Creating Clarity around FATCA – IRS
« Delay is not an option.
Michael Schneebeli Micha Bitterli
Partner Senior Manager
Audit Financial Services Audit Financial Services
T: +41 44 249 47 12 T: +41 44 249 47 97
E: firstname.lastname@example.org E: email@example.com
FATCA stands for “Foreign Account Tax Compliance Act” information cannot be shared, what if a FFI is unable to exit
and was set into force on 18 March 2010 in the U.S.A as part a relationship (long-term recalcitrant), etc.). Furthermore, we
of the “Hiring Incentives to Restore Employment Act (HIRE believe that the current notice is not always facilitating the
Act). FATCA should prevent U.S. tax-liable natural persons procedures to be performed by the FFI (which is mentioned
and legal entities from utilizing financial institutions abroad as a general goal on several occasions in the text) but rather
as well as other non-U.S. legal entities (so-called Foreign adding additional complexity to the problem. An overview of
Financial Institutions (“FFIs”)) in order to incompletely the newly published notice 2011-34 as well as our thoughts
file their tax return. This should be achieved through the on the impact on FFIs follows. For the detailed text as
introduction and increase of the reporting requirements to issued by the IRS, we refer to the original document that
the IRS. In order to enforce these reporting requirements, can be accessed at http://www.us.kpmg.com/microsite/
a withholding tax in the amount of 30% on all revenue from taxnewsflash/2011/Apr/n-11-34.pdf.
U.S. sources (“withholdable payments”) for non-cooperating
clients and financial institutions will be implemented. The notice introduces new definitions (e.g. “preexisting
Financial institutions who have signed the “disclosure , ,
individual account” “private banking account” etc.) and
agreement” with the IRS will be in charge for the deduction provides additional guidance on topics divided into the
of this withholding tax. According to the U.S. tax authority’s following seven sections
new approach, a circumvention of the newly introduced • ection I of the Notice provides updated guidance re-
withholding tax is nearly impossible. garding the procedures to be followed in identifying U.S.
accounts among preexisting individual accounts.
The initial publishing of the implementation guidelines by • ection II provides guidance regarding the definition
the U.S. Internal Revenue Service (“IRS”) occurred in Notice of the term “passthru payment” and provides guidance
2010-60 in August 2010. On Friday, April 8, the IRS published with respect to the obligation of participating FFIs to
notice 2011-34 (“the Notice”), a supplemental notice to withhold on passthru payments.
the first round of guidance. The notice was published in • ection III provides guidance regarding certain
response to comments submitted to the IRS following the categories of FFIs that will be deemed compliant.
publication of Notice 2010-60 and provides further guidance. • Section IV provides further guidance regarding the
obligation of participating FFIs to report with respect
General overview to U.S. accounts.
First of all we would like to mention that, despite the fact • ection V addresses the treatment of Qualified
that the supplemental notice provides guidance in some Intermediaries
key aspects of the FATCA legislation (e.g. identification • ection VI provides guidance regarding the application
of U.S. accounts, general rule for passthru payments, etc), of section 1471 to expanded affiliated groups of FFIs.
several issues that raised significant concerns are still not • ection VII states the effective date of FFI Agreements
addressed by IRS (e.g. how to aggregate accounts if the
Creating Clarity around FATCA – IRS Notice 2011-34 / April 2011 / 1
Section I – Identification of individual U.S. accounts
Section I of the notice provides detailed guidance on how “preexisting individual accounts” (natural persons) need to
be identified under FATCA. The identification occurs in the five steps illustrated below:
Step 3 Step 2
perform procedures Account balance <
Existing U.S. Accounts
a-d USD 50,000.– (optional)
U.S. Search for U.S. Indicia
yes no searchable information) no
U.S. > USD
yes no no
U.S. Search for U.S. Indicia
Account? (diligent review of
yes account files)
U.S. Account non-U.S. Account
It seems that the main target of Step 1 and 2 of the Step 3 focuses on the in-depth information a Relationship
identi-fication process is to reduce significantly the number Manager (“RM”) has about its clients. In case that a RM
of accounts subject to detailed analysis described below, has actual knowledge that his client is a U.S. person, a
as in Step 1, already known U.S. accounts (e.g. as they diligent review has to be performed to determine if the
participate in the QI program) are designated as U.S. client is effectively a U.S. account holder.
