september 13, 2010 fatca guidance - sullivan & cromwell€¦ · from the previously introduced...

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September 13, 2010

FATCA Guidance IRS Releases Preliminary Guidance on the FATCA Provisions of the HIRE Act

SUMMARY On August 27, 2010, the IRS and Treasury Department issued Notice 2010-60 (the “Notice”) providing

initial guidance on many of the foreign account tax compliance provisions of the “Hiring Incentives to

Restore Employment Act” (the “Act”). The IRS and Treasury Department intend to issue proposed

regulations incorporating the content of the Notice.

The Notice sets forth the IRS’s current expectations for:

• how the “grandfathered obligation” rules will be applied;

• how the term “financial institution” will be interpreted;

• what foreign financial institutions (“FFIs”) that enter into withholding and information-reporting agreements with the Treasury Department (such an agreement, an “FFI Agreement,” and such FFIs, “Participating FFIs”) will need to do to identify and classify their account holders;

• what U.S. financial institutions (“USFIs”) that make withholdable payments will need to do to identify and classify their account-holder payees;

• how to apply exemptions from withholding (including the proposal of a new exempt category for non-financial foreign entities (“NFFEs”) that are engaged in an active trade or business);

• providing each Participating FFI with an employer identification number (“EIN”) that the Participating FFI can use to document that it is a Participating FFI; and

• what information a Participating FFI will be required to report.

The IRS and Treasury Department also solicit comments on a variety of topics addressed in the Notice.

Such comments should be submitted by November 1, 2010. The Notice generally does not cover

provisions of the Act governing: (i) bearer bonds; (ii) substitute dividend and “dividend equivalent”

payments; (iii) U.S. taxpayer self-disclosure of foreign assets or (iv) certain trusts.

-2- FATCA Guidance September 13, 2010

BACKGROUND The Act, which was signed on March 18, 2010, includes foreign financial account provisions, mostly taken

from the previously introduced Foreign Account Tax Compliance Act (“FATCA”), which require: (i) FFIs to

report information on their account holders to the IRS and (ii) other foreign entities to provide information

regarding their beneficial owners to withholding agents. In the absence of compliance, there will be a

30% withholding tax on payments of U.S.-source “withholdable payments” (which generally include U.S.-

source investment income and gross proceeds from the sale or disposition of assets that generate U.S.-

source investment income).1

The Act, despite providing detailed rules in certain areas, delegates the development of many aspects of

the new withholding regime to the Treasury Department and the IRS.

THE NOTICE The Notice provides preliminary guidance on a number of foreign tax compliance provisions of the Act.

A. GRANDFATHERED OBLIGATIONS

Payments on “grandfathered obligations,” generally obligations that are outstanding on March 18, 2012,

are exempted from the Act’s withholding provisions. However, because the term “obligation” is not

defined in the Act or the relevant legislative history, uncertainty exists regarding how this exemption

should be applied. In the Notice, the IRS and Treasury Department indicate that forthcoming regulations

will define an “obligation” to be any legal agreement that produces (or could produce) “withholdable

payments,” is not equity for U.S. tax purposes, and has a definitive term or expiration date. Accordingly,

most fixed-term instruments that have a U.S. issuer and are classified as debt for U.S. tax purposes will

be “obligations,” while demand deposit arrangements will not. Uncertainty remains, however, as to how

the IRS intends to classify a variety of financial products, such as prepaid forward contracts and other

structured investments (although the guidance given under the Notice appears to suggest that such

instruments will constitute “obligations” as long as they are not treated as equity for U.S. tax purposes).

In addition, the Notice indicates that a “material modification” of an obligation will terminate the

obligation’s grandfathered status. A “material modification,” in the case of a debt instrument, will be

defined by reference to the general rules that govern whether a “significant modification” has occurred to

1 Although these provisions are not addressed by the Notice, the Act also: (i) eliminates certain tax

exemptions for foreign-targeted bearer bonds; (ii) imposes withholding tax on substitute dividend and dividend equivalent payments; (iii) requires increased disclosure by U.S. taxpayers with respect to foreign assets; and (iv) establishes new rules regarding the treatment of foreign trusts. Additional background on the Act can be found in the Sullivan & Cromwell LLP publication entitled “Hiring Incentives to Restore Employment Act Enacted: Legislation Includes Foreign Account Provisions and Employment Incentives” (March 24, 2010), which can be obtained by following the instructions at the end of this publication.


that instrument for U.S. tax purposes.2 In the case of other obligations, whether a modification is

“material” will be evaluated “based on all relevant facts and circumstances.” The Notice gives no

guidance on how the term “outstanding” should be interpreted, an area where additional guidance may be

needed.

B. FOREIGN FINANCIAL INSTITUTIONS AND NON-FINANCIAL FOREIGN ENTITIES

Whether many of the Act’s withholding and information-reporting requirements apply to a payment is

determined by whether the payee is an FFI. To be an FFI, an entity must first be a “financial institution.”

Under the Act, a “financial institution” is an entity that: (i) accepts deposits in the ordinary course of a

banking or similar business; (ii) as a substantial portion of its business, holds financial assets for the

account of others; or (iii) is engaged (or holds itself out as being engaged) in the business of investing,

reinvesting or trading in securities, partnership interests or commodities (or interests, including

derivatives, in such assets).3

1. Definition of a “Financial Institution”

a. Entities that Accept Deposits in the Ordinary Course of a Banking or Similar Business

In the Notice, the IRS states that an entity that is a “financial institution” because it accepts deposits in the

ordinary course of a banking or similar business4 generally includes an entity that would qualify as a bank

under Section 585(a)(2),5 a savings bank, a commercial bank, a savings and loan association, a thrift, a

credit union, a building society and a cooperative banking institution. Other entities may also be “financial

institutions” under this rule: the Notice observes that the fact that an entity is subject to the banking and

credit laws of the United States or a foreign country, or to bank regulation is “relevant to but not

necessarily determinative” of whether an entity is a “financial institution” because it accepts deposits in

the ordinary course of a banking or similar business.

2 See Treas. Reg. § 1.1001-3. If a debt instrument has undergone a “significant modification” under

these rules, it is generally treated, for U.S. tax purposes, as if it had been retired and reissued on the day when the “significant modification” took place.

