IRS Issues Preliminary Guidance on FATCA Reporting Requirements for Foreign Financial Institutions

Part III -- Administrative, Procedural, and Miscellaneous

PURPOSE

On March 18, 2010, the Hiring Incentives to Restore Employment Act of 2010, Pub. L. 111-147 (H.R. 2847) (the Act) was enacted into law. Section 501(a) of the Act added a new chapter 4 (sections 1471 -- 1474) to Subtitle A of the Internal Revenue Code (Code). Chapter 4 expands the information reporting requirements imposed on foreign financial institutions as defined in section 1471(d)(4) (FFIs) with respect to certain United States accounts as defined in section 1471(d)(1) (U.S. accounts). Chapter 4 also imposes withholding, documentation, and reporting requirements with respect to certain payments made to certain foreign entities.

Under section 501(d)(1) of the Act, chapter 4 is generally effective for payments made after December 31, 2012. The Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) intend to issue guidance in advance of the effective date of chapter 4 to ensure that affected persons have time to implement the systems and processes necessary to comply fully with the new withholding, documentation, and reporting obligations imposed by chapter 4. Consistent with this intent, this Notice provides preliminary guidance regarding priority issues involving the implementation of chapter 4, including the scope of obligations exempt from chapter 4 withholding under section 501(d)(2) of the Act, the definition of an FFI under section 1471(d)(4), the scope of collection of information and identification of persons by financial institutions under sections 1471 and 1472, and the information that FFIs must report to the IRS pursuant to an agreement under section 1471(b) (FFI Agreement) with respect to their U.S. accounts. In addition, this Notice announces the IRS's intentions with respect to the electronic filing of returns for purposes of implementing section 6011(e)(4) as added by section 522 of the Act.

Treasury and the IRS intend to issue proposed regulations incorporating the guidance provided in this Notice and addressing other matters necessary to implement chapter 4. In future guidance, Treasury and the IRS intend to publish a draft FFI Agreement and draft information reporting and certification forms. Treasury and the IRS request comments on the issues addressed in this Notice and the priority of other issues that should be addressed in future guidance.

Section I. Grandfathered Obligations

Section 501(d)(2) of the Act provides that chapter 4 shall not require any amount to be deducted or withheld from any payment under any obligation outstanding on March 18, 2012, or from the gross proceeds from any disposition of such an obligation. Thus, any payment made pursuant to any obligation outstanding on March 18, 2012 (or any gross proceeds from the disposition of such an obligation) will not be subject to withholding under chapter 4.

Treasury and the IRS intend to issue regulations providing that the term "obligation" for purposes of section 501(d)(2) of the Act means any legal agreement that produces or could produce withholdable payments. Regulations will provide, however, that an obligation for this purpose does not include any instrument treated as equity for U.S. tax purposes, or any legal agreement that lacks a definitive expiration or term. Thus, for example, savings deposits, demand deposits, and other similar accounts are not obligations for purposes of section 501(d)(2) of the Act. For this purpose, a legal agreement that produces withholdable payments does not include brokerage, custodial and similar agreements to hold financial assets for the account of others and to make and receive payments of income and other amounts with respect to such assets.

Treasury and the IRS also intend to issue regulations providing that an obligation entered into on or before March 18, 2012 will be treated as outstanding on March 18, 2012 and that any material modification of an obligation will result in the obligation being treated as newly issued for purposes of section 501(d)(2) of the Act as of the effective date of such modification. In the case of an obligation that constitutes indebtedness for U.S. tax purposes, a material modification means any significant modification of the debt instrument as defined in § 1.1001-3. In all other cases, whether a modification of an obligation is material will be determined based on all relevant facts and circumstances.

Section II. FFIs and NFFEs

Section 1471(a) requires a withholding agent to deduct and withhold a tax equal to 30 percent of the amount of any withholdable payment to an FFI that does not meet the requirements of section 1471(b). To meet the requirements of section 1471(b), an FFI is generally required to enter into an FFI Agreement, under which the FFI (participating FFI) agrees to undertake certain due diligence, reporting, and withholding responsibilities.

Under section 1471(d)(4), an FFI is defined as any financial institution which is a foreign entity. A foreign entity is any entity that is not a United States person. Section 1473(5). A "financial institution" is defined under section 1471(d)(5) as an entity that falls within one (or more) of three categories. Although many entities may be within two or more of these three categories, an entity need only satisfy the definition of one of the three categories to be a financial institution for purposes of section 1471.

Section 1471(d)(5) provides regulatory authority to modify the definition of financial institution. Significantly, a foreign entity that is excluded from the definition of a financial institution is a non-financial foreign entity, as defined in section 1472(d) (NFFE), and is subject to the documentation and reporting requirements applicable to NFFEs unless an exception applies.

Pursuant to section 1471(b)(2), the Secretary may treat an FFI as meeting the requirements of section 1471(b) (a deemed-compliant FFI) if the FFI: (i) complies with such procedures as the Secretary may prescribe to ensure that such institution does not maintain U.S. accounts and meets such other requirements as the Secretary may prescribe with respect to accounts of other FFIs maintained by such institution; or (ii) is a member of a class of institutions with respect to which the Secretary determines that application of section 1471 is not necessary to carry out the purposes of section 1471. Because such a deemed-compliant FFI would remain a financial institution under section 1471(d)(5), it would not be an NFFE, and therefore would not be subject to withholding under section 1472.

