Daily Tax Update - July 14, 2011: Treasury and IRS Issue Notice on Foreign Account Tax Compliance Act ("FATCA") Transitional Relief

TREASURY AND IRS ISSUE NOTICE ON FOREIGN ACCOUNT TAX COMPLIANCE ACT "FATCA" TRANSITIONAL RELIEF: Today, Treasury and the IRS released Notice 2011-53, which describes the timeline for the implementation of the FATCA withholding and reporting provisions.  The notice also provides that Treasury and the IRS anticipate issuing proposed FATCA regulations by December 31, 2011 and final regulations in the summer of 2012.  Treasury and the IRS also anticipate issuing draft versions, followed by final versions in the summer of 2012, of the associated FFI Agreement and reporting forms for use by withholding agents and participating FFIs.

  • The notices states that "[w]hile [FATCA] provides that the provisions of Chapter 4 are effective beginning in 2013, Treasury and the IRS have determined that because [the FATCA withholding and reporting provisions] create[] the need for significant modifications to the information management systems of FFIs, withholding agents, and the IRS, it is reasonable for regulations to provide for a phased implementation."  In conjunction with the release of the notice, the IRS also issued a news release quoting IRS Commissioner Doug Shulman as stating that "FATCA is an important development in US efforts to combat offshore noncompliance.  At the same time, the IRS recognizes that implementing FATCA is a major undertaking for financial institutions. Today's notice is a reflection of our serious commitment to implementation of the statute, but also a serious commitment to listen to the implementation challenges of affected financial institutions and make appropriate adjustments to ensure a smooth and timely roll-out."
  • The IRS will begin accepting FFI applications through an electronic submissions process no later than January 1, 2013.
  • FATCA withholding will be implemented in two phases. 
    • For payments made on or after January 1, 2014, withholding agents will be obligated to withhold under section 1471(a) only on US source interest, dividends, and other fixed or determinable annual or periodical gains, profits, and income ("FDAP").  FFIs will be identified as participating FFIs and will not be subject to withholding beginning on January 1, 2014 if they have registered as participating FFIs and entered into FFI Agreements by June 30, 2013. 
    • For payments made on or after January 1, 2015, withholding agents will be obligated to withhold under section 1471(a) on all withholdable payments (i.e., both US source FDAP payments and gross proceeds described in section 1473(1)(A)(ii)).
    • The obligations of participating FFIs to withhold on "pass-thru payments" will be detailed in further regulations, but will begin no earlier than January 1, 2015.  The obligations of participating FFIs with respect to computing and publishing their "passthru payment percentage" as described in Notice 2011-34 will not begin before the first calendar quarter of 2014.
  • The notice provides that the due diligence required to be undertaken by a participating FFI with respect to preexisting and new accounts will begin in 2013.
    • A participating FFI will be required to put into place account opening procedures, previously described in Notice 2010-60 and to be implemented in regulations, to identify US accounts opened on or after the effective date of its FFI Agreement.
    • The effective date of an FFI Agreement entered into any time before July 1, 2013, will be July 1, 2013. The effective date of an FFI Agreement entered into after June 30, 2013, will be the date the FFI enters into the FFI Agreement.
    • Within one year of the effective date of its FFI Agreement, a participating FFI will be required to have completed the private banking procedures described in Notice 2011-34 for all accounts opened before the effective date of its FFI Agreement that are associated with a private banking relationship (including individual and entity accounts) and that have a balance or value of at least $500,000 on the effective date of the FFI Agreement.  For accounts with a balance of less than $500,000, the private banking procedures must be completed by the later of December 31, 2014 or the date that is one year after the effective date of its FFI Agreement.
    • For all other pre-existing accounts not described above, a participating FFI must complete due diligence procedures as prescribed in Notice 2010-60, Notice 2011-34, and forthcoming regulations within two years of the effective date of its FFI Agreement.
  • The Notice also provides deadlines for when accounts identified as US accounts must be reported to the IRS.  Reporting will begin in 2014. 
    • An account for which a participating FFI has received a Form W-9 from the account holder (or, with respect to an account held by a US owned foreign entity, from a substantial US owner of such entity) by June 30, 2014 must be reported to the IRS as a US account by September 30, 2014. 
    • For the first year of reporting, the participating FFI will be required to report:
      • the name, address, and US TIN of each specified US person who is an account holder and, in the case of any account holder that is a US owned foreign entity, the name, address, and US TIN of each substantial US owner of such entity;
      • the account balance as of December 31, 2013, or, if the account was closed after the effective date of the FFI’s FFI Agreement, the balance of such account immediately before closure; and
      • the account number.
    • For each account for which the participating FFI is not able to report the information above (e.g., because the account holder has not waived any applicable reporting restrictions), the FFI will report the account among its recalcitrant account holders with US indicia in accordance with section IV.F of Notice 2010-60 and as prescribed in future guidance.  The reporting with respect to recalcitrant account holders identified by June 30, 2014 will be required to be filed with the IRS by September 30, 2014.
    • Reporting in subsequent years will be required as contemplated in Notice 2010-60 and Notice 2011-34 and as implemented in future regulations.
    • The notice can be accessed here: Notice 2011-53.
  • For additional information, contact Philip R. West - pwest@steptoe.com or  Amanda Varmaavarma@steptoe.com.

