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Final, temporary regs modify, add to, FATCA reporting and withholding rules

T.D. 9809, 12/30/2016; Reg. § 1.1471-1, Reg. § 1.1471-1T, Reg. § 1.1471-2 , Reg. § 1.1471-3, Reg. § 1.1471-3T, Reg. § 1.1471-4 , Reg. § 1.1471-4T, Reg. § 1.1471-5, Reg. § 1.1471-6 , Reg. § 1.1472-1, Reg. § 1.1473-1, Reg. § 1.1474-1 , Reg. § 1.1474-1T, Reg. § 1.1474-6, Reg. § 301.1474-1

IRS has issued final and temporary regs that modify and add to existing regs under the Foreign Account Tax Compliance Act (FATCA), on the subjects of information reporting by foreign financial institutions (FFIs) with respect to U.S. accounts and withholding on certain payments to FFIs and other foreign entities.

For contemporaneously issued final and temporary FATCA regs that coordinate with existing withholding rules, see ¶ 15. For contemporaneously issued proposed regs on FATCA reporting and withholding, see ¶ 5.

Background—FATCA. The Hiring Incentives to Restore Employment Act of 2010 (P.L. 111-147) added Chapter 4 to the Code—i.e., Code Sec. 1471 through Code Sec. 1474 (FATCA). Chapter 4 generally requires withholding agents to withhold tax on certain payments to an FFI unless it has entered into an FFI agreement with the U.S. to, among other things, report certain information with respect to U.S. accounts. 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).

Background—previous regs. On Jan. 28, 2013, IRS published final regs (T.D. 9610) under chapter 4, and on Sept. 10, 2013, corrections to the final regs were published (collectively, the 2013 final regs).

On March 6, 2014, IRS published temporary regs (T.D. 9657) under chapter 4, and corrections to the temporary regs were published later in 2014 (collectively, the 2014 temporary regs). Proposed regs cross referencing the temporary regs were also published on Mar. 6, 2014.

Final and temporary regs modify and add to existing FATCA regs. IRS has now issued final and temporary regs that modify and add to the 2013 final regs and the 2014 temporary regs. Several of the modifications were previously described in Notice 2014-33, 2014-21 IRB 1033; Notice 2015-66, 2015-41 IRB 541 ; and Notice 2016-08, 2016-6 IRB 304.

Highlights of the changes, organized by the reg section, are as follows:

  • Reg. §1.1471-1—Scope of Chapter 4 and definitions.

Nonreporting IGA FFI. A Model 1 IGA is an agreement between the U.S. or the Treasury Department and a foreign government or one or more agencies to implement FATCA through reporting by FFIs to such foreign government or its agency, followed by automatic exchange of the reported information with IRS. An FFI in a Model 1 IGA jurisdiction that performs account reporting to the jurisdiction’s government is referred to as a reporting Model 1 FFI.

A Model 2 IGA means an agreement or arrangement between the U.S. or the Treasury Department and a foreign government or one or more agencies to implement FATCA through reporting by FFIs directly to IRS in accordance with the requirements of an FFI agreement, supplemented by the exchange of information between such foreign government or its agency and IRS. An FFI in a Model 2 IGA jurisdiction that registered with IRS to obtain a Global intermediary identification number (GIIN) and agreed to comply with the terms of an FFI agreement is treated as a participating FFI and is referred to as a reporting Model 2 FFI. The term reporting IGA FFI refers to both reporting Model 1 FFIs and reporting Model 2 FFIs.

Under the 2014 temporary regs, a nonreporting IGA FFI is an FFI that is identified as a nonreporting financial institution under a Model 1 IGA or Model 2 IGA, that isn’t a registered deemed-compliant FFI, and an FFI that is a resident of, or located or established in, a Model 1 or Model 2 IGA jurisdiction, as the context requires, and that meets the requirements for certified deemed-compliant FFI status. (Reg. § 1.1471-1T(b)(83))