3 See Section 1471(b)(5). 4 See Section 1471(d)(5)(A). 5 Section 585 permits certain banks to deduct bad debt reserves for U.S. tax purposes, and includes a

definition of a “bank” that includes: (i) a “bank,” as defined in Section 581; (ii) the banking business of a U.S. branch of a foreign corporation; and (iii) a foreign corporation that would be a “bank” under Section 581 if it were not a foreign corporation. Under Section 581, a “bank” is a bank or trust company (including a building and loan association), incorporated under U.S. law, a substantial part of the business of which consists of receiving deposits, making loans and discounts, or of exercising fiduciary powers similar to those that national banks are permitted to exercise, which is supervised by a federal or state bank regulator.


b. Entities that, as a Substantial Portion of Their Businesses, Hold Financial Assets for the Account of Others

The Notice gives several examples of entities that are “financial institutions” for the purpose of the Act

because as a substantial portion of their businesses, they hold financial assets for the account of others:6

broker-dealers, clearing organizations, trust companies, custodial banks and entities acting as custodians

with respect to the assets of employee benefit plans. Moreover, as with deposit-taking institutions, the

Notice provides that whether an entity is subject to the banking laws, credit laws or broker-dealer

regulations of the United States or a foreign jurisdiction is “relevant to, but not necessarily determinative

of” whether an entity is a “financial institution” under this rule.

c. Entities that Are Engaged Primarily in the Business of Investing, Reinvesting or Trading in Securities, Partnership Interests or Commodities

As with the first two categories of “financial institutions,” the Notice gives several examples of entities that

will be classified as financial institutions under the Act because they are engaged primarily in the

business of investing, reinvesting or trading in securities, partnership interests or commodities.7 Such

entities include mutual funds (and their foreign equivalents, presumably including unit trusts, European

SICAVs and British IVICs), funds-of-funds (and other similar investments), exchange-traded funds, hedge

funds, private equity funds and venture capital funds, other managed funds, commodity pools and other

investment vehicles. Although the Act refers to entities engaged in the “business” of investing,

reinvesting or trading, the Notice indicates that an entity may be engaged in such a “business” for

purposes of the Act even if the entity’s level of activity would not otherwise constitute a “trade or

business” for other U.S. tax purposes. The IRS and Treasury Department expect that the regulations

issued under the Act will provide that whether an entity is engaged in such a “business” is a determination

that will be made on the basis of all the relevant facts and circumstances.

2. Excluded and Exempted Entities

Pursuant to the Notice, the IRS intends to exempt certain classes of entities from the definition of a

“financial institution,” and provides special rules for the treatment of insurance companies, entities with

certain identified owners and entities organized in a U.S. territory or possession.

a. Exempted Entities

The IRS and Treasury Department intend to issue regulations exempting certain foreign entities from the

definition of a “financial institution.” Such entities will be, instead, treated as NFFEs. Under the Notice,

the following entities will generally be entitled to such an exemption:

6 See Section 1471(d)(5)(B). 7 See Section 1471(d)(5)(C).


• holding companies for a subsidiary or a group of subsidiaries that primarily engage in a trade or business other than that of a “financial institution” (such as a traditional holding company that owns a group of manufacturing subsidiaries);

• start-up companies (other than financial institutions), which will be exempted for the first 24 months after their formation;

• non-financial entities that are in the process of liquidating or emerging from a reorganization or bankruptcy; and

• hedging or financing centers of a non-financial group that do not provide financial services to non-affiliates.

However, the Notice generally provides that investment funds, private equity funds, venture capital funds,

leveraged buyout funds, and vehicles whose purpose is to acquire or fund start-up companies and hold

those companies for investment for a limited period of time will not be “exempted entities.” In the Notice,

the IRS requests comments as to how the classes of entities discussed above can be better defined.

b. Special Rules for Insurance Companies

The Act’s definition of a “financial institution” is broad enough to include certain insurance companies

within the definition of a “financial institution.”8 The Notice provides that the IRS intends to issue

regulations that exempt insurance contracts that do not have cash value (such as property and casualty

insurance policies, and term life insurance contracts) from the definition of a “financial account,” and

further to exempt insurance companies that are primarily in the business of issuing such contracts from

the Act’s definition of a “financial institution” (instead, such entities would be treated as NFFEs).

However, the IRS, according to the Notice, believes that cash-value insurance contracts and annuity

contracts “may present the risk of U.S. tax evasion” that the Act is intended to prevent. Accordingly, the

Notice requests comments regarding the “appropriate treatment” of such contracts.

c. Special Rules for Entities with Identified Owners

The Notice also observes that investment funds—such as small family trusts—that only have a small

number of individual owners or NFFE owners that are not subject to the Act’s withholding requirements

(“excepted NFFEs”) may also constitute FFIs. The IRS notes, however, that the administrative burdens

associated with such entities entering FFI Agreements may significantly outweigh the benefits to such

entities of making investments that give rise to withholdable payments. Accordingly, the IRS intends to

issue guidance under which “certain” entities that are FFIs because they are engaged primarily in the

business of investing, reinvesting or trading in securities, partnership interests or commodities (but not

8 The legislative history of the Act specifically observes that “[i]t is anticipated that the Secretary may

prescribe special rules addressing the circumstances in which certain categories of companies, such as certain insurance companies, are financial institutions, or the circumstances in which certain contracts or policies, for example annuity contracts or cash-value life insurance contracts, are financial accounts or United States accounts for these purposes.” Joint Committee on Taxation, Technical Explanation of the Revenue Provisions Contained in Senate Amendment 3310, the “Hiring Incentives to Restore Employment Act,” Under Consideration by the Senate (Feb. 23, 2010), at 44.


entities that are FFIs because they accept deposits in the ordinary course of a banking or similar business

or, as a substantial portion of their businesses, hold financial assets for the account of others) would be

treated as “deemed compliant” FFIs so long as: (i) the withholding agent identifies each individual,

specified U.S. person9 or excepted NFFE10 that has an interest in such entity; (ii) the withholding agent

obtains from each such person the information that the withholding agent would be required to obtain (as

described below) from that person if such person were a new account holder or direct payer of the

withholding agent; and (iii) the withholding agent reports to the IRS (in a manner that will be detailed in

future guidance) any specified U.S. persons that are identified as direct or indirect interest holders in the

entity. The Notice is not clear as to how an FFI would be treated if it has, among its owners, one or more

privately held NFFEs, or how any U.S. owner of such NFFEs would be treated.

The Notice also requests comments regarding whether “certain” small FFIs (presumably meaning the

class described above) should be treated as NFFEs, in addition to being required to follow the procedures

described above.