accounts and in Step 2, all accounts (aggregated) with an
amount of U.S.D 50,000.—or lower can be eliminated Step 4 describes the actual procedures to be performed to
from the analysis. identify U.S. Accounts not detected or exempted during Step
1 – 3. The FFI needs to analyze “electronically searchable
information” regarding the following U.S. Indicia:
2 / Creating Clarity around FATCA – IRS Notice 2011-34 / April 201
a. Identification of an account holder as a U.S. resident The chief compliance officer or another equivalent-level
of U.S. citizen; officer of a FFI must certify to the IRS when the FFI has
b. a U.S. place of birth for an account holder; completed the above procedures for its preexisting
c. a U.S. residence address or a U.S. correspondence individual accounts. As part of these certification, the
address (including a U.S. P box) responsible officer will be required to certify that:
d. standing instructions to transfer funds to an account b
• etween the publication of the notice and the effective
maintained in the United States; date of the FFI’s FFI agreement, FFI management
e. an “in care of” address or a “hold mail” address that personnel did not engage in any activity, or have any
is the sole address shown in the FFI’s electronically formal or informal policies and procedures in place,
searchable information for the account holder; or directing, encouraging, or assisting account holders
f. a power of attorney or signatory authority granted to with respect to strategies for avoiding identification
a person with a U.S. address. of their accounts as U.S. accounts; and
• he FFI had written policies and procedures in place as of
In the case that one of the above indicia is fulfilled, a the effective date of the FFI’s FFI Agreement prohibiting
diligent review (that needs to be documented with specific its employees from advising U.S. account holders on
customer forms) has to be performed to evaluate if an how to avoid having their U.S. accounts identified.
account is a U.S. account or not.
Section II – Definition of Passthru payments
Also, this step defines “specific” U.S. indicia, the question The chosen definition of passthru payments surprised
arises, if the data search can simply be limited to specified several market participant as there were many commen-
fields representing the defined indicia (e.g. U.S. resident tators advocating for a narrow passthru payment definition
“yes/no”) or if further indicia have to be assessed that could unexpected given the nature of the law and the recent
result in the fact that one of the defined indicia is fulfilled U.S., but was also not tax practice. Prior to the notice, most
(e.g. second phone number of the client starts with 001 or FFIs and experts believed that the required deduction of the
+1, the client made a significant payment to the U.S.A, etc.). 30% withholding tax will be limited to transactions in U.S.
We believe that an appropriate search for the defined indicia assets and earnings with U.S. source or directly traceable
should include further indicia that need to be derived from .
to such “withholdable income” Also IRS still follows the
those defined in the Notice. We further believe that indicia concept that U.S. sourced revenues will be subject to 30%
e. will result in a large number of false hits and as a conse- withholding tax, the final ruling requires in addition to deduct
quence resulting in a significant workload, especially for FFIs the tax in case that a non-participating FFI would indirectly
engaging in countries where “hold mail” is market standard invest into U.S. assets (e.g through an investment into an
(e.g. Latin America). FFI that is heavily exposed to the U.S.A).
Step 5 requires an in-depth review of accounts not To prevent non-participating FFIs (and recalcitrant account
identified as U.S. accounts during steps 1-4 in case that holders) to indirectly invest into U.S. assets (e.g. through
the balance or value of the account is USD 500,000.– an investment into an participating FFI that is heavily exposed
or higher. This review is performed in the same way as to the U.S.A)., the Notice introduces the concept of the
under Step 4 but includes so called “account files” meaning “Passthru Payment Percentage (“PPP”). Thereby, the PPP
that data that is not electronically searchable also has represents the percentage of U.S. assets an FFI is invested
to be analyzed. in compared to its total assets. If a non-participating FFI is
now investing into a participating FFI, the payments out
Beginning in the third year following the effective date of the of this investments are also subject of the withholding tax
FFI Agreement, the FFI will be required to apply Step 5 as part of the income that resulted in the payment (e.g.