Section 1471(f) provides that withholding under section 1471(a) does not apply to any payment to the extent that the beneficial owner of such payment is (1) any foreign government, any political subdivision of a foreign government, or any wholly owned agency or instrumentality of any one or more of the foregoing, (2) any international organization or any wholly owned agency or instrumentality thereof, (3) any foreign central bank of issue, or (4) any other class of persons identified by the Secretary for purposes of this subsection as posing a low risk of tax evasion. Withholdable payments that are beneficially owned by an entity described in section 1471(f) are exempt from withholding under section 1471(a), whether received directly or through an FFI.

This section discusses the definition of "financial institution" for purposes of chapter 4. This section also identifies certain classes of foreign entities that will be (i) excluded from the definition of a financial institution and treated as NFFEs, (ii) treated as deemed-compliant FFIs, or (iii) identified as posing a low risk of tax evasion and exempted from withholding pursuant to section 1471(f).

A. Section 1471(d)(5): Definition of "Financial Institution"

Section 1471(d)(5) provides that, except as otherwise provided by the Secretary, the term "financial institution" means any entity that (A) accepts deposits in the ordinary course of a banking or similar business, (B) holds financial assets for the account of others as a substantial portion of its business, or (C) is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities (as defined in section 475(c)(2) without regard to the last sentence thereof), partnership interests, commodities (as defined in section 475(e)(2)), or any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities. As described in the following subsections, Treasury and the IRS intend to issue regulations providing guidance on each of the three categories of financial institutions set forth in section 1471(d)(5).

Although the statute refers to the "business" of investing, reinvesting, or trading, the concept of "business" as used in section 1471(d)(5)(C) is different in scope and content from the concept of a "trade or business" as used in other sections of the Code. For example, isolated transactions that might not give rise to a trade or business for other purposes may cause an entity to be engaged primarily in the business of investing, reinvesting, or trading in securities, depending on such factors as the magnitude and importance of the transaction in comparison to the entity's other activities.

Treasury and the IRS anticipate that regulations will provide that whether an entity is engaged primarily in the business of investing, reinvesting, or trading in securities must be determined on the basis of all relevant facts and circumstances. Although the analysis is ultimately fact-specific, Treasury and the IRS contemplate that future guidance will provide guidelines for determining what types of activity, carried on in whole or in part, constitutes the business of investing, reinvesting, or trading, and when an entity is primarily engaged in such a business.

B. Entities Excluded from Definition of Financial Institution and/or Otherwise Exempt from Some or All of the Obligations Imposed by Chapter 4

Treasury and the IRS intend to issue guidance identifying certain classes of entities that are included in or excluded from the definitions of the terms "financial institution" and FFI, and describing the resulting treatment of such entities under chapter 4.

This section identifies entities that Treasury and the IRS intend to exclude from the definition of FFI and exempt from the requirements of section 1472. In addition, this section describes the treatment of certain specific classes of entities, including insurance companies, entities with certain identified owners, and entities organized in a U.S. possession or territory identified in section 937(a)(1) (U.S. territory).

• Certain holding companies: A foreign entity the primary purpose of which is to act as a holding company for a subsidiary or group of subsidiaries that primarily engage in a trade or business other than that of a "financial institution," as defined under section 1471(d)(5) (an FI business), will be excluded from the definition of financial institution. Such holding companies would include, for example, a traditional holding company of a group of operating subsidiaries engaged primarily in a non-FI business. This class of excepted entities will not, however, include any entity functioning as an investment fund, such as a private equity fund, venture capital fund, leveraged buyout fund or any investment vehicle whose purpose is to acquire or fund the start-up of companies and then hold those companies for investment purposes for a limited period of time.

• Start-up companies: A foreign start-up entity that is investing capital into assets with the intent to operate a business other than that of a financial institution, but is not yet operating such a business, will be excluded from the definition of financial institution for the first 24 months after its organization. After such time, a foreign entity will no longer qualify for this particular exclusion from the definition of an FFI. For this purpose, the class of excepted foreign start-up entities will not include a venture fund or other investment fund that invests in start-up entities.

• Non-financial entities that are liquidating or emerging from reorganization or bankruptcy: A foreign entity that is in the process of liquidating its assets or reorganizing with the intent to continue or recommence operations as a non-financial institution may be excluded from the definition of financial institution if it was not a financial institution before beginning the process of such liquidation or reorganization.

• Hedging/financing centers of a non-financial group: A foreign entity that primarily engages in financing and hedging transactions with or for members of its expanded affiliated group (as defined in section 1471(e)(2)) that are not FFIs and that does not provide such services to non-affiliates may be excluded from the definition of financial institution, provided that the expanded affiliated group is primarily engaged in a non-FI business.

Treasury and the IRS do not view the issuance of insurance or reinsurance contracts without cash value as implicating the concerns of chapter 4. This would include, for example, most property and casualty insurance or reinsurance contracts or term life insurance contracts. Accordingly, Treasury and the IRS plan to issue regulations treating entities whose business consists solely of issuing such contracts as non-financial institutions for purposes of chapter 4.

However, other contracts such as life insurance (other than term life insurance contracts without cash value) or annuity contracts typically combine insurance protection with an investment component. Thus, such cash value insurance contracts or annuity contracts may present the risk of U.S. tax evasion that chapter 4 is designed to prevent. Treasury and the IRS request comments with respect to the appropriate treatment under chapter 4 of entities that issue cash value insurance contracts, annuity contracts, or similar arrangements, and with respect to the appropriate definition of cash value insurance contracts, annuity contracts and similar arrangements for this purpose.

