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April 14, 2011
New FATCA Guidance Supplemental Notice Provides Additional Guidance on the Information Reporting and Withholding Rules for Foreign Financial Institutions
SUMMARY 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;
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• Limits when a Participating FFI (described below) 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 below), 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.
BACKGROUND FATCA was passed in March 2010, and is intended to reduce U.S. tax avoidance by U.S. citizens and
residents holding assets outside the United States. To accomplish this goal, the main compliance
provisions of FATCA encourage: (i) FFIs to sign agreements to report information on their account
holders to the IRS (such FFIs, “Participating FFIs” and such agreements, “FFI Agreements”) and (ii) other
foreign entities to provide information regarding their beneficial owners to U.S. withholding agents. In the
absence of compliance, FATCA imposes a 30% withholding tax on payments of U.S.-source
“withholdable payments.”1 FATCA also requires Participating FFIs to withhold on “passthru payments”
(discussed below) made to “recalcitrant account holders” and FFIs that do not sign an agreement with the
IRS under the Act (such FFIs, “Nonparticipating FFIs”).
In August 2010, the IRS and Treasury released Notice 2010-60, the first round of guidance issued under
FATCA. Notice 2010-60 provided the IRS’s initial views regarding how a number of provisions of FATCA
would be applied, including: (i) the FATCA’s grandfathering rules; (ii) the definition of a “financial
institution” for FATCA purposes; (iii) what Participating FFIs will need to do to identify and classify their
account holders; (iv) what U.S. financial institutions (“USFIs”) that make withholdable payments will need
to do to identify and classify their account-holder payees; (v) how exemptions from withholding will be
1 “Withholdable payments,” under FATCA, include payments of U.S.-source interest, dividends and
other fixed or determinable, annual or periodical income, as well as any gross proceeds from the sale or disposition of an obligation of a type that can produce U.S-source interest or dividends. Additional background on FATCA can be found in the Sullivan & Cromwell LLP publication entitled “Hiring Incentives to Restore Employment Act Enacted: Legislation Includes Foreign Account Provisions and Employment Incentives” (March 24, 2010), which can be obtained by following the instructions at the end of this publication.
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applied; and (vi) what information a Participating FFI will be required to report. Notice 2010-60 also
requested public comment on a variety of subjects that relate to how FATCA will be implemented.2
THE NOTICE A. PASSTHRU PAYMENTS
The Notice provides the first guidance from the IRS and Treasury regarding how FATCA’s requirement
that Participating FFIs withhold on certain “passthru payments” will be implemented. The definition of a
“passthru payment” under the Notice is significantly broader than many observers had anticipated, and if
read literally, could encompass any payment made by a Participating FFI that is not made in a custodial
capacity (along with certain custodial payments). It is unclear whether the IRS and Treasury intended this
level of breadth, or if subsequent guidance will narrow the scope of what represents a potential passthru
payment. These rules may, if implemented without further refinement, also create significant logistical
and other challenges for Participating FFIs.
1. Background
A Participating FFI is required to withhold 30% of any “passthru payment” made to a “recalcitrant account
holder” (i.e., a person who fails to comply with reasonable requests for certain information that
Participating FFIs must request under FATCA) or a Nonparticipating FFI.3 FATCA defines a “passthru
payment” as: (i) any payment that is itself a withholdable payment and (ii) any payment that is not a
withholdable payment, to the extent it is “attributable to” a withholdable payment. The legislative history
of FATCA and prior IRS guidance do not further define what facts should cause a payment to be
considered “attributable to” a withholdable payment, although Notice 2010-60 requested comments on
how this feature of FATCA should be implemented.
Many commentators had, prior to the Notice, recommended that the IRS adopt a “tracing” approach to
defining the extent to which a payment is “attributable to” a withholdable payment.4 Under a “tracing”
view, a payment that is directly linked to a withholdable payment—such as a dividend paid by a non-U.S.
passive investment vehicle whose sole activity consists of investing in U.S. debt securities—would be
2 For additional background on Notice 2010-60, please see the Sullivan & Cromwell LLP Publication
entitled “FATCA Guidance: IRS Releases Preliminary Guidance on the FATCA Provisions of the HIRE Act” (Sept. 13, 2010), which can be obtained by following the instructions at the end of this publication.
3 See Section 1471(b)(1)(D). FATCA also requires withholding on passthru payments that are made to FFIs that have elected to be withheld upon.
4 See, e.g., N.Y. State Bar Ass’n, Tax Section, Report on Notice 2010-60 (Nov. 16, 2010); Letter from Rep. William Lacy Clay to Timothy Geithner, Secretary of the Treasury (Sep. 13, 2010); Letter from David Wagner, the Clearing House Association LLC, to Stephen E. Shay, Deputy Assistant Secretary for International Tax Affairs, U.S. Dep’t of the Treasury (Nov. 5, 2010).
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treated as a passthru payment. However, a payment that is more tenuously “attributable” to U.S.-source
income (such as interest paid by an FFI that is a multinational commercial bank with limited U.S.
operations) would not be considered a passthru payment.
2. Passthru Payments under the Notice
In the Notice, the IRS and Treasury announced that they do not intend to adopt a “tracing” approach to
determine whether a payment is “attributable to” a withholdable payment. Instead, the IRS and Treasury
describe a proposed rule that will, in effect, treat payments as “attributable to” withholdable payments in
proportion to the fraction of the payor’s total assets that have U.S. nexus (“U.S. Assets”). Specifically,
subject to limited exceptions: (i) any withholdable payment made by an FFI will be treated entirely as a
passthru payment and (ii) a portion -- the “passthru payment percentage” -- of any remaining or other
payment made by an FFI will be treated as a passthru payment. For payments made because an FFI is
acting as a custodian, the relevant passthru payment percentage will be the passthru payment
percentage of the issuer of the instrument or interest in the custodial account. In other cases, the
applicable passthru payment percentage will be that of the payor FFI.
The passthru payment percentage of any FFI will generally be the fraction of its assets that are U.S.