3. Classes of Persons Posing a Low Risk of Tax Evasion

The withholding and information-reporting provisions of the Act do not apply to payments to the extent

that the beneficial owner of the payment is a member of a class of persons—identified by the Treasury

Department—as posing a low risk of tax evasion.11 Various commentators suggested that this class may

include, among other groups, foreign retirement plans (which may otherwise constitute FFIs).12

The Notice indicates that the IRS intends to issue guidance exempting payments made to certain foreign

retirement plans from the Act’s withholding provisions. The requirements to qualify for this exemption

may be quite stringent. At present, the IRS expects to treat a foreign retirement plan as posing a low risk

of tax evasion only if the plan: (i) qualifies as a retirement plan under the law of the country where it is

established; (ii) is sponsored by a foreign employer; and (iii) does not permit U.S. persons, other than

9 Under the Act, a “specified U.S. person” is a U.S. person or entity that is not exempted from Section

1471 reporting rules (including an individual). 10 As noted above, an “excepted NFFE” is an NFFE owner that is not subject to the Act’s withholding

requirements. Examples of excepted NFFEs include a publicly traded corporation, a corporation in the same “expanded affiliated group” of a publicly traded corporation and a foreign government.

11 Section 1471(f). 12 See, e.g., American Bar Ass’n, Comments on Foreign Account Tax Compliance Offset Provisions of

the HIRE Act (Aug. 16, 2010). Other classes of persons that have been suggested as posing a low risk of tax evasion include widely held investment vehicles and certain other collective investment funds. See id. The legislative history of the Act also indicates that certain widely held collective investment vehicles could be termed “deemed compliant” with the Act under Section 1471(b)(2). See Joint Committee on Taxation, Technical Explanation of the Revenue Provisions Contained in Senate Amendment 3310, the “Hiring Incentives to Restore Employment Act,” Under Consideration by the Senate (Feb. 23, 2010), at 41.


employees who worked for the sponsor during the time when the relevant benefits accrued, to participate.

These rules would not, in their present form, apply to non-retirement benefit plans (such as other deferred

compensation plans); however, the Notice requests comments on whether such plans should be

permitted to claim similar treatment. In addition, the Notice requests comments on how “retirement plan”

should be defined, and how retirement plans may be able to identify themselves to withholding agents for

the purpose of claiming this exemption.

4. Special Rules for U.S. Branches of FFIs

Under the Act, a U.S. branch of an FFI is not exempted from the definition of an FFI. Although income

that is treated as effectively connected with an FFI’s U.S. trade or business (i.e., “ECI”) is not a

“withholdable payment,” this exemption does not, for example, operate to cover payments made to an

FFI’s U.S. branch on behalf of a customer.

The IRS and Treasury Department indicate, in the Notice, that they do not intend to exempt FFIs that

receive withholdable payments solely through their U.S. branches from the requirement to enter into an

agreement with the Treasury Department to avoid withholding under the Act. However, the IRS is

considering permitting U.S branches of FFIs to document their account holders under the rules applicable

to U.S. financial institutions.

In addition, although the current nonresident alien withholding rules provide a presumption that a payment

to a U.S. branch of a foreign bank or insurance company is, in the absence of a statement on a

withholding certificate to the contrary, presumed to be effectively connected with that entity’s U.S. trade or

business (and therefore generally exempt from withholding),13 the IRS indicates in the Notice that it does

not anticipate providing a similar exemption with respect to the Act’s withholding provisions.

5. Treatment of CFCs

The IRS and Treasury observe that the existing reporting requirements for controlled foreign corporations

of U.S. shareholders (“CFCs”) are generally less stringent than those prescribed by the Act and that,

accordingly, it is not appropriate to treat financial institutions that are CFCs as “deemed compliant” for the

purposes of the Act.14 In particular, the IRS notes that: (i) under the existing CFC reporting requirements,

CFCs are not required to report certain payments to domestic corporations, whereas FFIs are required to

report information on account holders that are specified U.S. persons (including certain domestic

corporations); (ii) the existing CFC reporting requirements do not require CFCs to report with respect to

the U.S. owners of foreign entities for which they maintain accounts; and (iii) the Act requires FFIs to

obtain waivers from account holders when a reporting obligation under the Act would otherwise be

13 See Treas. Reg. § 1.1441-4(a)(2)(ii). 14 See Section 1471(b)(2).


prohibited under foreign law (or, in the absence of such a waiver, to close such holders’ accounts), and

no comparable requirement would apply to FFIs that are CFCs if they were exempted from FFI status.

6. Financial Institutions Organized in U.S. Territories

In general, entities organized in a U.S. territory are considered “foreign” for most U.S. tax purposes.

However, under the Act, a financial institution organized under the laws of a U.S. territory is not an FFI,

except to the extent otherwise provided by the IRS and Treasury Department. Territory-organized

financial institutions are, however, withholding agents under the Act.15

The Notice indicates that the IRS generally does not intend to treat territory-organized financial

institutions as FFIs. However, as noted above, territory-organized financial institutions are required to

withhold under the Act’s withholding provisions. The Act does not specify how withholding should apply

in cases where a territory-organized financial institution is acting as an intermediary between a U.S.

withholding agent and an FFI or an NFFE. Under the Internal Revenue Code’s regular (nonresident

alien) withholding regime, territory-organized financial institutions are permitted to assume the withholding

and reporting responsibilities that apply to U.S. persons. The IRS intends to issue guidance that would

permit a territory-organized financial institution that receives a withholdable payment as an intermediary

to be exempted from the Act’s withholding provisions if it represents (in writing) to the relevant withholding

agent that it is assuming the withholding responsibilities imposed on U.S. withholding agents under the

Act.

a. Territory-Organized Investment Companies

The Notice also provides that the IRS and Treasury Department are considering treating territory-

organized financial institutions that are “financial institutions” solely because they are engaged primarily in

the business of investing, reinvesting or trading in securities, partnership interests or commodities as

NFFEs. If such an exemption is permitted, it is anticipated that a territory-organized entity may be exempt

from NFFE withholding if it: (i) is organized under the laws of a U.S. territory and (ii) is wholly owned by

one or more bona fide residents of the same U.S. territory.

b. Information Exchange

In addition, the Notice indicates that the IRS and Treasury Department expect to engage in discussions

with the governments of U.S. territories with the intent of “exploring how” the current territorial information-

reporting systems may supplement the obligations of territory-organized financial institutions. It is

possible, after such discussions, that the IRS and the relevant territorial jurisdictions may enter into

information-exchange agreements that could focus on providing information to the IRS regarding

specified U.S. persons who hold accounts at territory-organized financial institutions.