Treasury and the IRS intend to issue guidance under which certain foreign entities that are FFIs described in section 1471(d)(5)(C), but are not described in section 1471(d)(5)(A) or (B), would be treated as deemed-compliant FFIs if the withholding agent (i) specifically identifies each individual, specified U.S. person, or excepted NFFE that has an interest in such entity, either directly or through ownership in one or more other entities, (ii) obtains from each such person the documentation that the withholding agent would be required to obtain from such person under the guidance described in Section III of this Notice if such person were a new account holder or direct payee of the withholding agent, and (iii) the withholding agent reports to the IRS, in such manner as will be provided in future guidance, any specified United States person identified as a direct or indirect interest holder in the entity (Documented FFIs). See Section III of this Notice for further details about the general documentation requirements applicable to financial institutions with respect to their account holders.

Treasury and the IRS request comments as to whether certain small FFIs should be required, for purposes of applying chapter 4, to be treated as NFFEs, regardless of whether withholding agents currently determine the direct and indirect owners of such entities for purposes of complying with local law or regulatory obligations.

Because Territory-Organized FIs are withholding agents under chapter 4, they are required to withhold under sections 1471 and 1472 if the withholding has not previously been satisfied by another withholding agent. However, sections 1471 and 1472 do not specify how withholding applies to withholdable payments made to FFIs and NFFEs through Territory-Organized FIs acting as intermediaries. Accordingly, it is unclear under sections 1471 and 1472 whether a U.S. withholding agent making withholdable payments to an FFI or NFFE through a Territory-Organized FI acting in its capacity as an intermediary should apply withholding unless the Territory-Organized FI collected documentation establishing that withholding did not apply and provided that documentation to the U.S. withholding agent. For chapter 3 purposes, this situation is addressed by permitting certain Territory-Organized FIs to assume the withholding and reporting responsibilities applicable to United States persons as defined in section 7701(a)(30) (U.S. persons). See § 1.1441-1(b)(2)(iv). Sections 1471 and 1472, however, do not expressly make this treatment available to Territory-Organized FIs for chapter 4 purposes.

To help relieve the burden on Territory-Organized FIs receiving withholdable payments on behalf of account holders, Treasury and the IRS intend to issue guidance under which a Territory-Organized FI that receives withholdable payments in its capacity as an intermediary would be permitted to represent in writing to its withholding agent that with respect to the payment it is assuming the responsibilities imposed on U.S. withholding agents under sections 1471 and 1472. A Territory-Organized FI assuming such responsibilities would not be subject to withholding under section 1471 or 1472 with respect to such payments.

In addition, Treasury and the IRS are considering issuing guidance providing that a Territory-Organized FI that is described in section 1471(d)(5)(C) (and not in section 1471(d)(5)(A) or (B)) would not be treated as a financial institution, and instead would be treated as an NFFE with respect to withholdable payments or passthru payments that it receives for its own account. In that case, the Territory-Organized FI may qualify for an exception to section 1472 if the entity is organized under the laws of a U.S. territory and is wholly owned by one or more bona fide residents (as defined in section 937(a)) of such U.S. territory. Section 1472(c)(1)(C).

In addition, Treasury and the IRS intend to engage in discussions with the territorial governments for the purpose of exploring how the existing territorial information reporting regimes might be used to supplement the obligations of Territory-Organized FIs, such as by implementing information exchange or similar agreements to obtain information that is useful for identifying account holders of Territory-Organized FIs that are specified United States persons (specified U.S. persons), as defined in section 1473(3).

C. Classes of Persons Posing a Low Risk of Tax Evasion Under Section 1471(f)(4) -- Retirement Plans

Pursuant to section 1471(f), withholding under section 1471(a) does not apply to any payment to the extent that the beneficial owner of such payment is part of a class of persons identified by the Secretary for purposes of section 1471(f) as posing a low risk of tax evasion. Although a retirement plan may qualify as a financial institution under section 1471(d)(5), Treasury and the IRS intend to issue guidance providing that certain foreign retirement plans pose a low risk of tax evasion for chapter 4 purposes, and therefore payments beneficially owned by such retirement plans will be exempt from withholding under section 1471(a).

Treasury and the IRS anticipate that a foreign retirement plan will be identified as posing a low risk of tax evasion only if the retirement plan (i) qualifies as a retirement plan under the law of the country in which it is established, (ii) is sponsored by a foreign employer, and (iii) does not allow U.S. participants or beneficiaries other than employees that worked for the foreign employer in the country in which such retirement plan is established during the period in which benefits accrued. Comments are requested on the definition of a retirement plan for this purpose, and on how such a plan could appropriately identify or document itself to a withholding agent to verify its compliance with any such definitional requirements. In addition, comments are requested as to whether other categories of foreign employee benefit or deferred compensation plans should be subject to the same treatment as foreign retirement plans for chapter 4 purposes.

D. Treatment of Certain Other Classes of Entities

Treasury and the IRS do not intend to exempt an FFI from the requirement to enter into an FFI Agreement, even if the FFI receives withholdable payments solely through its U.S. branch. Thus, where a U.S. branch of an FFI receives withholdable payments that are not eligible for the ECI exclusion, the FFI generally will be required to execute an FFI Agreement to avoid being subjected to withholding under section 1471(a).