annually (Step 6 of the Notice) to all preexisting individual dividend) is sourced from U.S. assets. As not the entire
accounts that did not previously satisfy the account balance income is derived from U.S. assets, only the part that
or value threshold and other requirements to be treated as resulted from U.S. assets, which is in fact the PPP is,
high value accounts. Furthermore, if the RM subsequently subject to the withholding tax. Following is an example
becomes aware that an account holder of a preexisting to better illustrate this methodology:
private banking account has any of the U.S. indicia described We assume that a non-participating FFI invests in a
above, the RM must request documentation to evaluate if participating FFI. The participating FFI is heavily invested
the account holder does have U.S. status. This requirement in U.S. assets (as defined in the Notice) and the calculation
introduced in Step 3 of the Notice introduces the require- of the PPP shows 60% (meaning 60% of total assets
ment for monitoring activities to be performed by the FFI. are invested in U.S. assets). If the participating FFI now
Creating Clarity around FATCA – IRS Notice 2011-34 / April 2011 / 3
would distribute a dividend to the non-participating FFI in 3. No FFI maintains operations outside the country of
the amount of CHF 100.–, CHF 60.– (60% of CHF 100.–) organization
would be subject to the 30% deduction. 4. Each FFI in the affiliated group implements policies and
It needs to be mentioned that this concept is not limited procedures to ensure that it does not open or maintain
to investments into FFIs but also includes any other accounts for
payment that is not a custodial payment. This means that a a. Non-residents
variety of products (with U.S. underlying assets or not) are b. Non-participating FFIs
planned to become subject to this concept. Products that c. NFFEs (other than excepted NFFEs as defined in
are potentially affected by this ruling are e.g. OTC Swaps, Notice 2010-60)
Structured Investment Products, etc.
Given that a typical FFI operates in different countries and
The PPP needs to be calculated by all FFIs (participating or has clients resident outside of Switzerland, we believe
recalcitrant) on a quarterly basis and published in a way that that most of the Swiss FFIs will not be able to achieve the
the information can be publicly accessed (e.g. on the FFI’s “deemed-compliant” status. However, we believe that
web page). In case that the PPP is not calculated by a the guidance on how “Certain Investment Vehicles” can
participating FFI or not published, a PPP of 100% is become “deemed compliant” has more relevance for the
assumed. In case of a non-participating FFI, a PPP of 0% Swiss Market place.
is assumed. One could wonder why the PPP for non-
participating FFI was defined as 0% as in a first view, this In our view, the ruling on Investment Vehicles on how to
would provide opportunities for recalcitrant account holders achieve a “deemed-compliant” status is following the
to still invest into non-participating foreign fund and still spirit of FATCA and demonstrates the most obvious way
avoid the disclosure of its information. We believe that an on how such a compliance can be achieved:
assumed PPP of 0% for non-participating FFIs is reasonable 1. All holders of record of direct interests in the fund are
as the burden to enter directly or indirectly into U.S. assets participating FFIs or deemed-compliant FFIs;
is too high and consequently it can be assumed that non- 2. The fund prohibits the subscription for or acquisition
participating FFIs will not hold any U.S. assets. A calculation of any interests in the fund by any person that is not a
of the PPP for these FFIs will consequently always result participating FFI, a deemed compliant FFI or an
in 0%. Furthermore, the withholding tax will be deducted exempted entity; and
in the moment the non-participating FFI makes a transaction 3. The fund certifies that any passthru payment percentages
in its U.S. assets. that it calculates and publishes will be done in accordance
with the Notice.
Direct investments into NFFE that are domiciled outside
U.S.A are still excluded from the withholding tax regime. A mentioned in prior publications, we believe that the
business activities for non-participating FFIs will be
We believe that the new passthru payments regime will significantly limited due to FATCA and that for several
add significant complexity to the withholding agent function product lines (e.g. as in case of Collective Investment
as the PPP of all counterparties and issuers (if applicable) Vehicles), the only way to achieve compliance will be
needs to be traced. Consequently, this concept will require to restrict the entire value chain and note holders to
significant manual work-around for a process that will need participating FFIs.
to be highly automated.
