Foreign Financial Institutions: Get Ready for New Tax Compliance Obligations

Author:Ms Elizabeth McGinley, Alexander W. Jones and James D. Reardon
Profession:Bracewell & Giuliani LLP

On April 8, 2011, the Treasury and IRS issued Notice 2011-34 (the "Notice") which provides some, but not all, of the guidance foreign financial institutions need to satisfy their obligations under the Foreign Account Tax Compliance Act ("FATCA"). Under FATCA, foreign financial institutions are subject to complex information reporting rules with respect to their U.S. account holders. If such reporting obligations are not met, the United States will impose withholding, at a rate of 30%, on certain U.S. source payments to foreign financial institutions not in compliance with FATCA.

On March 18, 2010, the Hiring Incentives to Restore Employment Act of 2010, including the FATCA provisions of the Internal Revenue Code, became law. The FATCA rules require three categories of foreign financial institutions ("FFIs")1 to furnish the Treasury with information regarding their U.S. account holders. To induce FFIs to become "Participating FFIs" by entering into an agreement with Treasury to provide such information, FATCA requires that a U.S. payor of a "withholdable payment" to an FFI that has not entered into such an agreement, to withhold tax at a rate of 30%. Withholdable payments include U.S. source dividends, interest and gross proceeds from the disposition of U.S. securities.

The Treasury and the IRS subsequently issued Notice 2010-60 providing initial guidance on FATCA compliance. Such compliance includes the regular performance of due diligence with respect to account holders to determine if any holders are U.S. persons. If any account holder is identified as a U.S. person, a Participating FFI is required to provide Treasury with information about the identity of the U.S. person, the account balance, withdrawals and deposits, and the income such person derives from the account.

For additional background regarding FATCA and FFIs subject to its information reporting requirements, see Bracewell & Giuliani's May 6, 2010 client alert available here.

Additional Guidance Provided by the Notice

The Notice provides guidance on the due diligence protocols and procedures that Participating FFIs must observe with respect to disclosure agreements with the Treasury necessary to obtain, or maintain, their exemption from the 30% FATCA withholding tax.

The Notice primarily provides clarity regarding: (i) the reporting procedures a Participating FFI must undertake with respect to existing account holders, (ii) the definition of the term "passthru payment" that...

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