When a U.S. branch of an FFI receives a withholdable payment as an intermediary, however, Treasury and the IRS are considering permitting the U.S. branch to document its account holders for chapter 4 withholding purposes under the requirements to be imposed on USFIs. See Section III of this Notice for guidance on the documentation requirements to be imposed on USFIs. Treasury and the IRS anticipate that regulations will include rules coordinating the reporting required of FFIs with U.S. branches under chapter 4 with other U.S. tax reporting obligations, so as to avoid duplicative reporting with respect to accounts maintained by the U.S. branch of the FFI.

Treasury and IRS also intend to issue regulations regarding the application of the ECI exclusion by withholding agents making payments to U.S. branches of FFIs. Treasury and IRS do not intend that those regulations will incorporate the type of special presumption included for chapter 3 withholding purposes in § 1.1441-4(a)(2)(ii) for payments made to certain U.S. branches of regulated banks and insurance companies. Comments are requested as to other possible rules or methods that withholding agents could use to determine the application of the ECI exclusion.

Although CFCs are U.S. payors as defined in § 1.6049-5(c)(5)(i) and are therefore subject to the Form 1099 reporting requirements applicable to such payors, these reporting obligations differ from the obligations imposed under section 1471(b) on FFIs in several respects. In particular, Form 1099 reporting obligations do not apply with respect to two important classes of account holders whose accounts would be subject to reporting or withholding obligations under section 1471. First, as U.S. payors, CFCs are not required to report on certain payments to domestic corporations, whereas FFIs are required to report information on account holders that are specified U.S. persons, which, pursuant to section 1473(3), includes certain domestic corporations. Second, as U.S. payors, CFCs are not generally required to report on the U.S. owners of foreign entities for which they maintain accounts, and the section 1472 requirements to identify and report certain U.S. owners of certain foreign entities would apply only if a CFC made a withholdable payment to an NFFE. In contrast, section 1471(c)(1)(A) requires FFIs to report information with respect to substantial United States owners (substantial U.S. owners), as defined in section 1473(2), of account holders that are United States owned foreign entities as defined in section 1471(d)(3) (U.S.-owned foreign entities). Such accounts are not limited to those accounts to which an FFI has made withholdable payments.

In addition to the disparities between the information reporting obligations discussed above, section 1471(b)(1)(F) requires FFIs to obtain waivers from account holders when a section 1471(b) reporting obligation would otherwise be prohibited under foreign law (or, in the absence of such a waiver, to close such holders' accounts). No comparable requirement would apply to FFIs that are CFCs if they were exempted from FFI status. Accordingly, deeming CFCs to be compliant under section 1471(b)(2) would potentially result in disparate treatment of account holders of FFIs, depending on whether they held accounts with FFIs that are CFCs or other FFIs. Treasury and the IRS thus do not anticipate that financial institution CFCs will be exempted from the requirements to be imposed on other FFIs under section 1471(b). Treasury and the IRS do, however, anticipate coordinating the reporting required of financial institution CFCs under chapter 4 with other U.S. tax reporting obligations, with the objective of avoiding duplicative reporting.

E. Comments Requested

Treasury and the IRS request comments concerning the treatment under section 1471 of the entities described above, as well as the treatment of other foreign entities, including, for example, any foreign charitable organizations that may fall within the definition of an FFI. In particular, Treasury and the IRS request comments providing specific suggestions for defining and identifying specific classes of foreign entities that should be: (i) excluded from the definition of FFI; (ii) deemed to meet the requirements of section 1471(b) pursuant to section 1471(b)(2); or (iii) identified as posing a low risk of tax evasion pursuant to section 1471(f).

Section III. Collection of Information and Identification of Persons by Financial Institutions Under Sections 1471 and 1472

A. Overview

U.S. accounts are financial accounts which are held by one or more specified U.S. persons or U.S.-owned foreign entities. Section 1471(d)(1)(A). A specified U.S. person is (except as otherwise provided by the Secretary) any United States person other than certain types of entities that are expressly excluded under section 1473(3). A U.S.-owned foreign entity is any foreign entity which has one or more substantial U.S. owners. Section 1471(d)(3). A substantial U.S. owner is generally defined in section 1473(2) to include a specified U.S. person whose ownership interests in an entity exceed certain thresholds.

A participating FFI must also agree to withhold tax on certain payments made to non-participating FFIs and recalcitrant account holders. Section 1471(b)(1)(D). Recalcitrant account holders are those account holders that fail to comply with reasonable requests for information by a participating FFI in order for it to meet its obligations under section 1471(b) and (c), or that fail to provide a waiver in any case in which any foreign law would (but for such waiver) prevent the reporting of any information an FFI is required to report under section 1471(b) and (c). Section 1471(d)(6).

Section 1472(a) generally requires a withholding agent to deduct and withhold 30 percent of the gross amount of a withholdable payment made to an NFFE and beneficially owned by that NFFE or another NFFE, unless the beneficial owner is a member of an enumerated class of entities described in section 1472(c)(1) (excepted NFFEs), the payment is within a class of payments described in section 1472(c)(2), or certain documentation and reporting requirements are met. In addition, under section 1472, withholding agents are required to report certain information regarding the substantial U.S. owners of NFFEs, other than excepted NFFEs, that beneficially own withholdable payments.

Excepted NFFEs include (A) any corporation the stock of which is regularly traded on an established securities market, (B) any corporation which is a member of the same expanded affiliated group as a corporation the stock of which is regularly traded on an established securities market, (C) any entity which is organized under the laws of a U.S. territory and which is wholly owned by one or more bona fide residents (as defined in section 937(a)) of such U.S. territory, (D) any foreign government, any political subdivision of a foreign government, or any wholly owned agency or instrumentality of any one or more of the foregoing, (E) any international organization or any wholly owned agency or instrumentality thereof, (F) any foreign central bank of issue, and (G) any other class of persons identified by the Secretary for purposes of section 1472(c).

