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IRS corrects FATCA & Chapter 3 withholding regs by withdrawing 2014 prop regs

IRS has corrected proposed FATCA regs, which were published in January 2017, by withdrawing previous proposed FATCA regs that were issued back in 2014. IRS also similarly corrected proposed regs issued in January 2017, on information reporting and withholding on foreign persons under Chapter 3, by withdrawing previously issued proposed regs.

Background on Chapters 3 and 4 of the Code. In general, nonresident aliens and foreign corporations are subject to a U.S. withholding tax on certain items of income that they receive from U.S. sources that are not effectively connected with a U.S. trade or business. The U.S. withholding tax is generally collected at the source by the withholding agent—generally, the last person in the U.S. who handles the item before it is remitted to the foreign taxpayer or the taxpayer’s foreign agent.

Under chapter 3 of Subtitle A to the Code, “Withholding of Tax on Nonresident Aliens and Foreign Corporations,” a withholding agent must withhold 30% of any payment that is subject to withholding and made to a foreign payee, unless it can reliably associate the payment with valid tax documentation. (See Code Sec. 1441 to Code Sec. 1446.)

Chapter 4 of the Code (Code Sec. 1471 through Code Sec. 1474, commonly referred to as the “Foreign Account Tax Compliance Act” or FATCA) requires withholding agents to withhold 30% of certain payments to a foreign financial institution (FFI) unless the FFI has entered into a “FFI agreement” with IRS to, among other things, report certain information with respect to U.S. accounts. (The withholding rules are essentially a mechanism to enforce new reporting requirements.) Chapter 4 also imposes withholding, documentation, and reporting requirements on withholding agents with respect to certain payments made to certain non-financial foreign entities.

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 intergovernmental agreement (IGA) models that facilitate FATCA implementation.

2017 proposed regs. On Jan. 6, 2017, IRS published two sets of proposed regs on Chapters 3 and 4 of the Code.

The 2017 proposed Chapter 3 regs, also referred to as the “coordination regs,” would provide guidance on withholding of tax on certain U.S. source income paid to foreign persons, information reporting and backup withholding with respect to payments made to certain U.S. persons, and portfolio interest paid to nonresident alien individuals and foreign corporations. The regs would coordinate the documentation, withholding, and reporting requirements under various provisions of the Code. (Preamble to Prop Reg01/06/2017; see Weekly Alert ¶  15  01/05/2017) Generally, the 2017 proposed Chapter 3 regs revised and clarified certain sections of proposed regs that were issued in 2014 (Preamble to Prop Reg03/06/2014; see Weekly Alert ¶  25  02/27/2014).

The 2017 proposed FATCA regs would provide guidance on the verification requirements and events of default for certain sponsoring entities, the certification requirements and procedures for IRS’s review of certain trustees of trustee-documented trusts, and the procedures for IRS’s review of periodic certifications provided by registered deemed-compliant FFIs. The proposed regs would also set out procedures for future modifications to the requirements for certifications of compliance for participating FFIs, as well as requirements for certifications of compliance for participating FFIs that are members of consolidated compliance groups. (Preamble to Prop Reg01/06/2017; see Weekly Alert ¶  5  01/05/2017) The 2017 proposed FATCA regs also made a number of changes to certain sections of proposed regs that were issued in 2014 (Preamble to Prop Reg03/06/2014; see Weekly Alert ¶  1  02/27/2014).

New corrections to 2017 proposed regs. The corrections, published in the Federal Register on Sept. 15, 2017, insert language into both sets of 2017 proposed regs that officially withdraws the respective prior proposed regs that were published on Mar. 6, 2014 (Preamble to Prop Reg03/06/2014, and the correction to the 2017 proposed FATCA regs withdraws Preamble to Prop Reg03/06/2014).

The corrections are effective Sept. 15, 2017, and applicable beginning Jan. 6, 2017.

References: For Chapter 3 withholding on nonresident aliens, foreign corporations, and foreign partnerships in general, see Federal Tax Coordinator 2d ¶  O-11900; United States Tax Reporter ¶  14,414. For reporting under FATCA, see Federal Tax Coordinator 2d ¶  O-13070  et seq.; United States Tax Reporter ¶  14,714  et seq.

Corrections to Notices of Proposed Rulemaking, Federal Register (Sept. 15, 2017).

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