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IRS will amend nonresident, etc. withholding and FATCA regs to reduce compliance burdens

Notice 2016-8, 2016-6 IRB

In a Notice, IRS has announced that it intends to amend several regs with respect to chapters 3 (withholding of tax on nonresident aliens and foreign corporations) and 4 (the Foreign Account Tax Compliance Act; FATCA) of the Code to reduce a number of compliance burdens. Prior to the issuance of these reg amendments, taxpayers may rely on the rules described in the Notice.

Specifically, the changes to the regs will: (1) modify the date for submitting to IRS the preexisting account certifications required of certain foreign financial institutions (FFIs); (2) specify the period and date for submitting to IRS the periodic certification of compliance described in Reg. § 1.1471-5(f)(1)(ii)(B) for a registered deemed compliant FFI; (3) modify the transitional information reporting rules for accounts of nonparticipating FFIs to eliminate the requirement to report on gross proceeds for the 2015 year; and (4) specify the circumstances under which a withholding agent may rely on electronically furnished Forms W-8 (withholding certificate) and W-9 (Request for Taxpayer Identification Number and Certification) collected by intermediaries and flow-through entities.

Background—chapters 3 and 4, generally. Chapter 3 of the Code (Code Sec. 1441 through Code Sec. 1464) contains reporting and withholding rules relating to payments of certain U.S. source income (e.g., dividends on stock of U.S. companies) to non-US persons. These payments are payments from sources within the U.S. that constitute (a) fixed or determinable annual or periodical (FDAP) income; (b) certain gains from the disposal of timber, coal, or domestic iron ore with a retained economic interest; (c) gains relating to contingent payments received from the sale or exchange of patents, copyrights, and similar intangible property; and (d) distributions of effectively connected income by a publicly traded partnership.

Chapter 4 of the Code (Code Sec. 1471 through Code Sec. 1474, FATCA) requires withholding agents to withhold 30% of certain payments to an FFI unless the FFI has entered into an agreement (FFI agreement) with IRS to, among other things, report certain information with respect to U.S. accounts. Chapter 4 also imposes withholding requirements on withholding agents, with respect to certain payments made to certain non-financial foreign entities.

FFIs that have entered into FFI agreements are referred to as “participating FFIs.”

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 IGAs that facilitate FATCA implementation. Under a Model 2 IGA, reporting Model 2 FFIs report specified information about U.S. accounts directly to IRS in a manner consistent with the final regs (as modified by the applicable Model 2 IGA), supplemented by a government-to-government exchange of information on request.

New reductions in burdens. Notice 2016-8 provides for the following reductions in reporting burdens.

Preexisting account certifications. Reg. § 1.1471-4(c)(7) and section 8.03(A) of the FFI agreement (Rev Proc 2014-38, 2014-29 IRB 131) require participating FFIs and reporting Model 2 FFIs to certify to IRS that, within the applicable timeframe for complying with the due diligence procedures of Reg. § 1.1471-4(c) for preexisting accounts, they have complied with such procedures (“preexisting account certification”). The preexisting account certification must be made no later than 60 days following the date that is two years after the effective date of the FFI agreement. For example, a participating FFI or reporting Model 2 FFI that has an FFI agreement with an effective date of June 30, 2014 must submit a preexisting account certification to IRS by Aug. 29, 2016.

A participating FFI or reporting Model 2 FFI also is required under Reg. § 1.1471-4(f)(3) and section 8.03 of the FFI agreement to periodically certify to IRS that it has complied with the terms of the FFI agreement (“periodic certification of compliance”).Reg. § 1.1471-4(f)(3)(i) provides the general rules for the periodic certification of compliance and specifies that it must be submitted to IRS no later than six months following the end of the certification period. Notwithstanding the regs, section 8.03 of the FFI agreement allows the periodic certification of compliance to be submitted on or before July 1 of the calendar year following the certification period. The first certification period begins on the effective date of the FFI agreement and ends at the close of the third full calendar year following the effective date of the FFI agreement. Each subsequent certification period is every three calendar years following the previous certification period. Thus, under the FFI agreement, if a participating FFI or reporting Model 2 FFI has an FFI agreement with an effective date of June 30, 2014, the first certification period for the FFI ends on Dec. 31, 2017, and the FFI’s first periodic certification of compliance must be made on or before July 1, 2018.