FINAL REGULATIONS ADDRESSING FOREIGN TAX CREDIT GENERATOR TRANSACTIONS SUPPLEMENTED: Today, the IRS issued temporary regulations (T.D. 9536) (the text of which also serves as the text of proposed regulations (REG-126519-11)) supplementing final regulations issued yesterday (T.D. 9535) relating to the determination of the amount of taxes paid for foreign tax credit ("FTC") purposes. The final regulations issued yesterday address certain structured transactions that produce FTC results deemed inappropriate by Treasury and the IRS, commonly referred to as FTC generator transactions.

  • The final regulations issued yesterday address the treatment of foreign payments attributable to a structured passive investment arrangement ("SPIA"). Under the final regulations, amounts paid to a foreign taxing authority that are attributable to a SPIA, defined as an arrangement meeting six specified conditions, are not treated as an amount of "tax paid" for FTC purposes. The regulations as finalized apply to foreign payments that, if they were taxes, would be considered paid or accrued on or after July 13, 2011.
  • The first condition under the final regulations (the "Special Purpose Vehicle (“SPV”) condition") is that the arrangement utilizes an entity that meets two requirements. First, substantially all of the entity’s gross income must be attributable to passive investment income and substantially all of the entity’s assets must be held to produce such passive investment income. Second, there must be a foreign payment attributable to the income of the entity, as determined under the laws of the foreign country to which the foreign payment is made. Such foreign payment may be paid by the entity itself or by the owner(s) of the entity.
  • With respect to the second requirement of the SPV condition, the final regulations issued yesterday removed an exception under 2008 temporary regulations that a foreign payment does not include a withholding tax imposed on distributions or payments made by an entity to a US party. The IRS explained that this exception for withholding taxes was removed because the IRS and Treasury became aware that taxpayers can enter into arrangements that generate duplicative benefits involving foreign withholding taxes imposed on distributions made by an entity to a US party. The IRS provided as an example a situation where the parties undertake a transaction in which interests in a SPV are transferred by the US party to a counterparty subject to a repurchase obligation, and therefore withholding taxes imposed on distributions from the SPV may be claimed as creditable in both jurisdictions.
  • The temporary regulations issued today add a new provision clarifying that a foreign payment attributable to income of an entity includes a withholding tax imposed on a dividend or other distribution (including distributions made by a pass-through entity or an entity that is disregarded as an entity separate from its owner for US tax purposes) with respect to the equity of the entity.
  • The regulations can be accessed here and here.
  • For additional information, contact Philip R. West - pwest@steptoe.com.          