To comply with the obligations imposed by sections 1471 and 1472, USFIs will need to make determinations similar to those required of participating FFIs. In particular, USFIs making withholdable payments to entities will need to determine whether to treat those entities as U.S. persons, FFIs, entities described in section 1471(f), or NFFEs. USFIs will then need to determine: (1) whether FFIs are to be treated as participating FFIs, deemed-compliant FFIs, or non-participating FFIs; and (2) whether NFFEs are to be treated as excepted NFFEs or as other NFFEs.

Subsections III.B. and III.C. of this Notice describe the procedures to be applied by participating FFIs and USFIs to make the determinations required to comply with the provisions of sections 1471 and 1472. Subsection III.B. generally discusses the procedures to be applied by participating FFIs to make the requisite determinations described above for purposes of complying with both sections 1471 and 1472. For this purpose, Subsection III.B. distinguishes procedures for making such determinations with regard to each of the following four categories of accounts: (i) preexisting financial accounts held by individuals (preexisting individual accounts); (ii) new financial accounts held by individuals (new individual accounts); (iii) preexisting financial accounts held by persons other than individuals (preexisting entity accounts); and (iv) new financial accounts held by persons other than individuals (new entity accounts).

Subsection III.C. generally discusses the procedures to be applied by USFIs to make the requisite determinations for USFIs to comply with chapter 4. For this purpose, Subsection III.C. distinguishes procedures applicable to preexisting entity accounts from those applicable to new entity accounts.

B. Participating FFIs

Participating FFIs (as well as other withholding agents) also will be required to identify other FFIs as participating FFIs, deemed-compliant FFIs, or non-participating FFIs (or as entities described in section 1471(f)). To facilitate this process, Treasury and the IRS contemplate that the IRS will issue employer identification numbers (EINs) to participating FFIs (FFI EINs) and that participating FFIs will use these FFI EINs to identify themselves to withholding agents. Until withholding agents are able to verify the status of FFIs with the IRS, withholding agents and participating FFIs will be permitted to rely on certifications provided by FFIs as to their status as participating FFIs, unless the withholding agent or participating FFI knows or has reason to know that the certification provided is incorrect.

Within two years after the date on which the FFI's FFI Agreement enters into effect, all preexisting individual accounts that were treated under the procedures described above as other than U.S. accounts and that had an average monthly balance (or, if the balance or value is determined less frequently than monthly for purposes of reporting to the account holder, the average of the balance or value as determined for purposes of reporting to the account holder during the year) exceeding $1,000,000 during the year preceding the first year in which the FFI's FFI Agreement enters into effect will be subject to the procedures described in Section III.B.2.b., below, to determine whether such accounts should continue to be treated as other than U.S. accounts, unless the participating FFI has collected, reviewed, and maintained documentation sufficient to establish the U.S. or non-U.S. status of such accounts, and such U.S. or non-U.S. status is reflected in electronically searchable information maintained by the FFI and associated with the account.

Within five years after the date on which the FFI's FFI Agreement enters into effect, all preexisting individual accounts treated as other than U.S. accounts under the procedures described above will be subject to the procedures described in Section III.B.2.b., below, to determine whether such accounts should continue to be treated as other than U.S. accounts, unless the participating FFI has collected, reviewed, and maintained documentary evidence sufficient to establish the U.S. or non-U.S. status of such accounts, and such U.S. or non-U.S. status is reflected in electronically searchable information maintained by the FFI and associated with the account. Future guidance shall also prescribe circumstances under which the procedures described in section III.B.2.a. will be reapplied for accounts that are treated as other than U.S. accounts in step 1 of section III.B.2.a. and that have an average monthly balance exceeding $50,000 in a year subsequent to the first year in which the FFI's FFI Agreement is applied with respect to existing accounts.

A participating FFI will be deemed to have maintained documentation (other than a Form W-8BEN or Form W-9, a copy of which must be retained) if the participating FFI retains a record of the documentary evidence collected and reviewed, noting the type of document, any identification number contained in the document, the place of issuance, and the date of issuance and expiration date, if any.

C. USFIs

To comply with its obligations as a withholding agent under sections 1471 and 1472, a USFI will be required to determine whether to treat entities to which it makes withholdable payments as U.S. persons, participating FFIs, deemed-compliant FFIs, non-participating FFIs, entities described in section 1471(f), excepted NFFEs, or other NFFEs. Where the entities to which a USFI makes withholdable payments are account holders of the USFI, these determinations parallel the determinations that a participating FFI is required to make with respect to its entity account holders. To ensure that those parallel determinations are made in a consistent manner by FFIs and USFIs, Treasury and the IRS will require USFIs to determine whether their foreign entity account holders are NFFEs subject to reporting or withholding under section 1472 or FFIs subject to withholding under section 1471(a) by applying procedures similar to the procedures described in Section III.B.3 of this Notice. A USFI that performs such procedures will not be required to separately request certification under section 1472(b) from its NFFE account holders. Such procedures will apply only with respect to holders of financial accounts as defined in section 1471(d)(2) to which the USFI makes withholdable payments.

Section IV. Reporting on U.S. Accounts

This section describes the preliminary views of Treasury and the IRS regarding the manner and type of information reporting that FFIs must provide to the IRS annually with respect to their U.S. accounts under an FFI Agreement.

