FATCA Tax Withholding Phase-In Applies to Payments to Foreign Entities, in addition to Foreign Financial Institutions
IRS Notice 2011-53, originally issued on July 14, was revised and reissued on July 25 to clarify that FATCA withholding will be phased in for payments to foreign entities, following the same extended schedule announced in the original Notice 2011-53 for payments to foreign financial institutions.
The original Notice 2011-53 made specific reference to FATCA law in section 1471 of the Internal Revenue Code, which is the section addressing payments to foreign financial institutions. Now, the revised Notice 2011-53 has added specific reference to FATCA law in section 1472 of the IRC, which is the section addressing payments to other foreign entities (those such as partnerships, estates, trusts, corporations, companies, etc. which are not “financial institutions”).
In regard to the phased implementation of 30% FATCA withholding that will apply in certain circumstances, the revised Notice 2011-53 provides:
- The section 1471(a) and section 1472(a) withholding obligations of withholding agents with respect to U.S.-source FDAP payments will begin on January 1, 2014. “FDAP” payments are fixed and determinable, annual or periodic payments. Many payments processed through Accounts Payable are categorized as FDAP payments and are made to non-financial foreign entities, and thus are covered under section 1472.
- For payments made on or after January 1, 2015, the withholding obligation will expand so that withholding agents must withhold under section 1471(a) and section 1472(a) on all withholdable payments, including FDAP payments and also “gross proceeds” described in section 1473(1)(A)(ii).
(The 1473(1)(A) (ii) definition of gross proceeds is, “gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United States.)
This revision of Notice 2011-53 is a clarification that the phased implementation of FATCA withholding rules applies not only to payments to foreign financial institutions, but also applies to payments to other foreign entities. New tax regulations, which are expected before the end of 2011, may provide further clarification of which “payables” may, or may not, fall under the FATCA withholding obligation.