Assets. Under the Notice, U.S. Assets will be any assets to the extent they could give rise to passthru
payments. For purposes of this rule, a debt or equity instrument issued by a U.S. corporation will be
treated entirely as a U.S. Asset, and a debt or equity instrument issued by a non-financial foreign entity
(an “NFFE”) will not be treated as a U.S. Asset. A debt obligation or equity interest issued by another FFI
will be treated as a U.S. Asset to the extent of the issuer’s passthru payment percentage.5
A Participating FFI or deemed compliant FFI will be required to compute its passthru payment percentage
within roughly three months of the end of each fiscal quarter. Specifically, each such FFI will be required
to use “quarterly testing dates” that, for each fiscal quarter, represent either (i) the last redemption date of
the fiscal quarter (in the case of FFIs that conduct redemptions at least quarterly) or (ii) the last business
day of the fiscal quarter (in the case of all other FFIs). Within three months of a quarterly testing date,
each Participating FFI and deemed compliant FFI will be required to calculate and publish its passthru
payment percentage. In general, an FFI’s passthru payment percentage will be the sum of its U.S.
Assets held on the last four quarterly testing dates over the sum of all of its assets held on those dates.6
However, an entity becoming a Participating FFI for the first time will be entitled to use a special transition
5 Participating FFIs will be entitled to rely on the published “passthru payment calculations” of other
FFIs for this purpose. 6 The Notice also indicates that the IRS and Treasury intend to issue anti-avoidance rules that would
disregard asset transfers in cases when FFIs engage in a pattern of disposing of assets shortly prior to a quarterly testing date and reacquiring the same or similar assets at a later date.
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method that permits it to select an “initial testing date” that determines its initial passthru payment
percentage and phases in information from quarterly testing dates as they occur.7
Assets, other than assets held in custodial accounts (which will be disregarded), will generally be
reflected in passthru payment percentage calculations if (and to the extent) they are shown on a
Participating FFI’s balance sheet (as prepared under its method of accounting for reporting to interest
holders). Participating FFIs will also be required to include off-balance sheet transactions to the extent
provided in future guidance. An FFI that is not a Participating FFI or a deemed compliant FFI will be
deemed, for this purpose, to have a passthru payment percentage of 0%.8 However, a Participating FFI
or deemed compliant FFI that fails to publish its passthru payment percentage will be treated as having a
passthru payment percentage of 100%.9
In the Notice, the IRS and Treasury also announce that grandfathered obligations (i.e., in general, fixed-
term legal agreements that generate or could generate withholdable payments that are not treated as
equity under U.S. tax principles) will not be treated as U.S. Assets for the purpose of determining an
entity’s passthru payment percentage. In addition, grandfathered obligations will not give rise to passthru
payments under the rules applicable to custodial payments.
3. Request for Comments
In the Notice, the IRS and Treasury request comments regarding the proposed approach to passthru
payments that is described above. In addition, the IRS and Treasury have requested comments on the
following subjects that relate to passthru payments:
• The use of the passthru payment percentage with respect to domestic and foreign partnerships and other flow-through entities;
• How a partnership or other flow-through entity may determine whether a payment it makes to an interest holder is a withholdable payment or a passthru payment;
7 Specifically, under this alternative method, a Participating FFI will select any date that is within the six
months preceding the effective date of its FFI Agreement as its initial testing date. The percentage of the FFI’s assets that are U.S. Assets on the initial testing date will be the new Participating FFI’s passthru payment percentage for the first quarter during which its FFI Agreement is effective. For the next three quarters, a Participating FFI that elects this method will calculate its passthru payment percentage as the sum of its U.S. Assets on each quarterly testing date that has elapsed and the initial testing date over the sum of its total assets on each quarterly testing date that has elapsed and the initial testing date.
8 However, prior to doing so, an FFI will be required to confirm that the lower-tier FFI is not a Participating FFI or a deemed compliant FFI. The IRS intends to maintain a database that will permit such confirmation.
9 It is unclear how the IRS intends to resolve the circularity problem of Participating FFIs that hold significant interests (in the form of debt or equity) in each other and therefore need data from each other before they can furnish data to each other.
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• Whether it is appropriate to permit a USFI that is a partnership or other flow-through entity under U.S. tax principles to calculate and make available a passthru payment percentage that may be used by participating FFIs in determining their own passthru payment percentages with respect to non-custodial accounts held with such U.S. institutions;
• Possible exemptions from the definition of passthru payments that would, to the extent possible, be consistent with the policy goals of the passthru payment rule and reasonable in light of the potential burden on Participating FFIs;
• The most efficient mechanism for ensuring that accurate passthru payment percentage is readily available to FFIs for purposes of administering their obligations under FATCA; and
• Anti-avoidance rules that may be necessary to prevent the manipulation of an FFI’s passthru payment percentage.
4. Discussion and Further Considerations
At first glance, the passthru payment rules proposed in the Notice do not appear to be particularly
complex: in contrast to other U.S. international tax anti-avoidance provisions that require specialized U.S.
tax accounting, the passthru payment provisions in the Notice require what appear to be straightforward
calculations and rely on ordinary financial accounting. However, when multiple levels of FFIs are
involved, obtaining the necessary data to perform these computations may be quite complex.
The Notice is also unclear on a number of points, including how broad the IRS intends the passthru
payment rule to be. The proposal in the Notice applies passthru payment withholding to any payment
made by an FFI to a Nonparticipating FFI or recalcitrant account holder. Therefore, as with the
withholdable payment rule, passthru payment treatment could be applicable to payments of both interest
and principal. However, the definition of a passthru payment, as provided in the Notice, has the potential
to be broader than the definition of a withholdable payment. For example, the literal application of this
rule would mean that a Participating FFI would be required to treat a portion of any amount paid to a
Nonparticipating FFI for services or to acquire property as a passthru payment even though the same
amounts, if paid by a USFI, would not be withholdable payments. It is not clear whether the IRS’s intent,
in developing the Notice, was to craft the broadest possible definition of a passthru payment, with a view
toward hindering the ability of Nonparticipating FFIs and recalcitrant account holders to transact with
Participating FFIs, or if the breadth of this definition in the Notice was inadvertent.