A. In General

Section 1471 provides that a participating FFI must report the following information pursuant to an FFI Agreement with respect to each U.S. account:

• the name, address and taxpayer identification number (TIN) of each account holder which is a specified U.S. person;

• in the case of any account holder which is a U.S.-owned foreign entity, the name, address, and TIN of each substantial United States owner of such entity;

• the account number;

• the account balance or value (determined at such time and in such manner as the Secretary may provide); and

• except to the extent provided by the Secretary, the gross receipts and gross withdrawals or payments from the account (determined for such period and in such manner as the Secretary may provide).

B. Account Balance or Value

Section 1471(c)(1)(C) requires a participating FFI to report the account balance or value of each U.S. account. Treasury and the IRS intend to issue guidance that will provide that all such amounts must be reported in U.S. dollars. Future guidance will provide the appropriate method for currency translation. With regard to the account balance of deposit and custodial accounts, Treasury and the IRS are considering requiring reporting of the highest of the month-end balances during the year (or, if the balance is determined less frequently than monthly (e.g., quarterly) for purposes of reporting to the account holder, the highest of the balances as determined for purposes of reporting to the account holder during the year). In addition, the FFI will be required to provide additional account-related information (e.g., copies of account statements including monthly or quarterly balances and daily receipts and withdrawals) to the IRS upon request.

In the case of a U.S. account that is an interest in an entity described in section 1471(d)(5)(C), the value of the account may be required to be determined for a number of reasons throughout the year, including for purposes of (i) financial reporting, (ii) determining the compensation of any investment manager of or investment advisor to the FFI, or (iii) reporting to the account holder or determining any distributions or payments to the account holder. Treasury and IRS are considering requiring such a participating FFI to report the highest value of such account during the year, as determined for the purpose that requires the most frequent determination of value by the participating FFI. For example, assume that a participating FFI is required to be valued for two reasons: annually for purposes of reporting to its interest holders, and quarterly for purposes of calculating the compensation of the investment advisor to the FFI. In such a case, the value reported under section 1471(c)(1)(C) would be the highest of the quarterly values determined for purposes of calculating the compensation of the investment advisor.

Comments are requested regarding the above approaches, and regarding other potential approaches that may provide adequate information in a manner that will be administrable by participating FFIs without being subject to manipulation by U.S. account holders. Comments on possible currency translation conventions are requested. Comments on specific situations in which foreign laws may prevent the reporting of the information described above are also requested, along with descriptions of the steps that would be required of a participating FFI (and account holders of U.S. accounts maintained by the FFI) in order to overcome or waive any such restriction.

C. Gross Receipts and Withdrawals

Section 1471(c)(1)(D) requires the reporting of gross receipts and gross withdrawals and payments, except to the extent provided otherwise by the Secretary. Treasury and the IRS request comments as to how to minimize burdens on participating FFIs with respect to such reporting.

D. Section 1471(c)(2) Election

Section 1471(c)(2) allows a participating FFI to elect to have section 1471(c)(1)(C) or (D) not apply, and instead to report under sections 6041, 6042, 6045, and 6049 as if such FFI were a U.S. person and each holder of a U.S. account that is a specified U.S. person or U.S.-owned foreign entity were an individual and citizen of the United States. An FFI that makes this election must still comply with section 1471(c)(1)(A) and (B), and thus will also have to report the name, address, and TIN of each account holder which is a specified U.S. person and, in the case of any account holder which is a U.S.-owned foreign entity, the name, address, and TIN of each substantial United States owner of such entity, as well as the relevant account numbers; however, such an electing FFI will not have to report the account balance or value or the gross receipts and gross withdrawals of payments required under section 1471(c)(1)(C) and (D).

The time and manner for making the election and the conditions for meeting the reporting requirements of the election will be addressed in future guidance. Treasury and the IRS request comments regarding whether and in what circumstances a participating FFI should be permitted to make the election with respect to a subset of its accounts without making the election for all of its accounts (for example, whether a participating FFI should be permitted to make the election with respect to accounts held by individuals without requiring that the FFI make the election with respect to accounts held by entities).

E. Elimination of Duplicative Reporting

In certain circumstances, the same instrument or interest may give rise to a financial account with respect to more than one FFI. For example, assume a participating FFI (Fund) issues shares that are treated as a financial account under section 1471(d)(2)(C), and such shares are held by another participating FFI (Custodian) on behalf of a specified U.S. person. In that case, the shares owned by the specified U.S. person would (absent an applicable exception) constitute a financial account maintained by Fund and the specified U.S. person's custodial account maintained by Custodian would also be a financial account. Treasury and the IRS are aware that there is concern about whether both Fund and Custodian would be required to report the shares of Fund owned by the specified U.S. person.

Treasury and the IRS believe that, where possible, it is preferable for reporting to be performed by the FFI that is in a direct payment relationship with the account holder. This view is consistent with section 1471(d)(1)(C)(i), which provides that a U.S. account does not include a financial account held by another financial institution that meets the requirements of section 1471(b). Treasury and the IRS intend to issue regulations providing that in the case of a participating FFI that maintains an account of another participating FFI, only the participating FFI that has the more direct relationship with the investor or customer will be required to report the information required under section 1471(c). Thus, in the example in the preceding paragraph, Custodian will be required to report with respect to the custodial account held by the specified U.S. person, and the shares of Fund held by Custodian will not be a U.S. account subject to reporting by Fund. Moreover, in a case in which all of a participating FFI's direct account holders are also participating FFIs, the first-mentioned participating FFI would have no reporting obligations under section 1471(c).

