The Foreign Asset Tax Compliance Act (FATCA) imposes a new global withholding and reporting regime intended to curb tax evasion and noncompliance by U.S. taxpayers. FATCA accomplishes this by expanding reporting and due diligence requirements on financial institutions, particularly foreign financial institutions (FFIs). Further, FATCA imposes a 30% withholding tax on specific U.S. source payments to most FFIs unless the FFI agrees to undertake new reporting and disclosure requirements and become a Participating FFI.
The IRS issued Notice 2011-53, providing guidance on the implementation of FATCA. Generally, FACTA is effective starting on January 1, 2013, Notice 2011-53 delays the impact of some portions of FATCA until 2014 for FFIs that enter into an agreement with the IRS (FFI Agreement) on or before June 30, 2013.
All FFIs with qualified intermediary agreements, withholding foreign partnership agreements, and withholding foreign trust agreements, that expire on December 31, 2012, will be automatically extended until December 31, 2013. Any FFI that enters into an FFI Agreement on or before December 31, 2013, will be considered to have renewed its qualified intermediary agreement, withholding foreign partnership agreement, or withholding foreign trust agreement, as the case may be.
Notice 2011-53 also states that the IRS will begin accepting electronic FFI applications no later than January 1, 2013. FFIs that enter into Agreements on or before January 1, 2014 will be considered as Participating FFIs but, according to the Notice, unless the FFI Agreement is entered into before June 30, 2013, the FFI might not be identified as such in time to prevent withholding beginning on January 1, 2014. This means that FFIs wishing to participate may have to have systems in place by June 30, 2013 in order to apply for the FFI Agreement and to avoid withholding beginning on January 1, 2014.
Participating FFIs will have to complete due diligence requirements on accounts in accordance with a timetable established by the Notice:
- Within one year of the effective date of its FFI Agreement (considered July 1, 2013 for any FFI Agreement filed before then), a Participating FFI is required to complete the pre-existing account due diligence procedures for any private banking accounts opened before the effective date of its FFI Agreement and that have a balance or value of at least $500,000.
- All other pre-existing private banking accounts will need to be completed by the later of December 31, 2014, or the date that is one year after the effective date of its FFI Agreement.
- All other pre-existing accounts will need to be completed within two years of the effective date of the FFI Agreement.
Notice 2011-53 also provides that withholding on U.S. source dividends and interest will not begin until January 1, 2014 and withholding on all qualifying U.S. source payments (including gross proceeds from the sale of assets giving rise to U.S. source interest and dividends) will not begin until January 1, 2015.
For assistance with any of these issues, please contact our office at 916-488-8501.