The Notice also does not clarify whether passthru payment withholding will apply to payments made on
existing debt instruments issued by Participating FFIs. Although the Notice provides that: (i)
grandfathered “obligations” will not be treated as U.S. Assets in determining a Participating FFI’s passthru
payment percentage, and (ii) grandfathered “obligations” will not give rise to passthru payments under the
rules applicable to custodial payments, it is not clear how these rules will apply to preexisting debt issued
by Participating FFIs. It is unclear whether debt instruments that generate foreign-source interest are
obligations for purposes of the grandfathering rules set out in Notice 2010-60 or whether there is any
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exemption for payments made directly by a Participating FFI on its own preexisting debt instruments to a
Nonparticipating FFIs in a noncustodial setting.10
By providing that the passthru payment percentage applicable to an obligation will generally be
determined by reference to its payor, the rules announced in the Notice also have the potential to create
new differences among otherwise-equivalent products offered by Participating FFIs and U.S. financial
institutions. Although the Notice recognizes—in requesting comments on whether USFIs that are
partnerships or other flow-through entities should be permitted to calculate a passthru payment
percentage—that passthru payments can implicate USFIs, the Notice does not include a proposal that
would require USFIs to withhold on passthru payments to Nonparticipating FFIs. The absence of such a
rule creates a lack of parity between USFIs and Participating FFIs because a USFI will, without such a
requirement, be able to pay an amount that is not a withholdable payment (e.g., dividends from a foreign
mutual fund or payments on a derivative contract) to a Nonparticipating FFI without deduction, even
though a Participating FFI would be required to withhold on an equivalent payment in accordance with its
passthru payment percentage.
B. CATEGORIES OF FFIs THAT WILL BE DEEMED COMPLIANT
Section III of the Notice describes certain categories of FFIs that will be deemed compliant FFIs under
future regulations. Under Section 1471(b)(2), certain FFIs may be deemed to meet the requirements of
1471(b) (and therefore will not be required to enter into an FFI Agreement otherwise required for an FFI
to avoid withholding under FATCA on certain payments it receives). The Notice states that future
regulations will treat certain local banks, investment funds and retirement plans as deemed compliant
FFIs and outlines the requirements for qualification under each category. Of particular note are the rules
that permit certain local banks to be deemed compliant FFIs. Many FFIs have commented that locally
operating banks and bank branches present a low risk of U.S. tax avoidance and therefore, should not
have to incur the cost of becoming Participating FFIs. While the Notice adopts such rules, they are
limited in several ways. First, the rules require that the local bank not operate or solicit accounts in any
jurisdiction outside of its country of origin. This means foreign banks that have a branch or solicit
accounts in a neighboring country (not the U.S.) will not qualify for deemed compliant status even though
the bank has policies and procedures in place to ensure that it does not open accounts for U.S. persons.
Second, the rules apply only to entities and not to branches. As a result, a Participating FFI with a branch
that operates solely in a local jurisdiction will, nonetheless, have to include that branch when
implementing the reporting and withholding rules. Third, under the rules, a local bank will not be deemed
10 Under Notice 2010-60, an “obligation” is, subject to certain exceptions that generally would not apply
to debt, any legal agreement that produces or could produce withholdable payments. Foreign-source interest would generally not be considered a withholdable payment, and it is not clear if “could produce” should be read broadly enough to encompass instruments that theoretically could, but would not ordinarily be expected to, generate withholdable payments.
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complaint unless it limits the NFFEs that may open accounts at the bank to NFFEs that are organized and
operate in the jurisdiction of the bank. The Notice also requests comments regarding other types of FFIs
that could appropriately be treated as deemed compliant FFIs.
1. Banks and Certain Other FFIs that Operate Locally
a. Affiliated Banks that Are Organized and Operate in a Single Jurisdiction
Under the Notice, each member of an affiliated group of FFIs may be treated as a deemed compliant FFI
if each FFI in the “expanded affiliated group”:11
• Is licensed and regulated as a bank or similar organization authorized to accept deposits in its country of organization;
• Is organized in the same country as the other FFIs in the expanded affiliated group;
• Does not maintain operations outside the country of organization;
• Does not solicit account holders outside its country of organization; and
• Implements policies and procedures to ensure that it does not open or maintain accounts for non-residents, Nonparticipating FFIs or NFFEs (other than “excepted NFFEs” that are organized and operate in the same jurisdiction in which the members of the expanded affiliated group are organized and operate).12
b. Members of a Participating FFI Group that Only Operate in Their Home Jurisdiction
Pursuant to the Notice, an FFI that is a member of an expanded affiliated group that includes one or more
Participating FFIs may be treated as a deemed compliant FFI if:
• The member does not operate outside its country of organization;
• The member does not solicit account holders outside its country of operation;
• The member implements the preexisting account and customer identification procedures applicable for Participating FFIs to identify U.S. accounts, accounts of Nonparticipating FFIs
11 Under FATCA, a financial institution generally would be part of an “expanded affiliated group” that
includes another financial institution if: (i) one financial institution controls the other financial institution directly or through a chain of controlled entities or (ii) they are both under the common control (directly or through a chain of controlled entities) of a single corporation (whether or not such corporation is a financial institution itself). More specifically, FATCA defines an “expanded affiliated group” as an “affiliated group,” as defined by Section 1504(a), but by substituting a more-than-50% ownership requirement for the at-least-80% ownership requirement in each place where it appears in Section 1504(a), and disregarding the Section 1504(b)(2) prohibition on including insurance companies in an affiliated group and the Section 1504(b)(3) prohibition on including non-U.S. corporations in an affiliated group. It also includes partnerships and trusts if they are controlled, within the meaning of Section 954(d)(3), by other members of the expanded affiliated group (including other controlled partnerships or trusts).