OBAMA TO CANTOR:  “DON’T CALL MY BLUFF” -- GEITHNER:  "WE'RE RUNNING OUT OF TIME":  Yesterday’s deficit reduction/debt ceiling negotiations became testy between President Obama and House Majority Leader Eric Cantor.  According to several reports, the President exchanged words with Cantor over revenue increases and said that "enough is enough."  Obama said, "Don't call my bluff.  I'm going to the American people on this."  Obama added, "I've reached my limit.  This may bring my presidency down, but I will not yield on this."           

  • Cantor said, "He became very agitated."  Cantor called the President's exit from the talks "abrupt," and added that the two sides are "very far apart right now."  However, a House Democrat called Cantor’s version of the episode "completely overblown."
  • If no agreement is reached by Friday, the President is expected to hold weekend debt ceiling talks with lawmakers at Camp David.  If the deficit reduction negotiators can’t break their impasse by Friday, the focus is expected to turn solely on a way to raise the debt ceiling.  Today, White House Press Secretary Jay Carney said, "The President views Friday as an important moment where we can make an assessment about whether we are moving toward a significant bipartisan agreement on deficit reduction or not. If we're not, then we have to begin looking at making sure that we fulfill our obligation to uphold the credit rating of the United States."
  • Today on the Senate floor, Senate Majority Leader Harry Reid said, "House Majority Leader Eric Cantor has shown he shouldn’t be at the table and Republicans agree he shouldn’t be at the table.  Even Speaker [John] Boehner and Minority Leader [Mitch] McConnell seem to understand the seriousness of this situation."
  • Sen. Charles Schumer also criticized Cantor, "He is basically standing in the way and it’s a shame. ... If Eric Cantor decides everything, I fear we’ll be in default."  Schumer also said that he and other Democrats are trying to work with McConnell on a plan that will allow the debt limit to be raised but also contain a package of spending cuts.  Schumer said they wanted to "make some modifications so it isn't so political."
  • During a visit to Capitol Hill today, Treasury Secretary Timothy Geithner said, "We’ve looked at all available options and we have no way to give Congress more time to solve this problem.  We’re running out of time."  Geithner added, "The eyes of the country are on us.  The eyes of the world are on us, and we need to make sure we stand together and send a definitive signal that we’re going to take the steps necessary to avoid default and also take advantage of this opportunity to make some progress in dealing with our long-term fiscal problems.  We don’t have much time; it’s time we move."
  • Following Geithner's remarks, Reid said, "Secretary Geithner made one thing very clear:  August 2 is the deadline.  There is no waffling from that.  There’s no room to squeeze into another area – that’s it, August 2. . .  There is no wiggle room."

TAX BILLS INTRODUCED JULY 13TH:

1. [112nd] H.R.2515 : To amend the Internal Revenue Code of 1986 to increase the dollar limitation on employer-provided group term life insurance that can be excluded from the gross income of the employee.
Sponsor: Rep Burgess, Michael C. [TX-26] (introduced 7/13/2011)      Cosponsors (None)
Committees: House Ways and Means
Latest Major Action: 7/13/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

2. [112nd] H.R.2516 : To amend the Internal Revenue Code of 1986 to provide for a waiver of minimum required distribution rules applicable to pension plans for 2011 and 2012.
Sponsor: Rep Burgess, Michael C. [TX-26] (introduced 7/13/2011)      Cosponsors (None)
Committees: House Ways and Means
Latest Major Action: 7/13/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

3. [112nd] S.1366 : A bill to amend the Internal Revenue Code of 1986 to broaden the special rules for certain governmental plans under section 105(j) to include plans established by political subdivisions.
Sponsor: Sen Cantwell, Maria [WA] (introduced 7/13/2011)      Cosponsors (2)
Committees: Senate Finance

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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