15 See Section 1473(4).


7. Additional Request for Comment

The Notice requests comments on the classes of foreign entities that should be:

• excluded from the definition of an FFI;

• deemed compliant under Section 1471(b)(2); or

• identified as posing a low risk of tax evasion under Section 1471(f).

C. COLLECTION OF INFORMATION AND IDENTIFICATION OF PERSONS BY FINANCIAL INSTITUTIONS

1. Summary

Section III of the Notice: (i) sets forth a framework of rules and procedures for USFIs and Participating

FFIs to identify and classify their account holders (or, in the case of USFIs, account holder payees) for the

purpose of applying the Act’s withholding rules;16 (ii) proposes a new exempt category for NFFEs that are

engaged in an active trade or business; and (iii) provides that Participating FFIs will be issued an EIN that

the Participating FFI can provide to a payor (or FFI at which it holds an account) to establish its status as

a Participating FFI.

The procedures set forth in Section III of the Notice distinguish between new and existing accounts and,

with respect to both types of accounts, between those held by individuals and those held by entities.

During an introductory five-year period (two years in the case of accounts with an average monthly

balance or value exceeding $1,000,000 during the year before the year the FFI Agreement became

effective), the methodology applicable to existing accounts differs from the methodology applicable to

new accounts. With respect to existing accounts, the methodology focuses on electronically searchable

information already available to the financial institution and allows the financial institution to rely on

existing forms and information already in its files. If the electronically available information contains some

indicia of potential U.S. status, the rules require the financial institution to request additional information.

The type of additional information required will depend on the strength of the indicia of potential U.S.

status. For example, if a Participating FFI has a U.S. place of birth on file for an individual account

holder, that account holder will need to provide a non-U.S. passport or similar evidence plus a Form W-

8BEN to establish his or her non-U.S. status. In contrast, in instances where the only element of potential

U.S. status is a power of attorney granted to a person with a U.S. address, other documentary evidence

will generally be sufficient.

16 See Sections 1471 and 1472. It is important to note that the rules set forth in the Notice are

applicable to obligations of USFIs under Section 1472 only insofar as they are making payments to NFFEs that are account holders of the USFIs. The Notice does not provide guidance on how USFIs should apply the rules of Section 1472 (withholding on NFFEs) to withholdable payments made to beneficial owner payees that are not account holders (e.g., NFFEs that are suppliers to USFIs but not accountholders).


Generally, an FFI will have one year from the date it becomes a Participating FFI to initially classify its

existing account holders and request any necessary information. Account holders will have an additional

year to provide that information before they are treated as recalcitrant account holders. USFIs have until

December 31, 2013 to request information from those account holders they tentatively classify as FFIs or

NFFEs. A foreign entity must provide the requested information by December 31, 2014 or be treated as a

nonparticipating FFI or a non-exempted NFFE that is subject to withholding.

In addition to the rules and procedures related to identifying and classifying account holders, Section III of

the Notice provides that NFFEs that are engaged in an active trade or business will be treated as

excepted NFFEs (presumably pursuant to the authority granted to the Treasury under Section

1472(c)(2)). As such, the account of an NFFE engaged in a trade or business will not be treated as a

U.S. account for purposes of the Act regardless of whether it has substantial U.S. owners.

Section III of the Notice also includes a statement indicating that the Treasury and IRS contemplate

issuing EINs (referred to as “FFI EINs”) to Participating FFIs. Participating FFI’s will use these to identify

themselves to withholding agents.

2. Background and Categories

a. Participating FFIs

To comply with the requirements of the Act (i.e., to be a “Participating FFI”), an FFI must enter into an FFI

Agreement pursuant to which it agrees to identify and report information on its account holders that are

specified U.S. persons or U.S.-owned NFFEs. To do this, it must determine the proper status of all of its

account holders. If the account holder is an individual, the FFI must determine whether that account

holder is a U.S. person (and therefore a specified U.S. person subject to the Act’s reporting rules) or a

foreign person.

If the account holder is an entity, the determination process is more complicated. The FFI must first

establish whether the account holder is a U.S. or non-U.S. entity. If the account holder is a U.S. entity,

the FFI must determine whether it is a specified U.S. person. If the FFI concludes that the account holder

is a non-U.S. entity, it must then determine whether the non-U.S. entity is: (i) an FFI; (ii) an entity

exempted from the Act’s withholding and information-reporting rules, such as a foreign government, an

international organization or an entity that presents a low risk of tax evasion17 (an “Exempted Entity”); or

(iii) an NFFE.

If the Participating FFI concludes that the account holder is an FFI, it must ascertain whether it is (i) a

Participating FFI, (ii) a deemed compliant FFI or (iii) a nonparticipating FFI.

17 See Section 1471(f).


If the Participating FFI concludes that the account holder is an NFFE, it must then determine if it is an

excepted NFFE (such as a foreign government or a publicly traded corporation). If the NFFE is not an

excepted NFFE, the Participating FFI must evaluate whether the NFFE has substantial U.S. owners.

b. U.S. Financial Institutions

A U.S. financial institution (“USFI”) (and any other withholding agent)18 making a withholdable payment to

an entity must identify the recipient of the withholdable payment to comply with its obligations to withhold

on FFIs,19 and must identify the beneficial owner(s) of the payment to comply with its obligations to

withhold on NFFEs.20 In order to make this identification, the USFI will generally first need to determine

whether the entity recipient is a U.S. or non-U.S. entity. If the relevant entity is a non-U.S. entity, it must

evaluate whether it is: (i) an FFI; (ii) an Exempted Entity; or (iii) an NFFE. If the USFI determines that the

account holder is an FFI, the USFI must then determine whether the account holder is: (i) a Participating

FFI; (ii) a deemed compliant FFI; or (iii) a nonparticipating FFI. If the USFI determines that the entity is an

NFFE, the USFI must then ascertain if the account holder is an excepted NFFE. If the entity is not an

excepted NFFE, the USFI must determine whether the NFFE has substantial U.S. owners.

3. Information and Procedures

a. Existing Documentation and FFI EINs

As discussed above, under the rules established by the Act, both Participating FFIs and USFIs will be

required to identify certain of their account holders.

i. Reliance on Previously Collected Forms and Documentation

For the purpose of identifying U.S. account holders, the Notice will permit Participating FFIs and USFIs to

rely on any IRS Forms W-9 they have previously collected for other U.S. tax purposes. Any account

holder that is an individual and that has provided a Form W-9 will be treated as a U.S. person for

purposes of compliance with the requirements of FATCA. FFIs will also be permitted to rely on other

previously collected documentation. For example, a Participating FFI will be deemed to have satisfied the

requirement to maintain documentation (other than a Form W-8 or W-9) if it retains a record of the

documentary evidence collected, and reviews and records certain identifying information about the

evidence.

ii. EINs for Participating FFIs

The Notice states that the Treasury Department and IRS contemplate issuing EINs, referred to as FFI

EINs, to Participating FFIs. Participating FFIs will use these to identify themselves to withholding agents.

