IRS notice 2011-34: Foreign Account Tax Compliance Act.

June 7, 2011

On June 7, 2011, Tax Executives Institute filed the following comments with the Internal Revenue Service regarding Notice 2011-34 and the Foreign Account Tax Compliance Act (FATCA) provisions in Chapter 4 of the Internal Revenue Code. The comments focused on the need for the Treasury and the Service to provide additional guidance to persons affected by FATCA that are not foreign financial institutions. TEI's comments were prepared by a task force organized under the aegis of the IRS Administrative Affairs and International Tax Committees; the task force was chaired by Paul Heller of the Royal Bank of Canada. Benjamin R. Shreck, TEI Tax Counsel, serves as legal staff liaison to the Institute's International Tax Committee and coordinated the preparation of the submission.

On March 18, 2010, the Hiring Incentives to Restore Employment (HIRE) Act of 2010 was enacted into law. Subtitle A of Title V of the HIRE Act includes several provisions relating to foreign bank accounts, account holders, and cross border transactions, generally referred to as the Foreign Account Tax Compliance Act (FATCA or Chapter 4).

Section 501 of Part I of Subtitle A of the HIRE Act added Chapter 4 to the Internal Revenue Code of 1986; that Chapter, entitled Taxes to Enforce Reporting on Certain Foreign Accounts, sets forth four new sections to the Code:

* Section 1471, Withholdable payments to foreign financial institutions;

* Section 1472, Withholdable payments to other foreign entities;

* Section 1473, Definitions; and

* Section 1474, Special rules.

FATCA was enacted in response to the contention that U.S. persons were escaping tax on their worldwide income through the use of unreported offshore accounts and structures. The goals of FATCA are to require: (i) non-U.S. financial institutions to provide the Internal Revenue Service with information on U.S. persons that invest in accounts outside the United States, and (ii) non-U.S, entities to provide information about their U.S. owners to withholding agents, which will then provide such information to the IRS. Chapter 4 imposes a withholding tax on certain payments if due diligence and reporting requirements are not met in respect of these non-U.S, accounts and entities. Chapter 4 is generally effective for payments made after December 31, 2012.

In Notice 2010-60, the U.S. Department of the Treasury and IRS provided preliminary guidance regarding priority issues involving the implementation of Chapter 4 and requested comments on that guidance and other issues that should be given priority. TEI submitted comments in response to Notice 2010-60 and FATCA generally on October 19, 2010.

Notice 2010-60 was supplemented and in certain respects superseded by Notice 2011-34, which provides additional guidance under FATCA in response to concerns identified by commentators following the publication of Notice 2010-60, as well as other issues. Treasury and the IRS requested comments on issues addressed in Notice 2011-34 as well as comments on other priority issues in connection with forthcoming guidance on the application of Chapter 4. TEI is pleased to respond to their request for comments.

Background

Tax Executives Institute is the preeminent association of business tax executives worldwide. Our nearly 7,000 members represent 3,000 of the leading corporations in the United States, Canada, Europe, and Asia. TEI represents a cross-section of the business community, and is dedicated to developing mid effectively implementing sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works--one that is administrable and with which taxpayers can comply in a cost-efficient manner.

Because TEI is a broad-based organization that encompasses tax professionals employed by companies across all industry groups, the focus of our comments is on issues presented by Chapter 4 that apply to both financial and non-financial institutions and entities. For this reason, while Notice 2011-34 is concerned almost exclusively with issues related to financial institutions, the majority of TEI's comments relate to other priority matters, as requested by Treasury and the IRS.

Issues Addressed in Notice 2011-34

Section 1471(b)(2) provides that certain foreign financial institutions (FFIs) may be "treated ... as meeting the requirements" of subsection 1471(b) (deemed-compliant FFIs). An FFI may be a deemed-compliant FFI if it either (i) has complied with the procedures and other requirements set forth by the Secretary under section 1471(b)(2)(A), or (ii) is a member of a class of institutions with respect to which the Secretary has determined the application of section 1471 is unnecessary under section 1471(b)(2)(B). Entities that meet the requirements of section 1471(b) are exempt from withholding under section 1471(a). In addition, because deemed-compliant FFIs nevertheless remain FFIs, they are also exempt from withholding under section 1472, which applies to non-financial foreign entities (NFFEs).

While it may appear that deemed-compliant FFIs have no FATCA-related responsibilities this is clearly not the case. For example, Notice 2011-34 specifically requires that deemed-compliant FFIs calculate their passthru payment percentage or be deemed to have a percentage of 100. Further, a deemed-compliant FFI would continue to be a withholding agent if it makes withholdable payments, but would not be required to withhold on any passthru payments because it meets the requirements of section 1471(b). TEI is concerned, however, that the potential disconnect between the label "deemed-compliant FFI" and such an FFI's continued responsibilities under Chapter 4 will create confusion about the status of particular entities under FATCA, both with respect to the requirements applicable to the entities themselves and to persons making payments to those entities, resulting in administrative and compliance issues. The confusion will be exacerbated, moreover, by the numerous categories of entities under Chapter 4, the many exceptions to Chapter 4's requirements (some yet to be determined), and the variety and volume of payments made by affected entities (withholdable and otherwise).

TEI therefore recommends that some entities that may be categorized as "deemed compliant" FFIs be excluded from all Chapter 4 requirements and be treated as excepted NFFEs. Entities covered by the exclusion should include not-for-profit entities, including any investment company that is wholly owned by one or more not-for-profit entities. TEI recommends that a not-for-profit entity include any legal entity whose purpose is to safeguard the interests of its members or beneficiaries by way of mutual self-help, and which pursues political, religious, scientific, artistic, charitable, social or similar objectives. This definition tracks what is used for anti-money laundering and know-your-customer requirements in some jurisdictions.

In addition, some entities that currently may be FFIs should be treated as NFFEs because of the purpose, size...