12 Pursuant to Notice 2010-60, an excepted NFFE includes an NFFE that is engaged in an active trade or business.
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and accounts of NFFEs (other than excepted NFFEs that are organized and operate in the same jurisdiction in which the member is organized and operates); and
• The member agrees that if any of the types of accounts described immediately above are found, it will either (a) enter into an FFI agreement; (b) transfer the account to an affiliate that is a Participating FFI within the time proscribed in future regulations; or (c) close such account.
Treasury and the IRS have asked for comments on how an expanded affiliated group operating in a
single jurisdiction and an FFI member of an expanded affiliated group in which one or more members is a
Participating FFI could demonstrate that it meets the relevant requirements described above. Treasury
and IRS have also asked for comments as to whether there are policies and procedures other than those
applicable to Participating FFIs that an FFI member of a Participating FFI group could use to identify any
U.S. accounts.
2. Certain Investment Funds
a. Funds where all Holders Are FFIs or Exempt Entities
Pursuant to the Notice, an FFI that is an investment fund may be treated as a deemed compliant FFI if:
• The holders of the direct units or global certificate in the fund are (a) Participating FFIs or deemed compliant FFIs holding on behalf of other investors, or (b) entities that are exempt under Section 1471(f) (generally foreign governments, international organizations, foreign central banks or other entities identified by the IRS as having a low risk of tax evasion);
• The fund prohibits entities other than those described above from holding an interest in the fund; and
• The fund agrees that any passthru payment percentages that it calculates and publishes will be done in accordance with the rules set forth in the Notice. (See discussion in Section A above).
Significantly, the category of acceptable holders does not include U.S. financial institutions.
b. Funds with Other Specified Owners (Including U.S. Financial Institutions)
Based on comments received, Treasury and the IRS are considering, but have not yet determined,
whether funds may be treated as deemed compliant where:
• All direct holders in the funds are Participating FFIs, U.S. financial institutions, deemed compliant FFIs, exempted entities under Section 1471(f) or Nonparticipating FFIs acting as distributors;
• The fund’s distribution or similar agreements prohibit investors that are specified U.S. persons, NFFEs other than excepted NFFEs and non-participating FFIs;
• Each distributor of the funds agrees to enforce the investment restrictions; and
• Certain other requirements relevant to FATCA are met.
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c. Funds Traded on an Established Securities Market
Under the Code, an FFI that issues only debt or equity interests that are regularly traded on an
established securities market does not have “financial accounts.” Nevertheless, according to the Notice,
such entities are still FFIs that are subject to certain obligations to the extent they receive passthru
payments. Such FFIs would be required to enter into FFI Agreements to avoid FATCA withholding on
withholdable payments they receive, and must withhold on passthru payments that they make to
Nonparticipating FFIs and certify as to their passthru percentage.
Treasury and the IRS are considering, but have not yet determined, the circumstances under which such
FFIs could be deemed compliant FFIs.
3. Foreign Retirement Plans
The Notice states that Treasury and the IRS still intend to issue guidance describing the types of foreign
retirement plans that pose a low risk of tax evasion under Section 1471(f).13 Payments beneficially
owned by such retirement plans will be exempt from withholding under FATCA. In addition, Treasury and
the IRS intend to provide guidance on those foreign retirement plans and retirement accounts that may be
deemed compliant FFIs.
4. Other Entities that Should Be Treated as Deemed Compliant FFIs
Treasury and the IRS have requested comments regarding other categories of entities that should be
treated as deemed compliant FFIs.
5. Becoming Designated and Complying with Deemed Compliant FFI Rules
a. Use of Agent to Meet Due Diligence Requirements
In recognition of the fact that many FFIs employ paying agents or transfer agents to act on their behalf,
Treasury and the IRS intend to issue guidance clarifying that an FFI may use an agent to perform the due
diligence and other required actions to maintain their status as a deemed compliant FFI. The FFI will,
however, remain responsible for ensuring that the requirements are being met. Similarly, a Participating
FFI may use an agent to perform its obligations under an FFI agreement.
13 Notice 2010-60 stated that the IRS intended to treat a foreign retirement plan as posing a low risk of
tax evasion only if the plan: (i) qualifies as a retirement plan under the law of the country where it is established; (ii) is sponsored by a foreign employer; and (iii) does not permit U.S. persons, other than employees who worked for the sponsor during the time when the relevant benefits accrued, to participate.
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b. Certification as to Deemed Compliant Status
In order to qualify as a deemed compliant FFI, an FFI must apply to the IRS for deemed-compliance
status, obtain from the IRS an FFI identification number (an “FFI-EIN”) that designates it as a deemed
compliant FFI, and certify every three years that it meets the requirements for a deemed compliant FFI.
C. RULES FOR QUALIFIED INTERMEDIARIES, FOREIGN WITHHOLDING PARTNERSHIPS AND FOREIGN WITHHOLDING TRUSTS
Section V of the Notice covers rules for qualified intermediaries, foreign withholding partnerships and
foreign withholding trusts. These rules make clear that every qualified intermediary, foreign withholding
partnership and foreign withholding trust that is a FFI will be required to become a Participating FFI.
1. Qualified Intermediaries
Under Section 1471(c)(3), a qualified intermediary (generally a foreign financial institution or clearing
organization or foreign branch of a U.S. bank or clearing organization that has entered into an agreement
with the IRS to take on certain information reporting and withholding responsibilities under Chapter 3 and
Chapter 61 of the Code for payments of U.S.-source income that it receives as a custodian) (a “QI”) is
also required to comply with the account identification, reporting and other requirements of FATCA.
Pursuant to the Notice, Treasury and the IRS intend to issue guidance that will require all QIs that are
FFIs to become Participating FFIs unless they are deemed compliant FFIs under Section 1471 (see
discussion of deemed compliant FFIs in Section B above). Entities that are currently QIs will be required
to consent to include in their QI agreement the requirements for a Participating FFI. Such consents would
be effective as of January 1, 2013. The Notice states that Treasury and the IRS intend to issue transition
rules under both Chapter 3 and Chapter 4 of the Code to facilitate the change. Entities that wish to apply
for QI status after January 1, 2013 will be required to be Participating FFIs (unless they qualify for an
exception under Section 1471).