18 The Notice only addresses certain withholding obligations of U.S. Financial Institutions although

Section 1471 applies to any payor of a withholdable payment. 19 See Section 1471(a). 20 See Section 1472.


Treasury is considering requiring Participating FFIs to report the identity of any entity that provides

documentation indicating that it is a Participating FFI, but fails to provide a valid FFI EIN.

b. Rules and Procedures applicable to Participating FFIs

Under its FFI Agreement, a Participating FFI will be required to identify and report information on its

account holders that are specified U.S. persons or U.S.-owned NFFEs. The Notice divides these rules

into four categories: (i) rules for pre-existing accounts of individuals; (ii) rules for new accounts opened

by individuals; (iii) rules for pre-existing accounts held by entities; and (iv) rules for new accounts opened

by entities. Pre-existing accounts are financial accounts that are held as of the date the Participating

FFI’s FFI Agreement becomes effective.

i. Pre-Existing Accounts Held by Individuals

Section III of the Notice sets forth a series of steps that the Participating FFI must follow to ascertain

whether an individual account holder is a U.S. or non-U.S. person:

Step 1. If the average month-end balance of all depositary accounts held by the account holder at the

FFI during the calendar year preceding the date the Participating FFI’s FFI Agreement becomes effective

was less than $50,000, the FFI may (but is not required to) temporarily treat the account as a non-U.S.

account. As currently drafted, it does not appear that the IRS will require aggregating accounts from all

members of the Participating FFI’s expanded affiliated group.

Step 2. All account holders not addressed in Step 1 that are already documented as U.S. persons for

other U.S. tax purposes will be treated as specified U.S. persons.

Step 3. Account holders not addressed in Steps 1 and 2 will be treated as non-U.S. persons if the FFI’s

electronically searchable information does not contain any of the following enumerated indicia of potential

U.S. status:

(i) the account holder is identified as a U.S. citizen or resident;

(ii) a U.S. address is associated with an individual account holder;

(iii) a U.S. place of birth is on record for the account holder;

(iv) the sole address provided is an “in care of,” “hold mail” or P.O. box (presumably, this includes a sole address outside the United States);

(v) a power of attorney or signatory authority was granted to a person with an address in the U.S.; and

(vi) there are standing instructions to transfer funds to accounts maintained in the U.S.

Step 4. If any of the above indicia of potential U.S. status exist, the FFI must request and obtain

additional documentation to establish whether the account holder is a U.S. person. If the account holder

is identified as a U.S. citizen or resident, the account is presumed to be held by a U.S. person, and such

person must provide a Form W-9. If the indicia described in clause (ii) or (iii) are present with respect to


an account, the account holder must provide a Form W-9, or both a Form W-8BEN and documentary

evidence that the holder is not a U.S. person, such as a non-U.S. passport. Finally, holders of accounts

that contain indicia described in clauses (iv)-(vi) must provide either a Form W-9 or a Form W-8BEN, or

documentary evidence establishing the individual’s non-U.S. status. This documentation may be relied

on unless the FFI knows or has reason to know it is incorrect. An FFI will have one year after the

effective date of its FFI agreement to request such information, and an account holder will have one year

after the date of the request to provide the relevant information.

Step 5. Within five years of the effective date of the institution’s FFI Agreement (and within two years for

accounts with an average monthly balance or value exceeding $1,000,000 during the year before the

year the FFI Agreement became effective), all pre-existing individual accounts treated as non-U.S.

accounts will generally be subject to the procedures for new accounts described below.

ii. New Individual Accounts

A “new” individual account, under these rules, is an account opened after the effective date of the

Participating FFI’s FFI Agreement. It also includes new account relationships established by an individual

holding pre-existing accounts with the FFI. As with the rules for pre-existing individual accounts, a

Participating FFI must proceed through a series of steps to determine the proper status of the individual

account holder:

Step 1. An account for which the opening account balance, and the average monthly account balance of

all accounts of the account holder with the FFI, is less than $50,000 may be treated as a non-U.S.

account.

Step 2. All account holders not addressed in Step 1 that are already documented as U.S. persons for

other U.S. tax purposes will be treated as specified U.S. persons.

Step 3. If an account is not addressed in Steps 1 and 2, the FFI will be required to obtain documentary

evidence establishing U.S. or non-U.S. status of the individual that is the beneficial owner of the account

(either a Form W-9 from a U.S. individual or documentary evidence establishing the individual’s status as

a non-U.S. person).

Step 4. If an account is not addressed in Steps 1 and 2 and is not documented as a U.S. account

pursuant to Step 3, the FFI must examine all the documents it has collected in connection with the new

account (e.g., as part of its account opening procedures and for purposes of maintaining the account,

corresponding with the account holder, or complying with regulatory requirements) for the indicia of U.S.

status (using the indicia listed above in Step 3 for pre-existing accounts).

Step 5. Accounts with any of the enumerated indicia of U.S. status will be treated as potential U.S.

accounts. As with the rules for pre-existing individual accounts, the strength of indicia present will

determine the amount of other evidence needed to rebut this presumption of potential U.S. status.


Step 6. An FFI will be required to repeat Steps 4 and 5 each time it knows, or has reason to know, that

circumstances that could affect the account holder’s classification have changed.

According to the Notice, future guidance will set forth the appropriate time periods for completing the

Steps listed above, the default treatment of account holders during that period and the circumstances that

may trigger a re-evaluation of the non-U.S. status of an account with a balance of less than $50,000.

iii. Pre-Existing Entity Accounts

As it does for pre-existing and new individual accounts, Section III of the Notice sets forth a series of

steps the Participating FFI must apply to determine: (i) whether an existing entity account holder is a U.S.

or non-U.S. person, and if it is a U.S. person, whether it is a specified U.S. person or a non-specified U.S.

person and (ii) whether it is (a) a Participating FFI, a deemed compliant FFI or a non-participating FFI; (b)

an NFFE or an excepted NFFE; or (c) an Exempted Entity. A Participating FFI also must evaluate

whether the account holder must be treated as a recalcitrant account holder.21

Step 1. Account holders already identified as U.S. persons for other U.S. tax purposes will be treated as

U.S. account holders. Such account holders will have one year following the date the Participating FFI’s

FFI Agreement has become effective to provide documentation establishing that they are not specified

U.S. persons. After that point, the account holder will be treated as a specified U.S. person until

documentation establishing otherwise is provided to the FFI.