This definition of a nonreporting IGA FFI, however, excludes a nonreporting financial institution that is treated as a registered deemed compliant FFI under Annex II of the Model 2 IGA and a nonreporting financial institution that satisfies the requirements of a deemed-compliant FFI under the chapter 4 regs rather than the IGA. The Instructions for Form W-8BEN-E, “Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities),” state that an FFI that is treated as a nonreporting IGA FFI under an applicable IGA, including an entity treated as a registered deemed-compliant FFI under an applicable IGA, should certify its status as a nonreporting IGA FFI. The Instructions for Form W- 8BEN-E also provide that a nonreporting IGA FFI claiming a deemed-compliant status under the chapter 4 regs should certify its status as a nonreporting IGA FFI. (T.D. 9809, 12/30/2016)

To provide an inclusive definition of nonreporting IGA FFI consistent with the IGAs and to coordinate with the Instructions for Form W-8BEN-E, final regs revise the definition of nonreporting IGA FFI to mean an FFI that is a resident of, or located or established in, a Model 1 or Model 2 IGA jurisdiction, as the context requires, and that is a nonreporting financial institution described in Annex II of the Model 1 or Model 2 IGA, a registered deemed-compliant FFI described in Reg. § 1.1471-5(f)(1)(i)(A) through Reg. § 1.1471-5(f)(1)(i)(F) , a certified deemed-compliant FFI described in Reg. § 1.1471-5(f)(2)(i) through Reg. § 1.1471-5(f)(2)(v), or an exempt beneficial owner described in Reg. § 1.1471-6. (Reg. § 1.1471-1(b)(83))

To coordinate with the revised definition of nonreporting IGA FFI, the final regs modify the definition of certified deemed-compliant FFI to exclude nonreporting IGA FFIs because some nonreporting IGA FFIs are required to obtain global intermediary identification numbers (GIINs). These final regs instead include all nonreporting IGA FFIs in the definition of deemed-compliant FFI in Reg. § 1.1471-5(f).

The final regs also modify the documentation rules in Reg. § 1.1471-3(d)(7)(i) to incorporate the registration requirements for certain nonreporting IGA FFIs. Under the final regs, a withholding agent must obtain a GIIN from a nonreporting IGA FFI that is treated as a registered deemed-compliant FFI under Annex II of the Model 2 IGA or that is a registered deemed-compliant FFI described in Reg. § 1.1471-5(f)(1)(i)(A) through Reg. § 1.1471-5(f)(1)(i)(F) .

Preexisting obligation (and related documentation requirements). A chapter 4 withholding agent isn’t required to withhold on withholdable payments made before July 1, 2016 on preexisting obligations for which a withholding agent doesn’t have documentation indicating the payee’s status as a nonparticipating FFI, unless the payee is a prima facie FFI. (Reg. § 1.1471-2(a)(4)(ii)(A))

Under the 2014 temporary regs, the term preexisting obligation is defined as: (i) an obligation outstanding on the later of the date the FFI is issued a GIIN or June 30, 2014, for a withholding agent that is a participating FFI; (ii) an obligation issued prior to the later of the date of the FFI’s registration or the date the FFI is required to implement its account opening procedures, for a withholding agent that is a registered-deemed compliant FFI; and (iii) an obligation outstanding on June 30, 2014, for any other withholding agent not described in (i) and (ii).

The final regs implement transitional relief that is contained in Notice 2014-33 by modifying the definition of a preexisting obligation to provide that a withholding agent or an FFI may treat an obligation held by an account holder with the withholding agent or FFI, that is issued, opened, or executed on or after July 1, 2014, and before Jan. 1, 2015, as a preexisting obligation. (Reg. § 1.1471-1(b)(104)(i))

However, the timeframe for documenting preexisting entity obligations in Reg. § 1.1471-4(c)(3) is unchanged; that is, the timeframes provided in Reg. § 1.1471-4(c)(3) apply to all preexisting entity obligations, including those obligations described in the preceding sentence. Furthermore, as provided in Notice 2014-33, the final regs specify that if a participating FFI treats an entity account opened on or after July 1, 2014, and before Jan. 1, 2015, as a preexisting account, the FFI may not apply the exception from identification and documentation for certain low-value preexisting entity accounts under Reg. § 1.1471-4(c)(3)(iii)(A) to that account.

