n-11-53.pdf

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Part III - Administrative, Procedural, and Miscellaneous

Chapter 4 Implementation Notice

Notice 2011-53

I. BACKGROUND AND PURPOSE
On March 18, 2010, the Hiring Incentives to Restore Employment Act of 2010,
Pub. L. 111-147 (H.R. 2847) (the Act) added chapter 4 (Chapter 4) to Subtitle A of the
Internal Revenue Code (Code). Chapter 4 (comprising sections 1471 through 1474 of
the Code) imposes information reporting requirements on foreign financial institutions
(FFIs) with respect to U.S. accounts and imposes withholding, documentation, and
reporting requirements with respect to certain payments made to certain foreign entities.
On August 29, 2010, the Department of the Treasury (Treasury) and the Internal
Revenue Service (IRS) released Notice 2010-60, 2010-37 I.R.B. 329, providing
preliminary guidance regarding the implementation of Chapter 4 and requesting
comments on issues addressed in that notice and otherwise relevant to the
implementation of Chapter 4. On April 8, 2011, Treasury and the IRS released Notice
2011-34, 2011-19 I.R.B. 765, which modified and supplemented the guidance in Notice
2010-60. Unless otherwise defined, terms used in this notice have the same meanings
as set forth in sections 1471 through 1474, Notice 2010-60, and Notice 2011-34.
Treasury and the IRS have received numerous comments concerning the
practical difficulties in implementing aspects of the Chapter 4 rules within the time
frames provided in the Act and under Notice 2010-60 and Notice 2011-34. The

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challenges identified relate to the time to develop compliance, reporting, and
withholding systems necessary to comply with Chapter 4 and the implementing notices.
In addition, a number of stakeholders have noted that complying with certain provisions
may require coordination with a number of foreign governments. Treasury and the IRS
have met with stakeholders and foreign governments to understand the specific
administrative and legal challenges that must be addressed and the time necessary to
do so. While the Act provides that the provisions of Chapter 4 are effective beginning in
2013, Treasury and the IRS have determined that because Chapter 4 creates the need
for significant modifications to the information management systems of FFIs,
withholding agents, and the IRS, it is reasonable for regulations to provide for a phased
implementation of the various provisions of Chapter 4.
In light of these considerations, this notice describes the timeline for the
implementation of Chapter 4 and discusses certain substantive and procedural matters
that will be addressed in regulations issued by Treasury and the IRS. As described
below, those regulations will provide that certain obligations of participating FFIs will
commence in 2013. Further, those regulations will provide that the section 1471(a) and
section 1472(a) withholding obligations of withholding agents with respect to amounts
described in section 1473(1)(A)(i) (U.S. source FDAP payments) will begin on January
1, 2014. FFIs that would otherwise be subject to Chapter 4 withholding will be identified
as participating FFIs and therefore should not be subject to such withholding if they
have registered as participating FFIs and entered into FFI Agreements by June 30,
2013. The section 1471(b)(1)(D) withholding obligations of participating FFIs with

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respect to passthru payments will be specified in future regulations, but will begin no
earlier than January 1, 2015.

II. PHASED IMPLEMENTATION TIMELINE
A. Participating FFIs: Registration and Due Diligence

1. Registration of FFIs Beginning in 2013
The IRS will begin accepting FFI applications through its electronic submissions
process no later than January 1, 2013. An FFI must enter into an FFI Agreement by
June 30, 2013, to ensure that it will be identified as a participating FFI in sufficient time
to allow U.S. withholding agents to refrain from withholding beginning on January 1,
2014. Because of the time needed for the IRS to process FFI applications and for U.S.
withholding agents to verify whether a payee is a participating FFI, FFIs that enter into
FFI Agreements after June 30, 2013, but before January 1, 2014, will be participating
FFIs with respect to 2014, but might not be identified as such in time to prevent
withholding beginning on January 1, 2014. The effective date of an FFI Agreement
entered into any time before July 1, 2013, will be July 1, 2013. The effective date of an
FFI Agreement entered into after June 30, 2013, will be the date the FFI enters into the
FFI Agreement.