2. Foreign Withholding Partnerships and Foreign Withholding Trusts
Treasury and the IRS also intend to require all FFIs that are foreign withholding partnerships or foreign
withholding trusts (generally foreign partnerships and trusts that have entered into an agreement with the
IRS to take on certain information reporting and withholding responsibilities similar to those taken on by a
QI) to agree to become Participating FFIs under similar procedures. According to the Notice, Treasury
and the IRS intend to coordinate the reporting obligations of QIs, foreign withholding partnerships and
foreign withholding trusts under Chapter 3 and Chapter 4 of the Code and request comments on how the
rules under Chapter 3 may be modified for that purpose.
D. COMPLIANCE BY AFFILIATED GROUPS
The Notice also provides new rules that will be applicable to expanded affiliated groups. These rules will
generally require FFI affiliated groups to coordinate the FFI Agreement application process through a
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single “lead FFI” and, on a going forward basis, to appoint a contact entity to handle ongoing
communications with the IRS. The Notice also requests comments on the possibility of centralized
compliance among funds with the same asset manager.
Pursuant to Section 1471(e), the reporting requirements imposed on a Participating FFI apply to each
U.S. account maintained by the Participating FFI and to the U.S. accounts maintained by every other FFI
that is a member of the same expanded affiliated group that includes the Participating FFI (each such FFI
an “FFI affiliate” of an “FFI Group”).
1. All Members of FFI Group to Be Participating FFIs or Deemed Compliant FFIs
The Notice provides that Treasury and the IRS intend that each FFI affiliate in an FFI Group must either
be a Participating FFI or a deemed compliant FFI. Each FFI affiliate will be required to execute its own
FFI Agreement (through the coordinated application process described below) that applies to all of its
worldwide branches and offices, and will be issued its own FFI-EIN. In addition, each FFI affiliate will be
responsible for its own due diligence, withholding and reporting obligations. The Notice states that
Treasury and the IRS are still considering whether to allow an FFI Group to include one or more
Nonparticipating (and presumably non-deemed compliant) FFI affiliates.
2. Coordinated Compliance
a. Application Process
As set forth in the Notice, Treasury and IRS intend to require each FFI Group to designate a lead FFI to
complete an FFI Agreement with the IRS or a certification of deemed compliant FFI status for itself and on
behalf of each of its FFI affiliates. In particular the lead FFI will, among other things, be required to:
• Provide legally binding authorization from each FFI affiliate for the lead FFI to act on its behalf;
• Represent that it has identified each FFI in its expanded affiliated group and has completed the application in accordance with the instructions from each FFI affiliate;
• Represent that it is authorized to act as agent for the group for purposes of an ongoing requirement to identify any new FFI affiliates and any entities that cease to be FFI affiliates;
• Provide certain information about each FFI affiliate in its FFI Group and other information about the affiliate including whether it is a Participating or deemed compliant FFI, the types of accounts the affiliate maintains, whether the affiliate maintains “private banking accounts” (discussed below) and whether it is a QI, foreign withholding partnership or foreign withholding trust;
• Indentify each affiliate that maintains a branch that elects to separately report its U.S. accounts pursuant to Section IV of the Notice (discussed below);
• Provide the name, address and country of organization of each member of the FFI Group that is not an FFI; and
• Provide any additional information set forth in future guidance.
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b. Ongoing Coordination
Treasury and the IRS intend to require the lead FFI to continue to act as the central contact person for
issues that arise concerning the agreements and certifications of each FFI affiliate as well as matters
related to any non-FFI affiliate. In the alternative, the lead FFI may identify one or more other FFI
affiliates to act as contact person for particular members of the FFI Group (for example, to represent
affiliates in a single jurisdiction or that share a common business line). FFI Groups will also be permitted
to appoint one or more FFI affiliates in the FFI Group to oversee the group’s compliance (such FFIs are
referred to in the Notice as “Compliance FFIs”).
This centralized compliance approach is intended to create a more efficient process for both the FFI
Group and the IRS. Treasury and the IRS seek comments about this approach, including the time a
Compliance FFI would need to establish the policies and procedures for assuming these responsibilities
and additional suggestions to facilitate a Compliance FFI’s role in enforcing its affiliates’ compliance.
c. Compliance by CFCs
The Treasury and IRS have asked for comments as to whether U.S. shareholders of controlled foreign
corporations (“CFCs”)14 that are FFIs should be allowed to take on a role similar to that of a lead FFI or a
Compliance FFI for the CFC.
d. Centralized Compliance for Funds with a Common Asset Manager
Treasury and the IRS are also considering whether a group of funds with the same asset manager (or
other agent) should be permitted to contract with the asset manager or other agent to perform its
functions under an FFI Agreement. The asset manager or other agent would enter into a single FFI
Agreement for the funds and would be the point of contact for the IRS. This option would only be
permitted where the legal agreements and other arrangements with the fund permit the asset manager or
other agent to monitor the fund’s compliance. Each fund would remain liable for the performance of its
obligations under the FFI Agreement.
E. REVISED PROCEDURES FOR IDENTIFYING PREEXISTING INDIVIDUAL ACCOUNTS
The Notice also revises the procedures set forth in Notice 2010-60 that a Participating FFI must follow to
classify its preexisting individual accounts (i.e., accounts in existence prior to the effective date of such
FFI’s FFI Agreement) as U.S. or non-U.S. accounts.
Treasury and the IRS received several comments that the procedures set forth in Notice 2010-60 for
determining whether a preexisting individual account holder is a U.S. or non-U.S. person presented
14 Generally, a CFC is a foreign corporation more than 50% of which (by vote or value) is owned by
“U.S. shareholders,” where a “U.S. shareholder” is defined as a U.S. person that owns 10% or more of the voting power of the corporation.
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significant compliance challenges. In response, Section I of the Notice replaces Section III.B.2.a. of
Notice 2010-60 in its entirety.
