FATCA Postponed Deadlines: IRS and Treasury Department Propose "Phase-In" of FATCA Requirements

Sullivan & Cromwell LLP - July 15, 2011

On July 14, 2011, the Internal Revenue Service (the "IRS") and Treasury Department released Notice 2011-53 (the "Notice"), which announces their intended schedule for implementing the foreign account provisions ("FATCA") of the Hiring Incentives to Restore Employment Act of 2010. FATCA establishes a complex set of withholding, information reporting and due diligence requirements for foreign financial institutions ("FFIs"), and imposes a penalty tax on FFIs that do not sign an agreement (an "FFI Agreement") to become "Participating FFIs" and comply with these rules. FATCA also imposes withholding on certain payments made to non-financial foreign entities ("NFFEs") that do not provide certain information regarding their beneficial owners.

The Notice outlines a "phased implementation” timeline that extends many FATCA-related deadlines beyond the January 1, 2013 effective date provided by the statute. The Notice explains that this approach was adopted in light of discussions with financial institutions and foreign governments, which highlighted the administrative and legal challenges presented by FATCA. The proposed schedule:

  • Defers the imposition of FATCA withholding on U.S.-source payments of "fixed or determinable, annual or periodical income" made to FFIs, such as interest and dividends for one year until January 1, 2014;
  • Delays the date on which FATCA withholding will apply to other "withholdable payments" made to FFIs until January 1, 2015;
  • Phases in the due diligence rules that Participating FFIs will be required to use to classify foreign accounts;
  • States that the IRS will begin accepting FFI Agreements no later than January 1, 2013 and gives FFIs until June 30, 2013 to enter into an FFI Agreement in order to be identified by the IRS as being a Participating FFI as of January 1, 2014; and
  • Limits the scope of information required in the first round of FATCA reports that Participating FFIs will need to file (which will be due on September 30, 2014 for accounts that have been identified as U.S. accounts by June 30, 2014).

As drafted, the Notice does not indicate whether the IRS and Treasury Department intend to provide an analogous extension for the rules requiring withholding on payments made to NFFEs, so it is uncertain whether NFFE withholding will commence on January 1, 2013.

The Notice also supplements and clarifies some prior guidance issued under FATCA. In particular, the Notice indicates that the IRS and Treasury Department intend to issue further guidance:

  • Regarding the "private banking" procedures that were first outlined in Notice 2011-34 that will (i) allow a Participating FFI to delegate certain account review responsibilities to parties other than "private banking relationship managers" and (ii) limit the need to re-review certain accounts;
  • Providing transition rules for qualified intermediaries, withholding foreign partnerships and withholding foreign trusts; and
  • Defining "grandfathered obligations" to include legal agreements that produce "passthru payments" (even if they do not produce "withholdable payments").