Step 2. With respect to all account holders not addressed in Step 1, if the Participating FFI has

information in its electronically searchable database indicating that the account holder is a U.S. person, it

must be presumed to be a U.S. person. The Participating FFI must request documentation establishing

that the account holder is either not a U.S. person or not a specified U.S. person within one year from the

effective date of its FFI Agreement. The account holder must provide the information within one year of

the request, or it will be treated as a specified U.S. person and a recalcitrant account holder.

Step 3. Entities not classified under Step 1 or 2 will be presumed to be non-U.S. entities. A Participating

FFI must then complete the following procedures to classify a non-U.S. entity:

(i) If the entity’s name (or other information readily available in the FFI’s electronically searchable files) clearly indicates that the account holder is an FFI, it must tentatively be treated as such.

(ii) The Participating FFI must request, within one year of the effective date of its FFI Agreement, that an account holder tentatively treated as an FFI pursuant to (i) above provide either its FFI EIN and certification of Participating FFI status or other

21 A “recalcitrant account holder,” under the Act, is an account holder that fails to comply with

reasonable requests for the information required by the Act, or refuses to provide a waiver of a provision of foreign law prohibiting the reporting of the information that must be reported under the Act.


documentation indicating that the FFI is a deemed compliant FFI, a nonparticipating FFI, an Exempted Entity, or an NFFE.

(iii) Once the FFI receives an account holder’s FFI EIN and certification, it may begin to treat the account holder as a Participating FFI, subject to confirmation by the IRS that the FFI EIN provided is valid.

(iv) If information is not received within one year of the request, the account holder will be treated as a nonparticipating FFI. Prior to that time, it will be treated as an excepted NFFE, unless the entity is otherwise identified by the IRS on a published list.

Step 4. With respect to entities not classified under Steps 1-3 above, the Participating FFI must examine

the account holder’s file for evidence that the entity is engaged in an active trade or business (other than

as a financial institution). Such evidence may include statements of business activities, evidence of

physical assets used in business, evidence of persons employed in business activities, and receivables

and payables related to business activities. In addition, the IRS and Treasury Department are

considering permitting Participating FFIs to rely, in part, on information extracted from third-party credit

reports for the purpose of completing this step. An entity identified as engaged in an active trade or

business will be treated as an excepted NFFE. Curiously, there does not appear to be a way for an

account holder to certify that it is engaged in an active trade or business, but presumably, it will be

permitted to volunteer sufficient information for a Participating FFI to draw that conclusion. The IRS and

Treasury Department have requested comments on what level of evidence should be sufficient to

establish that an entity is engaged in an active trade or business and ways that this step may be

structured to avoid potential abuses.

Step 5. An entity not classified under Steps 1-4 above may present documentation identifying itself as a

Participating FFI, a deemed compliant FFI, a nonparticipating FFI, an Exempted Entity or an NFFE. The

Participating FFI may generally rely on documentation it has in its account files or, in the absence of such

documentation, must request, within one year from the effective date of its FFI Agreement,

documentation required to show or certify the status of the account holder. The account holder must

provide that documentation within one year of its request to avoid being treated as a nonparticipating FFI.

Step 6. If the documentation provided in Step 5 indicates that the account holder is an NFFE, the

Participating FFI must either: (i) obtain documentary evidence (or rely on existing evidence it has in its

files) that the NFFE is an excepted NFFE or (ii) gather information on the NFFE’s specified U.S. person

owners. In particular, the FFI must identify each specified U.S. person that owns an interest in the NFFE

directly or indirectly (other than ownership through a Participating FFI, deemed compliant FFI, excepted

NFFE or Exempted Entity). While the Notice refers to all specified U.S. owners, Section 1471 on its terms

seems only to require reporting on “substantial” U.S. owners. If the requested documentation is not

obtained, the account holder will be treated as a recalcitrant account holder from the date that is two

years after the effective date of the Participating FFI’s FFI Agreement.


iv. New Entity Accounts

A new entity account, under the Notice, is an account opened after the effective date of the Participating

FFI’s FFI Agreement. In classifying a new entity account, an FFI must follow the methods and

procedures established for pre-existing accounts, but using all the information collected by the FFI as part

of its account opening procedures (including information collected because of regulatory requirements)

regardless of whether such information is in electronically searchable files.

v. Anti-Duplication Rules

A Participating FFI that makes a withholdable payment to an account holder that is an NFFE will also be a

withholding agent for purposes of Section 1472 (withholding on payments to an NFFE). To avoid

duplicative documentation, the Notice states that a Participating FFI must use the documentation rules

described above rather than the certification procedures in Section 1472(b).

c. Rules and Procedures for Identifying Entity Accounts with USFIs

Pursuant to its obligations under the Act, a USFI must determine whether to treat an entity to which it

makes a withholdable payment as a U.S. entity or a non-U.S. entity. If the USFI identifies a payee as a

non-U.S. entity, it must determine whether that payee is a Participating FFI, a deemed compliant FFI, a

nonparticipating FFI, an Exempted Entity, an exempted NFFE or an NFFE that is not exempted.

Part III of the Notice sets forth procedures to be applied when a USFI is making withholdable payments to

an account holder that is an entity. The rules set forth in the Notice are divided between rules and

procedures applicable to pre-existing accounts and those applicable to new accounts. Pre-existing

accounts, in this context, are accounts that were opened prior to January 1, 2013. These procedures are

similar, but not identical, to the procedures that Participating FFIs will be required to use under the Notice

to identify account holders.

i. Pre-Existing Entity Accounts

The Notice provides that USFIs will be required to apply a series of steps to identify pre-existing entity

account holders:

Step 1. The USFI must treat all accounts identified as U.S. accounts for certain other U.S. tax purposes

as U.S. accounts.

Step 2. For foreign accounts, the USFI must complete the following procedures to classify the non-U.S.

entity.

(i) If the entity’s name or other electronically searchable information readily available to the USFI indicates that the account holder is an FFI, the account holder must be tentatively treated as such.