Generally, the Notice adopts a modified version of the procedures originally set forth in Notice 2010-60.
The procedures in the Notice are more onerous in some respects and less onerous in other respects than
those proposed in Notice 2010-60.
For example, Notice 2010-60 required an FFI’s preexisting individual accounts to be “re-tested” under the
procedures for determining whether new individual accounts are U.S. accounts within five years of the
effective date of the FFI’s FFI Agreement, unless certain exceptions applied. Under the Notice, there is
no provision for “re-testing” under the procedures for new individual accounts. However, the Notice
creates new steps in the identification procedures for “high value accounts” (accounts with a balance or
value of more than $500,000 at the end of the year preceding the effective date of the FFI’s FFI
Agreement) and for “private banking accounts.” In general, a private banking account is an account
maintained by the FFI’s private banking department or serviced as part of a private banking relationship,
and includes an account held by an entity, nominee or other person to the extent the account is
associated with a private banking relationship with an individual client. The new procedure places certain
identification responsibilities on the “private banking relationship manager.” A “private banking
relationship manager” is an officer or employee of an FFI who is assigned responsibility for specific
account holders on an ongoing basis and advises such clients on their private banking needs.
The Notice generally allows a Participating FFI to elect to treat all accounts with a balance or value of
$50,000 or less as non-U.S. accounts. In Notice 2010-60, this election applied only to depositary
accounts. For the purposes of determining whether an account’s value is above or below the $50,000
threshold, Notice 2010-60 required all depository accounts held by an account holder at an FFI to be
aggregated. In response to comments that certain local law restraints might prevent information sharing
across branches and affiliates of an FFI, the Notice now requires an account holder’s accounts to be
aggregated for the purposes of determining balance or value only if the accounts are associated with one
another under the FFI’s existing computerized information management, accounting, tax reporting or
other recordkeeping systems.
The Notice also adds a requirement for a responsible officer of an FFI to certify compliance with the steps
outlined below.
Other changes from the procedures set forth in Notice 2010-60 include clarifying the terms “electronically
searchable information” and “documentary evidence,” and no longer treating a non-U.S. P.O. box as an
indication of non-U.S. status.
It is unclear how these rules will interact with the procedures for new individual accounts set forth in
Notice 2010-60. In particular, under Notice 2010-60, consistent with the procedure for preexisting
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individual accounts, an FFI could elect to treat all new individual depository accounts with a balance of
$50,000 or less as non-U.S. accounts. The aggregation rules outlined in the Notice (aggregation of
accounts only if they are associated with one another on the FFI’s computer systems) may not apply to
new individual accounts, which would be subject to the aggregation rules outlined in Notice 2010-60
(aggregation of all of an account holder’s accounts), notwithstanding the fact that the comments that
motivated the change with respect to preexisting accounts apply equally to new accounts. It is not clear
whether the IRS plans to issue further guidance modifying the procedures for identifying new accounts as
U.S. or non-U.S. accounts.
1. Rules for Preexisting Individual Accounts
The revised steps are as follows:
Step 1. Subject to Step 2, all account holders that are already documented as U.S. persons for other
U.S. tax purposes will be treated as specified U.S. persons.
Step 2. The Participating FFI may elect to treat all accounts (including those with account holders
documented as U.S. persons for other U.S. tax purposes) with a balance of $50,000 or less at the end of
the calendar year preceding the effective date of the Participating FFI’s FFI Agreement as non-U.S.
accounts.
Step 3. If the Participating FFI maintains a private banking account that is not addressed in either Step 1
or Step 2, the FFI must perform the steps below:15
• Each private banking relationship manager must:
• request that a client provide a Form W-9 if the private banking relationship manager has actual knowledge that such client is a U.S. person; and
• perform a diligent review of the paper and electronic account files and other records with respect to whom he or she serves as a private banking relationship manager, and identify each client (including associated family members) who, to the best of the knowledge of the private banking relationship manager, has any of the following indicia of potential U.S. status:
(i) U.S. citizenship or lawful permanent resident status;
(ii) a U.S. birthplace;
(iii) a U.S. resident or correspondent address (including a U.S. P.O. box);
(iv) standing instructions to transfer funds to accounts maintained in the U.S.;
(v) the sole address provided is an “in care of” or “hold mail” address; or
15 For the purposes of Step 3, a Participating FFI may not rely on any documentation if the private
banking relationship manager knows or has reason to know that the information contained in such documentation is unreliable or incorrect.
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(vi) a power of attorney or signatory authority was granted to a person with an address in the U.S.
• If any client is identified as having indicia of potential U.S. status, the private banking relationship manager must:
(i) request additional documentation16 in order to determine whether the client is a U.S. or non-U.S. person;17 and
(ii) request, from each client that provides a Form W-9, a waiver of applicable restrictions, if any, on reporting the client’s information to the IRS.
• Each client that provides a Form W-9 and has agreed to provide a waiver of any information reporting restrictions must be included in the FFI’s reporting of its U.S. accounts.
• In general, if the client is identified as a U.S. person (either because he or she provides a Form W-9 or because he or she is identified as having indicia of U.S status and does not establish non-U.S. status), the Participating FFI must treat all accounts associated with such client as U.S. accounts.18
• Each account for which the account holders either have not provided the documentation requested (or, in the case of U.S. persons, have not provided a waiver of any information reporting restrictions) must be treated as recalcitrant accounts after the end of the first year in which the FFI’s FFI Agreement is in effect and must be included in the FFI’s reporting with respect to such accounts.
• The private banking relationship manager must create and retain lists of all existing clients whose accounts are U.S. accounts, non-U.S. accounts or recalcitrant
16 The Notice defines “documentary evidence” as including (i) documentary evidence sufficient to
establish the identify of an individual and the status of that person as a non-U.S. person (including any documentation that includes an individual’s name, address and photograph issued by an authorized governmental body within the last three years), (ii) any valid document issued by an authorized governmental body that includes the individual’s name and address and is typically used for identification purposes, and (iii) with respect to an account maintained in a jurisdiction with anti-money laundering/know-your-customer rules that have been approved by the IRS in connection with a QI agreement, any of the documents (other than a Form W-8) referenced in the jurisdiction’s attachment to its QI agreements for identifying natural persons, as shown on the IRS’s webpage.
