In Notice 2011-34 issued April 8, 2011, the IRS provided supplemental guidance regarding foreign financial account reporting requirements under the Foreign Account Tax Compliance Act (“FATCA”). All businesses that makes payments to foreign financial institutions should be aware of these rules which take effect in 2013.  The recently released supplemental guidance, which is expected to be part of extensive future regulations, clarifies certain withholding, documentation, and reporting requirements under FATCA. Because many questions remain, it is expected that the IRS will continue to release additional FATCA guidance.

Background

Beginning on January 1, 2013, a 30% withholding tax will be imposed on certain U.S. source payments (“withholdable payments”) made to foreign financial institutions (“FFIs”). Withholding will be required on payments made to FFIs that do not enter into an agreement with the IRS to provide information on financial accounts held by certain U.S. persons. FATCA is another weapon in the IRS’s arsenal to track and monitor potentially abusive foreign account strategies, although FATCA applies to legitimate and routine business payments as well.

Withholdable payments made to an FFI that has entered into an FFI agreement with the IRS are not subject to withholding under FATCA. Nevertheless, with certain exceptions, each “compliant” FFI is still required to withhold tax on certain payments it makes to any other FFI that has not entered into an FFI agreement or to any account holder that has not complied with information requests under FATCA (a “recalcitrant account holder”). 

Notice 2011-34 provides additional guidance regarding these secondary “pass-thru” payments and rules regarding “deemed-compliant FFIs.”

For further background, see "Why You Should Care About FATCA."

Pass-thru Payments

FATCA generally applies to any “withholdable payment,” which includes any payment of U.S. source (i) income or (ii) gross proceeds from the disposition of property that could give rise to U.S. source dividends or interest. FATCA also applies to pass-thru payments made by a participating FFI to non-participating FFIs and to recalcitrant account holders. Notice 2011-34 provides rules regarding what portion of a payment treated as a pass-thru payment must be withheld upon.

The IRS intends to define a U.S. asset for these purposes to include any asset to the extent it is of the type that could give rise to a pass-thru payment, including any debt or equity interest in a U.S. business entity.

Deemed-Compliant FFIs

Under Notice 2011-34, certain entities are “deemed compliant”:

Banks

A bank with operations confined to a particular country that meet certain other requirements is deemed compliant with FATCA.

Investment Funds

An investment fund will be treated as a deemed-compliant FFI if (i) all holders of record of interests in the fund are participating FFIs, are deemed-compliant FFIs, or are certain exempt entities, (ii) the fund prohibits the acquisition of its interests by any person that is not described in clause (i) above, and (iii) the fund certifies to the IRS that it will calculate and publish its pass-thru payment percentage.  The IRS may also treat an investment fund as a deemed-compliant FFI in certain other situations specified in Notice 2011-34.

Other Issues

Notice 2011-34 provides guidance on other topics under FATCA, including (i) relief for affiliated group FFIs, (ii) procedures for identifying U.S. accounts among preexisting individual accounts, (iii) reporting requirements for U.S. accounts, and (iv) requirements applicable to FFIs that are qualified intermediaries. 

The IRS expects to release further guidance and eventually Proposed Treasury Regulations.