New FATCA Guidance: Supplemental Notice Provides Additional Guidance on the Information Reporting and Withholding Rules for Foreign Financial Institutions

Sullivan & Cromwell LLP - April 14, 2011

On April 8, 2011, Treasury and the IRS published Notice 2011-34 (the “Notice”) providing much anticipated guidance on the information reporting provisions of the Hiring Incentives to Restore Employment Act of 2010 (commonly referred to as “FATCA”, as most of the provisions were originally introduced in the Foreign Account Tax Compliance Act). The Notice is the first official guidance on this subject since Notice 2010-60, released in August 2010. The Notice supplements, and in some cases supersedes, the guidance provided in Notice 2010-60. Although the Notice does not provide guidance on all aspects of FATCA, it does provide new and updated information on a variety of topics, including:

  • The definition of passthru payments (a definition that is significantly broader than many observers had anticipated);
  • Which entities may be treated as deemed compliant foreign financial institutions (“FFIs”) and the requirements that must be satisfied to qualify as a deemed compliant FFI;
  • The treatment of qualified intermediaries, foreign withholding partnerships and foreign withholding trusts; and
  • The application of FATCA’s reporting rules to affiliated groups of FFIs.

The Notice also revises and modifies the preexisting individual account identification procedures and U.S. account reporting requirements that were announced in Notice 2010-60. In particular, the Notice:

  • No longer requires certain preexisting individual accounts to be “re-tested” under the procedures for identifying new individual accounts;
  • Introduces the concepts of “high value accounts” and “private banking accounts” and sets forth specific procedures an FFI must comply with in order to identify its high value accounts and private banking accounts as U.S. accounts;
  • Limits when a Participating FFI (described in the attached publication) must aggregate the accounts a single account holder has at the FFI’s different branches and affiliates for the purposes of determining the balance or value of an account;
  • Modifies the information an FFI will be asked to provide to the IRS on its U.S. accounts; and
  • Adds a new requirement that the chief compliance officer (or an equivalent-level officer) of a Participating FFI must certify that, between the publication date of the Notice and the effective date of the FFI’s FFI Agreement (described in the attached publication), the FFI’s management personnel did not encourage or assist account holders with respect to strategies for avoiding identification of their accounts as U.S. accounts.

The Notice also states that Treasury and the IRS intend to (i) issue regulations incorporating the guidance in the Notice and (ii) publish draft FFI Agreements and draft information reporting and certification forms.

Although Notice 2010-60 requested comments on applying FATCA to insurance companies, the Notice does not include any guidance on this topic.