17 As was the case in Notice 2010-60, the type of documentation required varies depending on what U.S. indicia the client is identified as having. If the client is identified as a U.S. citizen or lawful permanent resident, the account is presumed to be held by a U.S. person, and such person must provide a Form W-9. If the indicia described in clause (ii) or (iii) are present with respect to an account, the client must provide a Form W-9, or both a Form W-8BEN and a non-U.S. passport or other government issued evidence establishing the client’s citizenship in a country other than the U.S. In addition, a client identified as having a birthplace in the U.S. must include a written explanation regarding the client’s renunciation of his or her U.S. citizenship, or a reason why the client did not acquire U.S. citizenship at birth. Holders of accounts that contain the indicia described in clause (iv) must provide either a Form W-9, or a Form W-8BEN and documentary evidence establishing the individual’s non-U.S. status. Holders of accounts that contain the indicia described in clauses (v) or (vi) must provide either a Form W-9, a Form W-8BEN or documentary evidence establishing the individual’s non-U.S. status.
18 However, an account held solely by a client’s family member will not be treated as a U.S. account if the family member provides a Form W-8BEN and documentary evidence establishing the non-U.S. status of the family member, unless the private banking relationship manager knows or has reason to know the family member is acting as a nominee or agent for the client.
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accounts. The FFI must ensure that all of the written requests and responses related to the search are retained by the FFI for ten years.
• The Participating FFI must complete the procedures above by the end of the first year in which the FFI’s FFI Agreement is in effect. A private banking relationship manager that subsequently becomes aware that a preexisting private banking account has any of the U.S. indicia described above must request additional documentation and, if the account holder does not establish non-U.S. status within one year of the date on which the private banking relationship manager discovers the U.S. indicia, must include the account in the FFI’s reporting of its U.S. accounts or treat the account as a recalcitrant account.
Step 4. For accounts not addressed in Steps 1, 2 or 3, the FFI must determine whether the FFI’s
electronically searchable information contains any of the indicia of potential U.S. status described in Step
3 above.
The Notice defines “electronically searchable information” as information that an FFI maintains in its tax
reporting files, customer master files or similar files, that is stored in the form of an electronic database
against which standard queries in programming language may be used. Customer master files include
an FFI’s primary files for maintaining account holder information. Information, data or files are not
electronically searchable merely because they are stored in an image retrieval system (i.e., pdfs or
scanned documents).
Similar to the process described in Step 3, if any of the above indicia of potential U.S. status exist, the FFI
must request and obtain additional documentation to establish whether the account holder is a U.S.
person. As in Step 3, the documentation required depends on the particular indicia of U.S. status.19
Step 5. For all accounts not identified in Steps 1 through 4, and that have a balance of $500,000 or more
at the end of the year preceding the effective date of the FFI’s FFI Agreement (“high value accounts”), the
FFI must perform a diligent review of the account files associated with the account. To the extent any of
the accounts contain U.S. indicia, the FFI must obtain the required documentation within two years of the
effective date of the FFI Agreement. Account holders that have not provided appropriate documentation
within two years of the effective date of the FFI’s FFI Agreement will be classified as recalcitrant account
holders until such documentation is received.
Step 6. Beginning the third year following the effective date of the FFI Agreement, the FFI will be
required to apply Step 5 annually to all preexisting individual accounts that were not previously high value
accounts, but that would be high value accounts if the account balance or value of the account were
tested on the last day of the preceding year. If an account has become a high value account, the FFI will
be required to treat such account as a recalcitrant account if it has not received the required
documentation by the end of the year.
19 See footnote 17.
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2. Certification of Completion
The chief compliance officer (or an equivalent-level officer) of the FFI must certify to the IRS when the FFI
has completed the above procedures (other than Step 6) for its preexisting individual accounts. The FFI
must certify completion of Steps 1 through 3 within one year of the effective date of the FFI’s FFI
Agreement and must certify completion of Steps 4 and 5 within two years of the effective date of the FFI’s
FFI Agreement.
As part of this certification, the FFI must certify that between the publication date of the Notice and the
effective date of the FFI’s FFI Agreement, the FFI’s management personnel did not engage in any
activity, or have any formal or informal policies and procedures in place, directing, encouraging, or
assisting account holders with respect to strategies for avoiding identification of their accounts as U.S.
accounts.
3. Long-Term Recalcitrant Account Holders
Under FATCA, withholding is required with respect to an FFI’s recalcitrant account holders. The Notice
states that such withholding is intended to provide relief for Participating FFIs that would not otherwise be
able to comply with the information reporting obligations under their FFI Agreements, and is not a
permanent substitute for collecting and reporting information with respect to U.S. accounts. According to
the Notice, Treasury and the IRS are continuing to consider what measures should be taken to address
long-term recalcitrant account holders, including whether, and in what circumstances, FFI Agreements
should be terminated due to the number of recalcitrant account holders remaining after a reasonable
period of time.
4. Requests for Comments
Treasury and the IRS are seeking comments on the procedures for private banking accounts, particularly
on (i) appropriate ways of modifying the definition of “private banking account” and the private banking
account procedures so that, where practical, the accounts of high-net-worth individuals who receive
private banking services are subject to the private banking account test in Step 3 and not the high value
account test in Step 5; and (ii) whether certain FFIs, such as insurance companies, should be required to
perform similar procedures with respect to their preexisting accounts, including private placement life
insurance.
5. Further Guidance
According to the Notice, Treasury and the IRS intend to require FFIs to adopt the procedures for
preexisting private banking accounts for any preexisting individual account that becomes a private
banking account, including requiring the chief compliance officer (or an equivalent-level officer) to certify
the completion of Step 3 with regard to such account. In addition, Treasury and the IRS are considering
adopting the procedures for preexisting private banking accounts for new accounts that are or become
private banking accounts.