2. Participating FFI Due Diligence

a. New Accounts

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A participating FFI will be required to put in place account opening procedures
described in Notice 2010-60, as implemented in regulations, to identify U.S. accounts
among accounts opened on or after the effective date of its FFI Agreement.

b. Pre-Existing Accounts

i. Certain Pre-Existing Private Banking Accounts (Equal to or Greater
than $500,000)
Within one year of the effective date of its FFI Agreement, a participating FFI will
be required to have completed Step 3 of the pre-existing account due diligence
procedures described in Section I.A.2 of Notice 2011-34 (the private banking
procedures), for all accounts opened before the effective date of its FFI Agreement that
are associated with a private banking relationship (including individual and entity
accounts) and that have a balance or value of at least $500,000 on the effective date of
the FFI Agreement.

ii. Private Banking Accounts Less than $500,000

A participating FFI will be required by the later of December 31, 2014, or the date
that is one year after the effective date of its FFI Agreement, to complete the private
banking procedures for all accounts opened before the effective date of its FFI
Agreement that are associated with a private banking relationship and are not described
in (i), above.

iii. Due Diligence for All Other Pre-Existing Accounts

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For all pre-existing accounts not covered in sections (i) and (ii) above, a
participating FFI must complete due diligence procedures as prescribed in Notice 2010-
60, Notice 2011-34, and forthcoming regulations within two years of the effective date of
its FFI Agreement.

iv. Private Banking Guidance

Regulations will provide further guidance on the scope of the private banking
procedures and the associated search of account holder files. Regulations will also
provide that, for purposes of applying the private banking procedures: (1) although
private banking relationship managers must identify any client for which such
relationship managers have actual knowledge that the client is a U.S. person and
request a Form W-9 from such person, as set forth in Notice 2011-34, the review of
account files may be completed by any person designated by the participating FFI; and
(2) accounts subject to due diligence procedures and identified as either U.S. accounts
or non-U.S. accounts under such procedures will not be subject to additional due
diligence procedures in subsequent years unless the account undergoes a change of
circumstance.

B. Reporting

1. New Accounts, Documented U.S. Accounts, and Private Banking Accounts
An account for which a participating FFI has received a Form W-9 from the
account holder (or, with respect to an account held by a U.S. owned foreign entity, from
a substantial U.S. owner of such entity) by June 30, 2014, must be reported to the IRS

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as a U.S. account by September 30, 2014. These accounts generally will include: (1)
private banking accounts identified as U.S. accounts under the procedures set forth
above and for which a Form W-9 has been collected by June 30, 2014; (2) new U.S.
accounts opened after the effective date of the FFI’s FFI Agreement and for which a
Form W-9 has been collected; (3) documented U.S. accounts described in Section I.A.2
Step 1 of Notice 2011-34; and (4) existing U.S. accounts documented pursuant to
Section 1.A.2 Steps 4 and 5 of Notice 2011-34 for which a Form W-9 is obtained by
June 30, 2014. With respect to these identified U.S. accounts, a participating FFI that
does not elect to report under section 1471(c)(2) must report in accordance with Notice
2011-34, except that for this first year of reporting, the participating FFI will only be
required to report the following information:
(i) the name, address, and U.S. TIN of each specified U.S. person who is an
account holder and, in the case of any account holder that is a U.S. owned
foreign entity, the name, address, and U.S. TIN of each substantial U.S.
owner of such entity;
(ii) the account balance as of December 31, 2013, or, if the account was closed
after the effective date of the FFI’s FFI Agreement, the balance of such
account immediately before closure; and
(iii) the account number.

