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FATCA FAQs update guidance on the safe harbor statistical sample for periodic reviews

August 3, 2018

IRS has revised its general frequently asked questions (FAQs) on the Foreign Account Tax Compliance Act (FATCA) on Qualified Intermediaries (QIs), Withholding Foreign Partnerships (WPs), and Withholding Foreign Trusts (WTs) to provide additional guidance on meeting the periodic review requirement, using the safe harbor statistical sample design set out in contained in Rev Proc 2017-15, 2017-3 IRB 437, Appendix II.

Background. The Hiring Incentives to Restore Employment Act of 2010 (P.L. 111-147) added Chapter 4 to the Code (Code Sec. 1471 through Code Sec. 1474, FATCA). In general, Chapter 4 requires withholding agents to withhold and deduct 30% from certain payments made to a foreign financial institution (FFI) unless the FFI: (i) has entered into an “FFI agreement” with the U.S. to, among other things, report certain information with respect to U.S. accounts (a participating FFI); (ii) is deemed to meet these requirements under Code Sec. 1471(b) (a deemed-compliant FFI); or (iii) is treated as an exempt beneficiary owner under Reg. § 1.1471-6. Chapter 4 also imposes withholding, documentation, and reporting requirements on withholding agents with respect to certain payments made to certain non-financial foreign entities (NFFEs).

In cases in which foreign law would prevent an FFI from complying with the terms of an FFI agreement, IRS has collaborated with other governments to develop two alternative model intergovernmental agreements (IGAs) that facilitate FATCA implementation. Reporting financial institutions under an applicable Model 1 IGA (reporting Model 1 FFIs) would satisfy their Chapter 4 requirements by reporting specified information about U.S. accounts to their government, followed by the automatic exchange of that information on a government-to-government basis with the U.S. Under a Model 2 IGA, reporting Model 2 FFIs would report specified information about U.S. accounts directly to IRS in a manner consistent with the final FATCA regs (as modified by the applicable Model 2 IGA), supplemented by a government-to-government exchange of information on request.

A QI is an eligible person that submits an application and enters into a QI agreement with IRS. The QI agreement released in Rev Proc 2017-15, 2017-3 IRB 437, Section 6, is effective on or after Jan. 1, 2017 (2017 QI agreement). Generally, under the QI Agreement, the QI agrees to assume certain documentation and withholding responsibilities in exchange for simplified information reporting for its foreign account holders and the ability not to disclose proprietary account holder information to a withholding agent that may be a competitor. A QI Agreement simplifies the U.S. tax withholding and reporting obligations for payments of income made to an account holder through one or more foreign intermediaries (e.g., a FFI).

Similar to the QI Agreement, the WP and WT Agreements are intended to simplify withholding and reporting obligations for payments to partners of a WP and beneficiaries or owners of a WT. The agreements are tailored to fit the unique situations of foreign partnerships and trusts in much the same way that the QI Agreement is designed to meet the needs of FFIs.

QIs, WPs, and WTs must periodically certify to IRS that they are in compliance with the applicable agreement. As part of this compliance program, a “responsible officer” is required to make periodic compliance certifications and provide, with the certifications, certain factual information to the IRS based, in part, on the results of a periodic review. The certification due date depends on which year the QI/WP/WT selected for its periodic review. In certain situations, a QI may apply for a waiver of the periodic review.

The factual information to be provided by the QI is set out in Rev Proc 2017-15, 2017-3 IRB 437, Appendix I. A statistical sampling procedure that a QI’s reviewer may use for conducting the periodic review is set out in Rev Proc 2017-15, Appendix II; it includes safe harbor procedures covering basic sample design parameters and methodologies, including sample size, strata allocation, and projection. Generally, sampling should only be used whenever an examination of all accounts within a particular class of accounts would be prohibitive in terms of time and expense. If it is reasonable to examine all accounts in connection with a particular part of the periodic review, sampling techniques should not be used. Sampling should only be used if there are more than 60 accounts to review.

IRS has on its webpage a number of FAQs that provide FATCA guidance. The “FAQs General” section provides FAQs that contain information for financial institutions, withholding agents, and intermediaries on a variety of topics including compliance, reporting, registration and QI/WP/WT issues. The FAQs set out how to meet the requirements for a person to enter into a withholding agreement with IRS to be treated as a QI within the meaning of Reg. § 1.1441-1(e)(5) and certify to IRS on behalf of a foreign payee that a lower rate of withholding applies.

New FAQs. In FAQ No. 14, Certifications and Periodic Reviews, IRS states that a sample size calculated using the safe harbor sample design contained in Rev Proc 2017-15, Appendix II, generally should not exceed 321 sample units (i.e., accounts). The possible exceptions are:

…when the QI uses “optional further stratification by dollar amounts” under Rev Proc 2017-15, Appendix II, section II.A.6., or

…when the sample population includes any accounts of:

(a) Private Arrangement Intermediaries (PAIs). If QI is an FFI, QI may enter into a private arrangement with another intermediary under which the other intermediary agrees to perform all of the obligations of QI under this Agreement. That intermediary is a PAI.

(b) Partnerships or trusts for which the QI is using the Agency Option. Under the Agency Option, in general, a QI may enter an agreement with a nonwithholding foreign partnership or nonwithholding foreign trust that is either a simple or grantor trust under which the partnership or trust agrees to act as an agent of QI with respect to its partners, beneficiaries, or owners, and, as QI’s agent, to apply the provisions of the QI Agreement to the partners, beneficiaries, or owners; or

(c) Partnerships or trusts for which the QI is using the Joint Account Option. If QI is an FFI, QI may enter an agreement with a nonwithholding foreign partnership or nonwithholding foreign trust that is either a simple or grantor trust to apply the simplified joint account documentation, reporting, and withholding procedures.

In addition, FAQ No. 14 notes that the QI or its reviewer can always decide to have a sample population larger than that resulting from the safe harbor method.

In FAQ No. 15, IRS stated that, in instances where there were less than 60 accounts in a stratum population, it was not necessary to reallocate the difference between 60 and the actual number of accounts in a stratum population over the other strata; and, therefore, such an instance should not increase the total sample size.

In FAQ No. 16, IRS stated that the number of accounts to be sampled from that stratum is the lesser of 60 accounts or the number of accounts in that stratum population. The difference between the number of accounts to be sampled and the number of accounts allocated to that stratum should reduce the number of accounts allocated to all other strata with a stratum population greater than 60 accounts, on a pro rata basis.

References: For reporting under FATCA, see FTC 2d/FIN ¶O-13,330 et seq.; United States Tax Reporter ¶14,714 et seq.

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