July 14, 2011 Tax Alert: IRS Announces FATCA Transition Relief
On July 14, 2011, the Internal Revenue Service (IRS) released Notice 2011-53 (to be published in Internal Revenue Bulletin 2011-32 on August 8, 2011) that provides long-awaited transitional relief for significant obligations under Foreign Account Tax Compliance Act (FATCA). The IRS stated in the accompanying news release that using a phased implementation takes into account concerns raised in comments to Notice 2010-60 and Notice 2011-34 and IRS’ desire to provide a workable timeline for FATCA implementation. In brief, the phased procedures include the following:
1. June 30, 2013 deadline to enter into an foreign financial institution (FFI) agreement. An FFI that enters into an FFI Agreement by such date will be identified as a participating FFI and thus avoid FATCA withholding that will begin January 1, 2014. FFIs that enter FFI Agreements after June 30, 2013 but before January 1, 2014 will be considered participating FFIs for 2014 however they may be subject to FATCA withholding due the lack of time to identify them as participating FFIs before FATCA withholding begins on January 1, 2014. The effective date for FFI Agreements entered before July 1, 2013 will be July 1, 2013 and any FFI Agreement entered after June 30, 2013 will be the date the FFI enters the FFI Agreement.
2. New account due diligence procedures generally must be in place from the effective date of the FFI agreement. The due diligence procedure of Section 1.A.2 of Notice 2011-34 for pre-existing private banking accounts with a value of at least $500,000 will need to be performed within one year from the effective date of the FFI Agreement and for pre-existing private banking accounts of a lower value by the later of December 31, 2014 or the first year anniversary of the FFI Agreement. For all other pre-existing accounts due diligence procedures must be performed within two years of the effective date of the FFI Agreement.
3. Reporting of gross receipts and gross withdrawals or payments from U.S. accounts will not be required for the first year of reporting (2013). However, an FFI will be required to report as a recalcitrant account holder any US Account holder identified by June 30, 2014 for which the FFI is not able to report the information required under §1471(c)(1) (for instance due to failure to obtain a waiver from the account holder).
4. FATCA withholding begins for FDAP (fixed, determinable, annual, periodical) payments made on or after January 1, 2014. FATCA withholding for FDAP and gross proceeds will begin January 1, 2015. Pass-thru payments will become subject to FATCA withholding no earlier than January 1, 2015 and therefore the obligation to calculate any pass-thru percentage will not begin before the first calendar quarter of 2014.
5. IRS anticipates publishing proposed regulations by December 31, 2011, and final regulations in the summer of 2012. In addition, IRS and Treasury anticipate issuing draft FATCA reporting forms in conjunction with the proposed guidance and final forms to be published for use in the summer of 2012.
IRS Notice 2011-53 and IRS News Release 2011-76 are attached to this tax alert.