The final regs also clarify the definition of a preexisting obligation in the 2014 temporary regs to remove the references to withholding agents in the second and third sentences of Reg. § 1.1471-1(b)(104)(i) because the term preexisting obligation may apply to a participating FFI or registered deemed-compliant FFI that is not a withholding agent because the FFI never has control or custody of withholdable payments (as, for example, in the case of a participating FFI or registered deemed-compliant FFI that is documenting preexisting account holders). (Reg. § 1.1471-1(b)(104)(i))

Other definitions. The final regs also revise the definition of “branch” (Reg. § 1.1471-1(b)(10)), “U.S. person” (Reg. § 1.1471-1(b)(141)) and “withholding” (Reg. § 1.1471-1(b)(146)). And, the new temporary regs add a definition for the term “permanent resident address.” (Reg. § 1.1471-1T(b)(99))

  • Reg. §1.1471-2—Requirement to deduct and withhold tax on withholdable payments to certain FFIs.

Withholding obligation of a foreign branch of a U.S. financial institution. The 2014 temporary regs generally provide that a foreign branch of a U.S. financial institution is a withholding agent and is not an FFI. The 2014 temporary regs also provide that a foreign branch of a U.S. financial institution that is a reporting Model 1 FFI is both a withholding agent and a registered deemed-compliant FFI, and must withhold in accordance with Reg. § 1.1471-2 and Reg. § 1.1472-1(b) .

However, the 2014 temporary regs do not fully coordinate such branch’s withholding and documentation obligations as a U.S. withholding agent with its obligations as a reporting Model 1 FFI. (T.D. 9809, 12/30/2016)

The final regs clarify, in Reg. § 1.1471-2(a)(2)(v), that a foreign branch of a U.S. financial institution is a U.S. withholding agent and a payee that is a U.S. person, and therefore has primary withholding responsibility on withholdable payments that it makes and is not subject to withholding under chapter 4 on withholdable payments that it receives.

Grandfathered obligations. Under the 2013 final regs, a withholdable payment does not include a payment made under a grandfathered obligation. A grandfathered obligation includes certain obligations outstanding on July 1, 2014, as well as any agreement requiring a secured party to make a payment with respect to, or to repay, collateral posted to secure a grandfathered obligation.

The final regs contain rules regarding situations where: a) the same collateral is posted for both grandfathered and nongrandfathered obligations; and b) a new obligation is created as a result of posting a grandfathered obligation as collateral. (Reg. § 1.1471-2(b)(i)(A))

  • Reg. §1.1471-3—Identification of payee.

Rules for reliably associating a payment with a withholding certificate or other appropriate documentation. The final regs include rules on use of Form W-8IMY (Withholding certificate of an intermediary, flow-through entity, or U.S. branch) (Reg. § 1.1471-3(c)(3)(iii)); evidence supporting a claim of foreign status (Reg. § 1.1471-3(c)(6)(ii)(B)(2)); indefinite validity of withholding certificates (Reg. § 1.1471-3(c)(6)(ii)(B)(2)); and relief from a withholding agent’s requirement to obtain new documentation from an FFI following a change in circumstances (Reg. § 1.1471-3(c)(6)(ii)(A)).

Documentation requirements to establish a payee’s Chapter 4 status. The final regs modify the procedures for withholding agents to document the chapter 4 status of a payee that is a sponsored investment entity or sponsored controlled foreign corporation described in Reg. § 1.1471-5(f)(1)(i)(F) or a sponsored direct reporting NFFE described in Reg. § 1.1472-1(c)(5). (Reg. § 1.1471-3(d)(4)(vi))

Effective dates. The regs are effective on Jan. 6, 2017. However, taxpayers may apply the regs as of Jan. 28, 2013. (Reg. § 1.1471-1(c), Reg. § 1.1471-2(c), Reg. § 1.1471-3(g) , Reg. § 1.1471-4(j), Reg. § 1.1471-5(l), Reg. § 1.1471-6(i), Reg. § 1.1472-1(h) , Reg. § 1.1473-1(f), Reg. § 1.1474-1(j), and Reg. § 1.1474-6(g))

References: For reporting under FATCA and for withholdable payments to FFIs and other foreign entities, see Federal Tax Coordinator 2d ¶  O-13070  et seq.; United States Tax Reporter ¶  14,714  et seq.

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