The Notice also mentions criteria for “Local FFI Members
For more examples and detailed information on how to of Participating Groups” and “Other Categories (e.g. foreign
calculate the PPP in case of more complex structures .
retirement plans)” Please refer to the Notice for an overview
(e.g. fund of fund structure), we refer to the Notice. of the criteria and more detail.
Section III – Deemed-Compliant Status for Certain FFIs Section IV – Reporting on U.S. accounts
The notice lists five criteria that need to be fulfilled that a In principle, Section IV does not provide any significant
“deemed-compliant” status can be obtained by an affiliated further insight into the reporting requirements other than
group: Notice 2010-60. It provides some relief with respect to
1. Each FFI in an affiliated group is, under the laws of its the periodicity of the reporting. Furthermore, it provides
country of organization, licensed and regulated as a bank some more detail on what needs to be reported as
or similar organization authorized to accept deposits. “gross receipts and gross withdrawals or payments made
2. All of the FFIs are organized in the same country to and from an U.S. account” .
4 / Creating Clarity around FATCA – IRS Notice 2011-34 / April 201
From our view, the most significant questions with respect each such FFI affiliate for the lead FFI to act on its behalf in
to reporting (aggregation of accounts, long-term recalcitrant signing the application.
account holders, etc.) are still not addressed.
Consistent with the centralized application process, the IRS
Section V – Qualified Intermediaries and Treasury also intend to allow Group of FFIs to centralize
Section V highlights that IRS and U.S. Treasury intend to the oversight role with respect to the compliance by the FFI
issue guidance requiring all FFIs currently acting as QIs to Group. E.g. it will be allowed that one designated FFI will be
become participating FFIs unless they qualify as deemed responsible to establish applicable policies and procedures
compliant FFIs. This requirement was expected and is in with respect to FATCA.
line with our understanding of the FATCA legislation.
A coordinated process is more effective than an approach
Section VI – Reporting on U.S. accounts in which each individual FFI of a Group would apply for an
It was expected that Treasury and IRS will issue regulations application. However, we believe that not all activities can
requiring that each FFI affiliate in an FFI Group must be a be centralized from a legal point of view, considering a
participating FFI or a deemed compliant FFI to avoid any multitude of countries in which a Group of FFIs may have
evasion of the legislation. Section VI actually states that the operations or branches.
IRS and Treasury intend to issue such a regulation.
The most important point in this Section of the Notice is
The Notice further notes that a Group of FFIs will need to related to Collective Investment entities (Funds). The IRS
apply for a compliant status through a coordinated process. is currently considering to allow a centralized compliance
For this purpose a “lead FFI” within the Group has to option for Funds. Thereby an asset manager or other agent
be designated. The “lead FFI” will provide the IRS with would execute a single FFI agreement on behalf of each
documentation, evidencing that each FFI affiliate has agreed member of a group of Funds that contracts with the asset
to the provisions of an FFI agreement or certification. Such manager to perform the functions required under the FFI
documents will include a legally binding authorization from Agreement.
Those that have advocated a «wait and see» Given the new guidance (which actually enables the FFI
approach may feel vindicated to some extent to properly identify existing accounts of natural persons)
as the IRS still has not announced the date and the given timeframe for the implementation of the
at which participating FFIs need to enter into FATCA requirements, we believe that FFIs should now start
the agreement and is somewhat hesitant to a detailed analysis of the actual impact on its business to
provide detailed guidance in a number of areas. be able to take an appropriate strategic decision around
We believe that there is a good probability that FATCA and related regulations. Furthermore we would like
the IRS will actually postpone the implementation to mention that the IRS estimates that around 100,000
date or at least will introduce the requirements in FFIs will be affected by FATCA. Experts are estimating the
several steps (as it was recent practice in the USA number to be even significantly higher. Given the large
for several other laws with significant impact on the number of companies affected, we doubt that sufficient
organizations (e.g. SOX)). qualified support is available in the market for all FFIs affected.
Creating Clarity around FATCA – IRS Notice 2011-34 / April 2011 / 5