(ii) For each entity tentatively treated as an FFI, the USFI must request certification of the FFI’s Participating FFI status and an FFI EIN. Upon receipt of the FFI EIN and certification of Participating FFI status, the USFI may treat the foreign entity as a Participating FFI, subject to confirmation by the IRS that the FFI EIN provided is valid.

(iii) If a valid FFI EIN is not provided by December 31, 2013, the USFI must request documentation indicating whether the foreign account holder is a Participating FFI, a deemed compliant FFI, a nonparticipating FFI, an Exempted Entity or an NFFE. If that information is not provided by December 31, 2014, the USFI must treat the account holder as a nonparticipating FFI until it receives appropriate documentation establishing the non-U.S. account holder’s status.

(iv) Between the date that the information is requested and December 31, 2014, the non-U.S. entity will be treated as an excepted NFFE unless it is otherwise identified by the IRS on a published list of nonparticipating FFIs.

Step 3. If an entity is not treated as a U.S. account holder or an FFI, the USFI must examine the entity’s

account file for evidence that it is engaged in an active trade or business (other than as a financial

institution). An entity identified as engaged in an active trade or business will be treated as an excepted

NFFE.

Step 4. An entity not classified under Steps 1-3 above may present documentation identifying itself as a

Participating FFI, a deemed compliant FFI, a nonparticipating FFI, an Exempted Entity or an NFFE. The

USFI may rely on documentation it has in its account files, or must request documentation to show or

certify the status of the account holder. The account holder must provide such documentation by

December 31, 2014 to avoid being treated as a nonparticipating FFI.

Step 5. If the documentation provided in Step 4 indicates that the account holder is an NFFE, the USFI

must either obtain documentary evidence (or rely on existing evidence it has in its files) that the NFFE is

an excepted NFFE or gather information on the NFFE’s specified U.S. person owners. In particular, the

USFI must identify each specified U.S. person that owns an interest in the NFFE directly or indirectly

(other than ownership through a Participating FFI, deemed compliant FFI, excepted NFFE or Exempted

Entity). If the USFI is unable to identify such persons or obtain the required information by December 31,

2014, the USFI must withhold on payments made to that account until the requested documentation is

supplied. While the Notice refers to all specified U.S. person owners, it is noteworthy that Section 1471,

on its terms, only requires reporting on “substantial” U.S. owners.

ii. New Entity Accounts

Accounts opened with a USFI on or after January 1, 2013 are new entity accounts. In opening a new

entity account, a USFI will be required to follow the method and procedures established for pre-existing

accounts, but using all the information collected by the USFI as part of its account opening procedures

(including information gathered for purposes of opening and maintaining the account, for correspondence

with the account holder and for complying with regulatory requirements) regardless of whether such

information is in electronically searchable files. The USFI will also be treated as knowing this information


for purposes of whether the USFI has knowledge or reason to know that the documentation provided is

unreliable or incorrect.

D. REPORTING ON U.S. ACCOUNTS

In Section IV of the Notice, the IRS details its initial views on how the reporting requirements imposed by

the Act with respect to U.S. accounts maintained by FFIs might be satisfied. Under Section 1471, a

Participating FFI must report: (i) the name, address and TIN of each account holder who is a specified

U.S. person; (ii) if the account is held by a U.S.-owned foreign entity, the name, address and TIN of each

substantial U.S. owner of that entity; (iii) the account number; (iv) the account balance or value; and

(v) except to the extent provided by administrative guidance, the gross receipts of the account and gross

withdrawals from the account.

a. Deposit and Custodial Accounts

Under the IRS’s initial view, Participating FFIs may be required to report the highest month-end (or

reporting period-end if, for example, an FFI only reports to the account holder on a quarterly basis)

balance of any deposit or custodial account. The IRS also anticipates requiring Participating FFIs to

report additional information (e.g., copies of account statements showing daily receipts and withdrawals)

with respect to deposit or custodial accounts upon request. Under the Notice, the IRS expresses an

intent to require the account balance to be reported in U.S. dollars. The IRS expects to issue guidance in

the future on how such amounts should be converted from any local currency in which the account is

maintained.

b. Investment Vehicles

The IRS is considering alternative approaches for reporting the “account balance” of an interest that is

deemed a “financial account” because it is an interest in an entity engaged primarily in the business of

investing, reinvesting or trading in securities, partnership interests or commodities. In the Notice, the IRS

observes that such entities may be required to determine the value of such interests for a variety of

reasons, including: (i) financial reporting; (ii) fixing the compensation of the entity investment manager;

and (iii) reporting to owners (or determining distributions). The IRS is currently considering requiring

investment vehicles to report the highest value of the relevant “account,” as determined for the purpose

that requires the most frequent determination of the “account” value during the year.

c. Request for Comment

In the Notice, the IRS requests comments on the above approaches, as well as other possible reporting

approaches that “will be administrable by Participating FFIs without being subject to manipulation by U.S.

account holders.” In addition, the IRS requests comments on situations in which foreign law may interfere

with the information-reporting approaches described above, along with how a Participating FFI may

overcome or obtain a waiver of such restrictions.


The Notice does not give any preliminary guidance on how Participating FFIs may be required to report

gross receipts and withdrawals. However, through the Notice, the IRS requests comments on how the

burdens associated with such reporting may be minimized.

2. Election to Report Under the Reporting Regime Applicable to U.S. Citizens

Under the Act, a Participating FFI may elect to comply with the information-reporting rules that govern

U.S. financial institutions’ accounts of U.S. citizens.22 This election does not obviate the need to report

the name, address, and TIN of each account holder that is a specified U.S. person or the requirement to

report the account number. However, an FFI making such an election will not be required to report the

account balance or value, or the gross receipts to and withdrawals from the account.

The IRS intends to issue future guidance on the time and manner for making this election. In addition, in

the Notice, the IRS requests comments on whether, and in what circumstances, a Participating FFI

should be permitted to make this election for a subset of accounts (e.g., accounts held by individuals, but

not accounts held by entities).

3. Elimination of Duplicative Reporting

In the Notice, the IRS observes that the same instrument may give rise to more than one “financial

account” under the Act. As an example, shares in a non-U.S. fund may be held in a custodial account at

an FFI that is a traditional financial institution. The shares of the fund would themselves constitute a

“financial account,” as would the custodial account.

The Notice indicates that, where possible, the IRS’s preference is to require the FFI that is in a direct

payment relationship with the account holder to be responsible for reporting. Accordingly, the IRS intends

to issue regulations providing that when a Participating FFI maintains an account of another Participating

FFI, only the Participating FFI with a more direct relationship with the customer or investor will be

responsible for reporting the information required by the Act.