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F. REVISED RULES FOR REPORTING ON U.S. ACCOUNTS
Section IV of the Notice provides revised rules for reporting on U.S. accounts. Under Section 1471, a
Participating FFI must report: (i) the name, address and TIN of each account holder who is a specified
U.S. person; (ii) if the account is held by a U.S.-owned foreign entity, the name, address and TIN of each
substantial U.S. owner of that entity; (iii) the account number; (iv) the account balance or value; and (v)
except to the extent provided by administrative guidance, the gross receipts of the account and gross
withdrawals from the account.
The Notice modifies and supplements Treasury and the IRS’s initial views set forth in Notice 2010-60 on
how the reporting requirements imposed by FATCA with respect to U.S. accounts will be satisfied. In
particular, the Notice:
• Requires an FFI to report year-end account balances with respect to its depositary and custodial accounts, as opposed to highest month-end (or reporting period-end, e.g., quarter-end) balances that were required under Notice 2010-60;
• Clarifies what information an FFI must report with respect to gross withdrawals from, and payments to, its U.S. accounts, and states that such amounts need not be determined in accordance with U.S. federal income tax principles;
• Exempts certain FFIs from tax basis reporting obligations under Section 6045(g); and
• Provides that the IRS intends (i) that an FFI may elect to comply with the information reporting rules that govern U.S. financial institutions’ accounts of U.S. citizens separately with respect to each of its branches, (ii) that an FFI may elect to report information on its U.S. accounts separately with respect to each of its branches, and (iii) that such elections will be made at the time an FFI enters into an FFI Agreement.
1. Account Balance or Value of Deposit and Custodial Accounts
Notice 2010-60 required FFIs to report the highest month-end (or reporting period-end if, for example, an
FFI only reports to the account holder on a quarterly basis) balance of any deposit or custodial account.
In response to comments that a number of FFIs do not retain records of their periodic account balance
determinations, the IRS has modified its initial suggested reporting requirements. According to the
Notice, Treasury and the IRS intend to issue regulations requiring FFIs to report year-end account
balances or values.
2. Gross Receipts and Withdrawals
FATCA also requires the reporting of gross receipts and gross withdrawals or payments made to and
from U.S. accounts, except to the extent otherwise provided by the Secretary. Notice 2010-60 requested
comments as to how to minimize burdens on Participating FFIs with respect to this requirement.
The Notice provides that Treasury and the IRS intend to issue regulations requiring an FFI to report
annually the following information with respect to a U.S. account that is a deposit or custodial account:
• the gross amount of dividends paid or credited to the account;
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• the gross amount of interest paid or credited to the account;
• other income paid or credited to the account; and
• gross proceeds from the sale or redemption of property paid or credited to the account with respect to which the FFI acted as a custodian, broker, nominee, or otherwise as an agent for the account holder.
For these purposes, the amount and character of dividends, interest, other income and gross proceeds
do not need to be determined in accordance with U.S. federal income tax principles (though an FFI may
rely on such principles). Once the FFI has applied a method to determine such amounts, it must apply
such method consistently for all account holders and for all subsequent years unless the Commissioner
consents to a change in method.20 Consent will be automatically granted for a change to rely on U.S.
federal income tax principles.
With respect to U.S. accounts that are non-regularly traded debt or equity interests in a financial
institution, the FFI will be required to report the gross amount of (i) all distributions, interest and similar
amounts credited to such account during the year, and (ii) each redemption payment made during the
year.
If a U.S. account is closed or transferred in its entirety by an account holder during the year, the FFI will
be required to report the income paid or credited to the account for the year until the date of transfer or
closure, and will also be required to report the amount or value withdrawn or transferred from the U.S.
account as a gross withdrawal. The FFI will also be required to report the U.S. account as closed or
transferred.
In addition, the Notice states that FFI Agreements will provide that if the FFI retains copies of statements
sent to holders of U.S. accounts in the ordinary course of its business, such statements must be retained
for five years and provided to the IRS upon request.
3. Tax Basis Reporting
The Notice provides that if an FFI is not treated as a U.S. payor for the purposes of the interest reporting
regulations under Chapter 61 of the Code (i.e., it is not (i) a CFC, (ii) a foreign partnership with one or
more U.S. partners that hold, in the aggregate, more than 50% of income or capital in the partnership, or
that at any time during the year engages in U.S. trade or business, (iii) certain foreign persons with 20 Such amounts may be determined under the same principles that the FFI uses to report information
on its resident account holders to the jurisdiction in which the FFI (or branch thereof) is located. If such amounts are not reported to the tax administration of the jurisdiction in which the FFI (or branch thereof) is located, such amounts must be determined in the same manner as is used for purposes of reporting to the account holder. If such amounts are reported neither to the FFI’s (or branch thereof) local tax administration nor to the account holder, such amounts must be determined in accordance with U.S. federal income tax principles or any reasonable method of reporting consistent with the accounting principles generally applied by the FFI.
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income that is effectively connected to a U.S. trade or business, or (iv) the U.S. branch of a foreign bank
or foreign insurance company) and the FFI reports the information required by Section 1471, the FFI will
not be required to report the tax basis information otherwise required to be reported under Section
6045(g) with respect to the account.
4. Branch and Affiliate Reporting
In addition, as FATCA permits a Participating FFI to elect compliance with the information reporting rules
that govern U.S. financial institutions’ accounts of U.S. citizens,21 the IRS intends to issue guidance
allowing FFIs to make such election with respect to each of their branches separately. The IRS intends to
issue guidance allowing FFIs to elect to have each branch separately report information regarding the
U.S. accounts it maintains. The IRS intends that such election(s) will be made as part of the application
process for an FFI to obtain status as a Participating FFI.
* * *
21 Section 1471(c)(2). This election does not eliminate the need to report the name, address, and TIN of
each account holder that is a specified U.S. person or the requirement to report the account number. However, an FFI making such an election will not be required to report the account balance or value, or the gross receipts to and withdrawals from the account.
Copyright © Sullivan & Cromwell LLP 2011
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