Issued during the afternoon of the last Friday in August, Notice 2010-60 1 (the Notice) was soon emailed around the world even though it was evening in Europe and the middle of the night in Asia. Eagerly awaited by financial institutions and their advisors, the Notice provides the first guidance under the Foreign Account Tax Compliance Act (FATCA) provisions, contained in new Chapter 4 of the Internal Revenue Code of 1986, as amended (‘‘the Code’’).2 The Notice specifically provides ‘‘preliminary’’ guidance concerning grandfathered obligations, the scope of Chapter 4, and the due diligence procedures that will be required for Foreign Financial Institutions (FFIs) and U.S. Financial Institutions (USFIs). In addition to providing preliminary guidance, the Notice also requests comments on a wide range of issues.3 In this first tranche of guidance, the U.S. Department of the Treasury (‘‘Treasury’’) and the Internal Revenue Service (IRS) reflect the statutory compliance requirements but also attempt to reduce to the extent possible the burden on withholding agents, FFIs, and other foreign entities.
SUMMARY OVERVIEW OF FATCA
Under the FATCA rules, if certain certification and reporting requirements are not met, withholding of 30% is required on a ‘‘withholdable payment’’ made to a foreign entity. The term ‘‘withholdable payment’’ means: (1) U.S.-source fixed or determinable annual or periodical income, commonly referred to as ‘‘FDAP,’’ which is currently subject to U.S. withholding tax when paid to a foreign person; and (2) the gross proceeds from the sale of property that produces FDAP income. With respect to the latter category, which is generally not otherwise subject to U.S. tax when paid to a foreign person, FATCA imposes withholding tax (assuming the certification and reporting requirements are not met) on the gross proceeds with no basis offset, thereby potentially subjecting return of capital to withholding tax.
The FATCA provisions divide foreign entities into two categories: FFIs and Non-Financial Foreign Entities (NFFEs). FFIs include depository and investment banks, mutual funds, and any other entities specified in regulations. In order to avoid the new withholding regime, FFIs must enter into an agreement with the IRS under which they obligate themselves to determine which of their account holders are U.S. persons and to provide the IRS identifying information about the U.S. account holders and the accounts. An NFFE is not required to enter into an agreement with the IRS, but, instead, in order to avoid the new withholding regime, must provide the U.S. payor with a certificate that either certifies that the NFFE has no U.S. owners or identifies its U.S. owners.
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