Click here to view 2015 Form 14345, Application for Qualified Intermediary, Withholding Foreign Partnership, or Withholding Foreign Trust.

IRS has released 2015 Form 14345 (Application for Qualified Intermediary, Withholding Foreign Partnership, or Withholding Foreign Trust). The form has been updated to reflect Foreign Account Tax Compliance Act (FATCA) information.

Background on withholding under Code Chapters 3 and 4. In general, nonresident aliens (NRAs) 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. These items are “fixed, determinable, annual, and periodic income” (FDAP), and they include interest, dividends, royalties, compensation, and certain gains.

The U.S. withholding tax is generally collected at source by the withholding agent. The withholding agent is 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.

In this regard, chapter 3 of Subtitle A to the Code, “Withholding of Tax on Nonresident Aliens and Foreign Corporations,” applies. (See Code Sec. 1441 to Code Sec. 1446.) Under chapter 3, 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.

In 2010, Congress passed the Hiring Incentives to Restore Employment Act of 2010, P.L. 111-147, which added chapter 4 of Subtitle A to the Code. Chapter 4, commonly known as FATCA, essentially represents an international tax reporting regime, the object of which is to thwart efforts by U.S. persons to hide unreported income and assets offshore. (See Code Sec. 1471 to Code Sec. 1474.)

In general, chapter 4 requires withholding agents to withhold tax on certain payments to a foreign financial institution (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. In addition, it 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.

Background on the qualified intermediary regime. The qualified intermediary (QI) system was designed to simplify U.S. tax withholding and reporting obligations for payments of income made to an account holder through one or more foreign intermediaries— for example, an FFI.

A QI is an eligible entity that enters into a contract with IRS (i.e., a QI Agreement) to assume certain responsibilities related to compliance with the U.S. tax withholding and reporting regime – that is, it is a withholding agent under chapters 3 and 4.

Rev Proc 2000-12, 2000-1 CB 387, contains the original application procedures for becoming a QI and reproduces the text of IRS’s model QI Agreement. To incorporate the FATCA requirements, IRS subsequently issued Rev Proc 2014-39, 2014-29 IRB 150.

In Rev Proc 2014-39, IRS set forth the revised procedures for a person to enter into a withholding agreement with IRS to be treated as a QI within 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.

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

Rev Proc 2014-47, 2014-35 IRB 393, provided guidance for entering into WP and WT Agreements with IRS under Reg. § 1.1441-5(c)(2)(ii) and Reg. § 1.1441-5(e)(5)(v). It also highlighted changes to the existing WP and WT Agreements that were included in Rev Proc 2003-64, 2003-2 CB 306, as modified by Rev Proc 2004-21, 2004-1 CB 702 and Rev Proc 2005-77, 2005-2 CB 1176, and provided the text to the most current version of the WP and WT Agreements.

Form 14345. A prospective QI, WP, and WT must submit Form 14345 to become a QI, WP, and WT, respectively. (See Rev Proc 2014-39 and Rev Proc 2014-47.)

The Form 14345 must establish, to the satisfaction of IRS, that the applicant has adequate resources and procedures to comply with the terms of the relevant agreement.

An application must include not only the information required on Form 14345, but also a completed Form SS-4 (Application for Employer Identification Number) and any additional information and documentation requested by IRS.

References: For withholdable payments to FFIs and other foreign entities, see FTC 2d/FIN ¶  O-13070  ; United States Tax Reporter ¶  14,714  .

Tagged with →