F. Reporting with Regard to Recalcitrant Accounts

Treasury and the IRS intend to require a participating FFI to report the number and aggregate value of financial accounts held by recalcitrant account holders and the number and aggregate value of financial accounts held by related or unrelated non-participating FFIs. In addition, Treasury and the IRS intend to require a participating FFI to report the number and aggregate value of financial accounts held by recalcitrant account holders that have U.S. indicia (as described in Section III.B.2.b. step 4 above or in future guidance).

Section V. Request for Specific Comments

A. Verification Requirements Applicable to Participating FFIs

Under section 1471(b)(1)(B), as part of an FFI Agreement, a participating FFI agrees to comply with such verification procedures as the Secretary may require with respect to the identification of U.S. accounts. Treasury and the IRS consider effective verification procedures to be crucial to ensuring compliance with chapter 4. Treasury and the IRS recognize, however, that the compliance gains associated with the implementation of verification procedures must be balanced against the costs that such procedures would impose on FFIs.

Treasury and the IRS understand that for compliance purposes in connection with various countries' AML/KYC and similar laws, regulators typically place some degree of reliance on verification procedures and reviews performed by public accountants engaged by financial institutions or by the internal audit function of financial institutions. Treasury and the IRS also understand that, unlike the procedures commonly used by external auditors to verify compliance with QI agreements, these verification procedures and reviews are performed under engagements that are not agreed-upon procedures.

Treasury and the IRS request comments about the procedures performed by public accountants or other external auditors when conducting an AML/KYC audit or similar engagement, including information about the objectives of such engagements, the types of procedures performed, and the types of reports issued as part of such engagements. In addition, Treasury and the IRS are exploring the possibility of relying in some circumstances on written certifications by high-level management employees of the applicable financial institution regarding the steps taken to comply with chapter 4. Treasury and IRS request comments on the information and representations that should be included in such certifications and the extent to which public accountants or other external auditors rely on written certifications of compliance provided by officers or other responsible management employees of the applicable financial institution in the course of AML/KYC audits or similar engagements. Treasury and the IRS request comments concerning the extent to which the format of reports associated with such engagements could be appropriately modified to further compliance with chapter 4. Treasury and the IRS further request comments as to the extent to which public accountants would be able to perform, consistent with their attestation or other accounting standards, verification procedures and reporting with respect to FFIs under engagements that are not agreed-upon procedures.

B. Treatment of Passthru Payments

As part of an FFI Agreement, an FFI must deduct and withhold a tax equal to 30 percent of (1) any passthru payment that is made by such institution to a recalcitrant account holder or a non-participating FFI, and (2) in the case of a passthru payment made by such institution to a participating FFI that has elected under section 1471(b)(3) to be withheld upon with respect to such payment, so much of such payment as is allocable to accounts held by recalcitrant account holders or non-participating FFIs. Section 1471(b)(1)(D). Section 1471(d)(7) defines "passthru payment" to mean any withholdable payment or any other payment to the extent attributable to a withholdable payment.

One of the purposes of requiring withholding on passthru payments is to permit an FFI that has entered into an FFI Agreement to continue to remain in compliance with its agreement, even if some of its account holders have failed to provide the FFI with the information necessary for the FFI to properly determine whether the accounts are U.S. accounts and perform the required reporting, or, in the case of account holders that are FFIs, have failed to enter into an FFI Agreement. The rule also encourages FFIs that do not invest directly in the United States or that do not hold U.S assets that produce withholdable payments, but which benefit from investments that produce payments that are attributable to withholdable payments, to enter into an FFI Agreement.

Treasury and the IRS have received comments concerning the potential difficulties that may arise for FFIs in trying to determine whether a payment is "attributable to" a withholdable payment. Comments are requested as to methods that a participating FFI could use to determine whether payments it makes are attributable to withholdable payments, including any associated information reporting that may be necessary, and which take into account the administrative burden imposed by any such approach.

C. Election to be Withheld Upon

Under section 1471(b)(3), subject to any requirements imposed by the Secretary, a participating FFI may elect to have a withholding agent withhold on withholdable payments or passthru payments made to it, rather than act as a withholding agent for passthru payments it makes to its account holders. If a participating FFI meets the requirements the Secretary may provide and so elects, it will be withheld upon to the extent withholdable payments or passthru payments made to it are allocable to accounts that are held by recalcitrant account holders or non-participating FFIs. As part of the election, a participating FFI must agree to notify the withholding agent of its election to be withheld upon and provide such other information as may be necessary for the withholding agent to determine the appropriate amount to deduct and withhold from withholdable payments or passthru payments it makes to the electing FFI. The electing FFI must also agree to a waiver of any right under any treaty of the United States with respect to any amount deducted and withheld pursuant to the election. To the extent provided by the Secretary, the election to be withheld upon may be made with respect to certain classes or types of accounts of the participating FFI.

Treasury and the IRS have received comments regarding the administrative challenges that may be raised by an election under section 1471(b)(3). Comments are requested as to the appropriate scope of such an election. In particular, comments are requested as to the types of financial accounts for which such an election should be available. In addition, comments are requested as to the type of information reporting an electing FFI would need to provide to a withholding agent so that the appropriate amount of tax could be deducted and withheld from any withholdable payments or other passthru payments made to the electing FFI.