The reporting described above is intended to provide participating FFIs greater
flexibility to satisfy the reporting requirements of section 1471(c) and section IV.B of
Notice 2011-34, and is not intended to change the information that generally must be

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reported as set forth in Notice 2011-34. Accordingly, reporting in 2014 will be made on
the same forms as will be used in subsequent years to report all required information,
and participating FFIs may elect for 2014 to report any or all of the additional
information described in section IV.B of Notice 2011-34 with respect to U.S. accounts.
With respect to a participating FFI that elects reporting under section 1471(c)(2) for
such accounts, the FFI may report only the items listed in (i) and (iii), above, for its
report filed by September 30, 2014.
In accordance with its normal practice, the IRS will assess the accuracy of the
reported information and communicate with the FFI to resolve discrepancies in the
information, such as those regarding U.S. TINs. Unresolved discrepancies could result
in an account being treated as held by a recalcitrant account holder.
For each account for which the participating FFI is not able to report the
information above, because, for example, the account holder has not waived any
applicable reporting restrictions, the FFI will report the account among its recalcitrant
account holders with U.S. indicia in accordance with section IV.F of Notice 2010-60 and
as prescribed in future guidance. The reporting with respect to recalcitrant account
holders identified by June 30, 2014, will be required to be filed with the IRS by
September 30, 2014.

2. Reporting with respect to Post-2013 Years

Reporting with respect to 2014 and subsequent years will be required as
contemplated in Notice 2010-60 and Notice 2011-34 and as implemented in future
regulations.

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C. Withholding

1. Withholdable payments
Pursuant to the phased implementation procedures contemplated in this notice,
regulations under Chapter 4 will implement withholding by withholding agents on
withholdable payments in two phases. For payments made on or after January 1, 2014,
withholding agents (whether domestic or foreign, including participating FFIs) will be
obligated to withhold under section 1471(a) and section 1472(a) only on U.S. source
FDAP payments. For payments made on or after January 1, 2015, withholding agents
will be obligated to withhold under section 1471(a) and section 1472(a) on all
withholdable payments (including both U.S. source FDAP payments and gross
proceeds described in section 1473(1)(A)(ii)).

2. Passthru payments
Participating FFIs will be obligated to withhold on withholdable payments of U.S.
source FDAP under section 1471(a) and section 1472(a) for payments made on or after
January 1, 2014, but will not be required to withhold under section 1471(b)(1)(D) with
respect to other passthru payments made before January 1, 2015. Accordingly, the
obligations of participating FFIs with respect to computing and publishing their passthru
payment percentage as set forth in Notice 2011-34 will not begin before the first
calendar quarter of 2014.

III. TIMELINE FOR PUBLISHED GUIDANCE

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Treasury and the IRS anticipate issuing proposed regulations incorporating the
guidance provided in Notice 2010-60 as amended and supplemented by Notice 2011-34
and this Notice and providing further guidance on implementing Chapter 4 by December
31, 2011. After consideration of comments, Treasury and the IRS anticipate publishing
final regulations in the summer of 2012. In conjunction with these regulations, Treasury
and the IRS also anticipate issuing draft versions followed by final versions of the
associated FFI Agreement and reporting forms for use by withholding agents and
participating FFIs in the summer of 2012.

IV. MISCELLANEOUS
A. Qualified Intermediary and Other Withholding Agreements Expiring in 2012

All qualified intermediary agreements, withholding foreign partnership
agreements, and withholding foreign trust agreements of entities qualifying as FFIs that
expire on December 31, 2012, will be automatically extended until December 31, 2013.
Any FFI that enters into an FFI Agreement on or before December 31, 2013, will be
considered to have renewed its qualified intermediary agreement, withholding foreign
partnership agreement, or withholding foreign trust agreement, as the case may be.

B. Clarification of the Scope of Grandfathered Obligations

Section 501(d)(2) of the Act provides that Chapter 4 shall not require any amount
to be deducted or withheld from any payment under any obligation outstanding on
March 18, 2012, or from the gross proceeds of any disposition of such an obligation.
Section I of Notice 2010-60 defined the term “obligation” for this purpose to mean any

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legal agreement that produces or could produce withholdable payments, but not
including any instrument treated as equity for U.S. tax purposes, or any legal agreement
that lacks a definitive expiration or term. Questions have been raised regarding whether
legal agreements that give rise to passthru payments other than withholdable payments
are excluded from the definition of “obligation” for this purpose. Treasury and the IRS
intend to issue regulations clarifying that, for purposes of section 501(d)(2) of the Act,
the term “obligation” means any legal agreement that produces or could produce
passthru payments (including withholdable payments), but not including any instrument
treated as equity for U.S. tax purposes, or any legal agreement that lacks a definitive
expiration or term.

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