
whether they are excepted from FFI status, and if so why. Based on the
guidance provided in Notices 2010-60 and 2011-34, these could be
difficult determinations to make in many cases.
Withholding on
(i) gross proceeds from property that can produce U.S. source interest
or dividends and (ii) passthru payments will not be required before
January 1, 2015. The Notice therefore delays the date in which financial
institutions are required to begin computing their passthru payment
percentages as of the first quarter of 2014. The delay of withholding on
gross proceeds and passthru payments acknowledges the difficulty of
building new systems to withhold on amounts that have not previously
been subject to nonresident withholding.
The earlier January 1,
2014 withholding date appears to apply to bank deposit interest and
interest on obligations with a maturity of 183 days or less. Those
payments have never been subject to U.S. nonresident withholding, and
Treasury and the IRS have not yet responded to comments that such
payments should not be subject to chapter 4 withholding. It is curious
that the Notice applies two different effective dates for what is
essentially the same problem.
Private
Banking Accounts
The Notice makes changes to the private
banking account due diligence rules, but these changes are generally not
helpful. The rules were first announced in the section of Notice 2011-34
addressing due diligence rules applicable to individuals. The Notice,
through a parenthetical, now states that the private banking account
procedures apply to entity accounts as well. This may always have been
the IRS's intent, but it is still not clear how the private banking
account due diligence rules apply to entity accounts.
The Notice
does restrict the one-year time limit for performing the private banking
account due diligence procedures required by Notice 2011-34 (Step 3) to
accounts existing before the effective date of the FFI Agreement
("pre-existing accounts") that have a value of $500,000 or more, rather
than applying the time limit to all private banking accounts. For
accounts less than $500,000, the participating FFI has until the later
of December 31, 2014, or one year after the effective date of the FFI
Agreement, to complete the private banking account due diligence
procedures. However, given the breadth of the definition of a private
banking account in Notice 2011-34 and the number of private banking and
wealth management accounts that will exceed the $500,000 threshold, this
change to the rules provides very little, if any, relief.
The
second change is that the "diligent review of all paper and electronic
account files and other records," required by Notice 2011-34 for private
banking accounts can be performed by any person designated by the
participating FFI; it no longer has to be personally done by the account
relationship manager. This change does not address the fundamental
concern expressed by commentators that a review of all files and
records, including paper records and other records that are not
electronically searchable, are overly burdensome. The Notice does state
that "regulations will provide further guidance on the scope of the
private banking procedures and the associated search of account holder
files," but the limited changes made in the Notice do not leave one
hopeful.
The Nature of Future Guidance
The Notice places the transition rules within the context of
applying the rules of Notice 2010-60 and Notice 2011-34. For example, it
uses language such as "account opening procedures described in Notice
2010-60, as implemented in the regulations" and "a participating FFI
must complete the due diligence procedures as prescribed in Notice
2010-60, Notice 2011-34 and forthcoming regulations." This language
leaves the impression that the rules of Notices 2010-60 and 2011-34 have
set the fundamental rules of FATCA implementation and suggests that
Treasury and the IRS have already rejected the many important changes
requested by commentators. It is too early to tell, but the language is
not comforting.
What Actions Should Be
Taken Now?
The Notice provides some relief regarding the
timing of FATCA implementation, but implementation still promises to be
a long and difficult process. Clients should continue to analyze the
impact of chapter 4 on their businesses, understand where there are gaps
between current reporting, withholding, and client on-boarding
procedures and what is known to be required under FATCA, and inform
their customers about the impact of FATCA. Clients should be careful,
however, to focus their efforts on what is known with a relative degree
of certainty and be careful not to waste resources on the many
unanswered areas regarding FATCA implementation.