4. Recalcitrant Account Holder Reporting

The Notice indicates that the IRS intends to require Participating FFIs to report the number and aggregate

value of financial accounts held by (i) “recalcitrant account holders;”23 (ii) recalcitrant account holders with

U.S. indicia and (iii) related or unrelated nonparticipating FFIs.

22 See Section 1471(c)(2). 23 As noted above, a “recalcitrant account holder” is an account holder that fails to comply with

reasonable requests for the information required by the Act, or refuses to provide a waiver of a provision of foreign law prohibiting the reporting of the information that must be reported under the Act.


E. REQUEST FOR ADDITIONAL COMMENTS

The IRS and Treasury Department solicit comments on a variety of topics in Section V of the Notice.

Such comments should be submitted by November 1, 2010.

1. Verification Requirements Applicable to Participating FFIs

Under the Act, Participating FFIs are required to comply with the verification procedures prescribed by the

Treasury Department with respect to the identification of U.S. accounts. In the Notice, the IRS observes

that, while important, verification procedures must be balanced against the costs that such procedures

impose on FFIs. The IRS is aware that in connection with the anti-money laundering/know-your-customer

(“AML/KYC”) regimes imposed by various countries, the relevant regulators often rely to some degree on

certifications made by either public accountants or financial institutions’ internal audit departments.

Accordingly, the IRS and Treasury Department request comments on the following subjects:

• the procedures used by public accountants and other external auditors, including both the types of procedures that are performed and the types of reports that are issued;

• the information and representations that should be included in written certifications made by high-level management employees, and the extent to which public accountants or other external auditors rely on written certifications of compliance provided by management employees in the course of their AML/KYC audits and similar engagements;

• the extent to which the format of reports associated with AML/KYC engagements could be modified to further comply with the Act; and

• The extent to which public accountants would be able to perform verification procedures and reporting with respect to FFIs.

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

Certain foreign investment vehicles are subject to either procedures or legal restrictions prohibiting their

sale to certain U.S. persons. The IRS and Treasury Department understand, moreover, that in cases in

which interests in such vehicles are held by intermediaries that maintain direct account relationships with

beneficial owners, the relevant distribution or similar agreements contain covenants and representations

prohibiting the sale of such interests to U.S. persons, and that the relevant AML/KYC laws of certain

jurisdictions apply broadly to all brokers and distributors to require the identification of beneficial owners

(including certain U.S. persons) investing in such vehicles.

Accordingly, the IRS and Treasury Department are considering whether such arrangements, potentially in

connection with additional requirements, may provide a basis for treating such an institution as “deemed

compliant” with the Act.24 In particular, the IRS and Treasury Department request comments on the

following:

24 See Section 1471(b)(2)(A).


• specific information about the applicable laws and regulations that may result in an investment vehicle’s determination to prohibit sales of its interests to U.S. persons;

• the categories of investment vehicles that may be covered by such laws and regulations;

• examples of the distribution or similar agreements that prohibit sales of interests to U.S. persons;

• information regarding the legally binding nature of the prohibitions and the penalties that apply if such prohibitions are violated;

• the extent to which the AML/KYC laws used to enforce such prohibitions would apply in identifying U.S. persons that may invest in such vehicles, both directly and through the ownership of other entities;

• the extent to which purchases of interests in such entities by nonparticipating FFIs would be treated as unsuitable investments and the extent to which, and mechanisms by which, nonparticipating FFIs could be prohibited from purchasing such interests; and

• approaches that would allow the IRS and Treasury Department to verify or otherwise ensure compliance with such prohibitions.

3. Application of the Act by U.S. Withholding Agents Other than U.S. Financial Institutions

As discussed above, although many of the Act’s provisions apply primarily to financial institutions, certain

withholding rules within the Act also affect non-financial U.S. withholding agents. In the Notice, the

Treasury Department and IRS indicate that they are considering permitting U.S. withholding agents (other

than financial institutions) to rely on a foreign entity’s certification as to its classification under the Act, in

the absence of reason to know that this certification is unreliable or incorrect. In addition, the IRS and

Treasury Department anticipate that these requirements would apply, with respect to withholdable

payments made by FFIs and U.S. financial institutions, to NFFEs that are not account holders with such

institutions.

Consistent with the above, the IRS and Treasury Department request comments on the following

subjects:

• the form of certifications that should be required with respect to withholdable payments made by non-financial U.S. withholding agents and payments made by financial institutions to NFFEs that are not account holders;

• the renewal provisions that should be required by the certifications described above, along with the circumstances under which a withholding agent should not be required to solicit such certifications;

• the appropriateness of providing an exception to the withholding required by the Act for payments made to an NFFE engaged in an active trade or business with respect to payments made by non-financial withholding agents; and

• other exceptions to NFFE withholding that may be appropriate.

4. Additional Topics

In addition, the Notice requests comment on the following subjects:


• the appropriate scope of the election that a Participating FFI may make to be withheld upon instead of serving as a withholding agent25 (including the types of financial accounts for which the election to be withheld upon should be available to a Participating FFI, and the type of information reporting that an electing FFI would need to provide to a withholding agent to allow the withholding agent to deduct the appropriate amount of tax from a payment);

• methods that a Participating FFI could use to determine whether payments it makes are “passthru payments,”26 including any associated information reporting that may be necessary;

• possible approaches to reduce the burden imposed on Participating FFIs by the Act’s information-reporting and withholding provisions (such as exempting Participating FFIs from the requirement to perform withholding on “passthru payments” made to individual recalcitrant account holders in cases where the reporting by the Participating FFI to the IRS is sufficient to permit the IRS to ascertain information regarding the identities of the account holders through an information-exchange program with a foreign competent authority);

• what measures should be taken to address long-term recalcitrant accounts; and

• whether (and in what circumstances) the IRS and Treasury Department should consider terminating any FFI Agreements because of the number of remaining recalcitrant account holders at the Participating FFI.

* * *

25 See Section 1471(b)(3). 26 Under the Act, a “passthru payment” is any payment, whether or not a “withholdable payment,” “to the

extent attributable to a withholdable payment.” See Section 1471(d)(7). As such, a “passthru payment” could potentially include an amount of foreign-source income, such as a dividend payment of a non-U.S. investment fund that is attributable to U.S.-source interest received by the fund. There is no legislative gloss on what it means for a payment to be “attributable” to a withholdable payment.

Copyright © Sullivan & Cromwell LLP 2010

-23- FATCA Guidance September 13, 2010 NY12530: 295783.5C

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