IRS Provides Further Guidance for Foreign Accounts Reporting.

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1 April 2011 IRS Provides Further Guidance for Foreign Accounts Reporting. On April 8, 2011, the U.S. Internal Revenue Service ( IRS ) released Notice (the Notice ), which contains a second round of guidance regarding the new reporting requirements for foreign accounts imposed by the Hiring Incentives to Restore Employment Act of 2010 (the HIRE Act ). The Notice supplements and modifies Notice (the 2010 Notice ), which was described in our Tax Alert from September The HIRE Act imposes a 30% withholding tax on certain payments to foreign financial institutions ( FFIs ) unless the FFI enters into an agreement (an FFI Agreement ) with the IRS to undertake information reporting to the IRS regarding any U.S. persons who are direct or indirect owners of accounts with the FFI. The Notice: > clarifies the treatment of passthru payments ; > identifies categories of FFIs that will be deemed compliant with the information reporting requirements without entering into a reporting agreement; > supersedes the process outlined in the 2010 Notice for determining the status of existing individual account holders; > modifies the U.S. account reporting requirements in the 2010 Notice; > explains the interaction of the FFI and Qualified Intermediary ( QI ) regimes; and Contents Passthru Payments... 1 Deemed-Compliant FFIs... 2 Local Bank Groups... 2 Local FFI Members of Participating FFI Groups... 2 Investment Funds... 3 Foreign Retirement Plans... 3 Determining Status of Existing Individual Account Holders... 3 Reporting on U.S. Accounts... 3 Requirements for Qualified Intermediaries... 4 Affiliated Groups of FFIs... 4 Effective Date of FFI Agreement... 5 > outlines compliance procedures for FFI affiliated groups. Passthru Payments Passthru payments are payments that are attributable to payments that require withholding under the HIRE Act ( withholdable payments ). Participating FFIs may be required to withhold 30% of a passthru payment that is made to a noncompliant FFI or an account holder who has failed to verify its U.S. or non-u.s. status (a recalcitrant account holder ). The IRS has responded to comments IRS Provides Further Guidance for Foreign Accounts Reporting. 1

2 about the difficulty of tracing the source of each particular payment for FFIs such as investment funds by instituting a passthru payment withholding regime based on the percentage of an FFI s assets that can give rise to withholdable payments. Each such FFI must calculate its passthru payment percentage ( PPP ) to determine which portion of a passthru payment is subject to withholding. Each FFI must publish its PPP, or it will be deemed to have a PPP of 100% and must withhold 30% of its total payments to non-compliant FFIs or recalcitrant account holders. Passthru payments on custodial accounts (where the FFI is acting as a custodian, broker or other agent) are also subject to withholding by the FFI, based on the nature of the securities held in the account; or, in the case of an interest in another FFI, the PPP of that FFI. For example, if a participating FFI is a custodian and holds an interest in another FFI on behalf of a recalcitrant account holder, the custodian FFI would calculate the amount required to be withheld from the payment by multiplying the gross payment to the accountholder by the other FFI s PPP (which is required to be published and publicly available). Payments on debt obligations outstanding as of March 18, 2012 do not give rise to withholdable payments or passthru payments. Deemed-Compliant FFIs The Notice identifies several categories of FFIs that will be deemed to be compliant without having to enter into an FFI Agreement. A deemed-compliant FFI will normally be required to: (i) apply for deemed-compliant status; (ii) obtain an FFI identification number; and (iii) certify every three years to the IRS that it meets the deemed-compliant status requirements. The categories of FFIs eligible for deemed-compliant status are: Local Bank Groups A group of affiliated FFIs (an FFI Group ) may be treated as deemed-compliant FFIs if they are all local banks that are licensed, organized, and operating within a single country, that do not solicit account holders from outside that country, and that implement policies to ensure they do not open or maintain accounts for non-residents, non-participating FFIs, or non-excepted non-financial foreign entities ( NFFEs ). Local FFI Members of Participating FFI Groups If an FFI is a member of an FFI Group that includes at least one participating FFI, it may be treated as deemed-compliant if (i) it has no operations and does not solicit account holders outside its country of organization, and (ii) it implements customer identification procedures to identify accounts of U.S. holders, non-participating FFIs, and non-excepted NFFEs, and either transfers IRS Provides Further Guidance for Foreign Accounts Reporting. 2