D. Sanctions With Respect to Recalcitrant Account Holders

As noted above, participating FFIs are required to withhold tax (or in the case of an FFI that elects to be withheld upon, to provide a withholding agent with information necessary to determine appropriate withholding) with respect to passthru payments made to recalcitrant account holders. Withholding with respect to recalcitrant account holders is intended to provide relief for participating FFIs that would not otherwise be able to collect the information required to comply with their obligations under their FFI Agreements. It should not, however, become a permanent substitute for collecting and reporting information with respect to U.S. accounts. Treasury and the IRS request comments on what measures should be taken to address long-term recalcitrant accounts, including whether, and in what circumstances, Treasury and the IRS should consider terminating FFI Agreements due to the number of recalcitrant account holders remaining after a reasonable period of time.

E. FFIs Subject to Restrictions Prohibiting U.S. Account Holders

Treasury and the IRS have received comments stating that for purposes of complying with certain legal requirements, some foreign collective investment vehicles have procedures and legal restrictions that prohibit the sale of their interests to certain U.S. persons, and include or will include language to that effect in their prospectuses and application documents. Similarly, in cases in which interests in such vehicles are held by intermediaries or distributors that maintain direct account relationships with the beneficial owners in such vehicles, applicable distribution or similar agreements contain covenants and representations that prohibit the sale of such interests to U.S. persons.

Finally, it has been represented that in certain jurisdictions, AML/KYC laws support compliance with these prohibitions because they apply broadly to all brokers and distributors in the intermediation chain to require the identification of beneficial owners (including certain U.S. persons) investing in such vehicles.

Treasury and the IRS are considering whether, under the standard set forth in section 1471(b)(2)(A), the types of legal requirements and arrangements described above, potentially in connection with certain additional requirements, may provide a basis to treat such institutions as meeting the requirements of section 1471(b). Treasury and the IRS thus request further comments on the following:

F. Electronic Filing Requirements for Financial Institutions

Section 522 of the Act amends section 6011(e) to the Code to permit the Secretary to require filing on magnetic media (electronic filing) by financial institutions as defined in section 1471(d)(5) with respect to tax for which such institutions are liable under chapter 3 and chapter 4 of the Code, without regard to the general rule under section 6011(e)(2) that limits the authority of the Secretary to require electronic filing to persons required to file at least 250 returns during the calendar year.

Treasury and the IRS consider the receipt of electronic filings by financial institutions in lieu of paper filings to be critical to chapter 3 and chapter 4 compliance efforts. As a result, Treasury and the IRS intend to issue regulations that would require all or most financial institutions to electronically file their returns with respect to tax for which such institutions are liable under chapter 3 and chapter 4 of the Code. Treasury and the IRS anticipate that this requirement would impact many existing filers. To provide sufficient time for financial institutions to comment regarding the implementation of this requirement and to coordinate the effective date for this requirement with the general effective date of chapter 4, Treasury and the IRS intend to require electronic filings with regard to tax for which financial institutions are liable under chapter 3 and chapter 4 of the Code beginning with returns filed for taxable years ending after December 31, 2012.

G. Application of Chapter 4 by U.S. Withholding Agents Other than USFIs

Treasury and the IRS contemplate permitting U.S. withholding agents other than USFIs to rely on a foreign entity's certification as to its classification for chapter 4 purposes, absent reason to know that such certification is unreliable or incorrect. These requirements would also apply with respect to withholdable payments made by FFIs and USFIs to NFFEs that are not holders of financial accounts maintained by the financial institution. Treasury and IRS request comments on the form of such certifications, their renewal provisions, and circumstances under which a withholding agent should not be required to solicit such certifications from certain classes of persons or with respect to certain classes of payments, such as arm's-length payments made for goods or services in the ordinary course of the withholding agent's trade or business.

Treasury and the IRS also anticipate providing an exception in guidance to the withholding required under section 1472 for payments made to an NFFE engaged in an active trade or business by withholding agents other than financial institutions. Comments are requested regarding the appropriateness of such an exception, how a withholding agent may determine whether an NFFE is engaged in an active trade or business, and other exceptions to withholding under section 1472 that may be appropriate.

H. Potential Modifications to Chapter 4 Requirements Based on Availability of Information From Other Sources

In some cases, information required to be collected and reported by FFIs under chapter 4 may already be reported to the IRS, or may otherwise be readily available to the IRS through other means. Treasury and the IRS intend to consider approaches that will help minimize the burden on participating FFIs. For example, Treasury and the IRS are considering whether to exempt a participating FFI from the obligation to perform withholding on passthru payments to individual recalcitrant account holders where reporting by the participating FFI to the IRS is sufficient to permit the IRS to obtain information about the identities of those recalcitrant account holders through an information exchange request to a foreign jurisdiction. Treasury and the IRS solicit comments on possible approaches to reduce the burden imposed on participating FFIs by chapter 4.

REQUESTS FOR PUBLIC COMMENT

This Notice requests public comments regarding certain priority issues identified for forthcoming guidance on the application of chapter 4 of the Code.

Written comments should be sent to: CC:PA:LPD:PR (NOT-121556-10), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (NOT-121556-10), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224 or sent electronically via the Federal eRulemaking Portal at Notice.Comments@irscounsel.treas.gov (NOT-121556-10). Please insert "Notice 2010-60" in the subject line of any electronic communications.

All comments will be available for public inspection and copying. Due to the compressed timeline for issuing guidance in advance of the effective date of chapter 4, this Notice solicits written comments from affected persons by November 1, 2010.

DRAFTING INFORMATION

The principal author of this Notice is John Sweeney of the Office of Associate Chief Counsel (International). For further information regarding this Notice contact Kay Holman at (202) 622-3840 (not a toll-free call).