3 those accounts to a participating FFI, enters an FFI Agreement itself, or closes the accounts. Investment Funds Certain collective investment vehicles and other investment funds will be deemed-compliant if: (i) all holders of record of direct interests in the fund are participating FFIs, deemed-compliant FFIs holding on behalf of other investors, or certain other entities such as a foreign government; (ii) the fund prohibits the subscription for or acquisition of any interests in the fund by any person that is not of one of these types; and (iii) the fund certifies that its PPP will be calculated and published in accordance with the Notice. Foreign Retirement Plans The IRS is still considering comments received regarding the types of foreign retirement plans that should be treated as deemed-compliant FFIs and intends to provide further guidance on the types of foreign retirement plans that may qualify for such treatment. Determining Status of Existing Individual Account Holders The Notice responds to a number of comments on the 2010 Notice by revising the procedures for determining the status of existing individual account holders. The new guidelines focus on high net worth individuals and individuals in private banking relationships, and apply presumptive rules to existing customer files unless there is a reason to know that the information is unreliable or incorrect. Account holders that have indicia of U.S. status are required to provide confirmation of U.S. status or proof of non-u.s. status, or they will be treated as recalcitrant account holders. The FFI will have one or two years from the effective date of the FFI s agreement with the IRS to collect the required information, depending on the type of account. For the purpose of determining account holder status, the Notice requires FFIs to treat as a single account only those accounts that are associated with each other under the FFI s existing computerized information systems. Reporting on U.S. Accounts The Notice relaxes the valuation and balance determinations required for U.S. account information reporting under the 2010 Notice. Under the new rules, FFIs will generally be required to report only the year-end account balances or values for U.S. accounts, and, with respect to U.S. custodial and depositary accounts maintained by the FFI, the gross amount of dividends, interest, and other income, and the gross proceeds from the sale of property, paid or credited to the account. This supersedes the 2010 Notice s requirement for more frequent account balance or value determinations. The amount of income or gross proceeds paid or credited to the account need not be determined in accordance with U.S. federal income tax principles, and the FFI may use the same principles IRS Provides Further Guidance for Foreign Accounts Reporting. 3

4 that the FFI uses to report information on its resident account holders to the jurisdiction in which the FFI is located. If a U.S. account is closed or transferred during the year, the FFI will be required to report the income paid or credited to the account until the date of transfer or closure, as well as the amount or value withdrawn or transferred from the account, and to report the U.S. account as closed or transferred. FFIs with accounts that consist of equity or debt interests must report the amounts paid on those accounts. The Notice clarifies that FFIs that are not U.S. payors are not required to report tax basis information with respect to accounts that they report to the IRS. FFIs will be given the option to elect to have each branch report information regarding U.S. accounts that the branch maintains, if the FFIs face constraints under local law that would prevent consolidating account holder information across branches or affiliates located in different jurisdictions. Requirements for Qualified Intermediaries QIs are non-u.s. entities that have assumed withholding and reporting obligations pursuant to an agreement with the IRS. The Notice clarifies that a QI must enter into an FFI Agreement, in addition to the other requirements imposed on QIs, unless the QI is deemed compliant under the foreign account reporting rules (e.g., as a local bank). Existing FFIs that are QIs must amend their QI agreements to include a requirement to enter into FFI Agreements. FFIs applying for QI status after January 1, 2013, will be required to satisfy the requirements of the HIRE Act in order to obtain QI status. Similar requirements will apply to foreign withholding partnerships and trusts. Affiliated Groups of FFIs The Notice provides that each FFI affiliate in a compliant FFI Group must be a participating FFI or deemed-compliant FFI. Each participating FFI affiliate must enter into an FFI Agreement, obtain a separate FFI identification number, and be responsible for satisfying its requirements under the HIRE Act. FFI Groups will be required to apply for participating FFI or deemed-compliant FFI status through a coordinated application process. An FFI Group will be required to designate a lead FFI. In general, a lead FFI will be responsible for filing the required applications and documentation with the IRS for itself and each affiliate of the FFI Group, as well as providing certain other information about each affiliate of the Group and acting as a central point of contact for the IRS (though it may designate some of this responsibility to other FFIs). FFI Groups will also have an option to designate an FFI to assume an oversight role with respect to the compliance by the FFI Group. Further guidance that would allow centralized managers of funds to act as the primary point of contact for the IRS and to supervise compliance may be forthcoming. IRS Provides Further Guidance for Foreign Accounts Reporting. 4

5 Contacts Effective Date of FFI Agreement FFI Agreements will become effective on the later of the date they are executed or January 1, For further information please contact: Stephen Land Partner Francisco Duque Sarah Stein David Mitchell This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters LLP. All Rights reserved 2011 Linklaters in the U.S. provides leading global financial organizations and corporations with legal advice on a wide range of domestic and cross-border deals and cases. Our offices are located at 1345 Avenue of the Americas, New York, New York Linklaters LLP is a multinational limited liability partnership registered in England and Wales with registered number OC The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on Please refer to for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at marketing.database@linklaters.com Avenue of the Americas New York, NY Telephone Facsimile IRS Provides Further Guidance for Foreign Accounts Reporting. 5