To reduce compliance burdens, IRS intends to amend the chapter 4 regs and the FFI agreement to provide that the preexisting account certification must be submitted to IRS at the same time that the participating FFI or reporting Model 2 FFI is required to submit its first periodic certification of compliance. In addition, the regs under chapter 4 will be modified to conform with the FFI agreement such that the periodic certification of compliance must be submitted on or before July 1 of the calendar year following the certification period, instead of no later than six months following the end of the certification period. Therefore, the preexisting account certification will be due to IRS by July 1, 2018, for a participating FFI or reporting Model 2 FFI that has an FFI agreement with an effective date of June 30, 2014, instead of by Aug. 29, 2016.

The changes to the preexisting account certification described in the notice do not affect the deadlines for a participating FFI or reporting Model 2 FFI to complete the due diligence procedures for preexisting accounts under Reg. § 1.1471-4(c) and the FFI agreement.

Registered deemed-compliant FFIs. A registered deemed-compliant FFI that is a local FFI or restricted fund is required to make a one-time certification regarding its preexisting accounts similar to the certification requirement of a participating FFI. (See Reg. § 1.1471-5(f)(1)(i)(A)(7) and Reg. § 1.1471-5(f)(1)(i)(D)(6), respectively.) Restricted funds must make this certification by the later of Dec. 31, 2014 or six months after the date the FFI registers as a registered deemed-compliant FFI. The chapter 4 regs do not specify a time for local FFIs to make this certification.

In addition, each registered deemed-compliant FFI must certify every three years to IRS that all of the requirements for the deemed-compliant category claimed by the FFI have been satisfied since the later of the date the FFI registered as a registered deemed-compliant FFI or June 30, 2014 (“periodic certification of registered deemed-compliant status”). (Reg. § 1.1471-5(f)(1)(ii)(B)) The chapter 4 regs do not specify a time for submitting the periodic certification of registered deemed-compliant status or the date on which the first certification period begins.

The chapter 4 regs will be amended to provide that local FFIs and restricted funds must submit their one-time certifications regarding preexisting accounts at the same time that they submit the first periodic certification of registered deemed-compliant FFI status. The chapter 4 regs will also be modified to provide that registered deemed-compliant FFIs must provide the periodic certification of registered deemed-compliant FFI status on or before July 1 of the calendar year following the end of the certification period.

In addition, the regs will provide that the first certification period begins on the later of the date the FFI registered as a deemed-compliant FFI or June 30, 2014, and ends at the close of the third full calendar year following such date. Subsequent certification periods will continue to be the three-calendar-year period following the previous certification period. For example, a registered deemed-compliant FFI that is a local FFI and that has such status on June 30, 2014 will be required to make its one-time certification regarding preexisting accounts and its first periodic certification of registered deemed-compliant FFI status on or before July 1, 2018.

Accounts of nonparticipating FFIs. Under Reg. § 1.1471-4(d)(2)(ii)(F), a participating FFI or registered deemed-compliant FFI that maintains an account of a nonparticipating FFI (including a limited branch and limited FFI treated as a nonparticipating FFI) must provide transitional reporting to IRS of all foreign reportable amounts paid to or with respect to the account for each calendar year 2015 and 2016. A foreign reportable amount means foreign source payments described in Reg. § 1.1471-4(d)(4)(iv) (which includes gross proceeds). Alternatively, a participating FFI or registered deemed-compliant FFI may report all income, gross proceeds, and redemptions paid to or with respect to an account held by a nonparticipating FFI, instead of reporting only foreign reportable amounts. (Reg. § 1.1471-4(d)(2)(ii)(F)) Similar transitional reporting rules apply to reporting Model 2 FFIs for accounts of nonparticipating FFIs for calendar years 2015 and 2016. (Section 6.04 of the FFI agreement)

Under Reg. § 1.1471-4(d)(7)(ii)(B) and section 6 of the FFI agreement, participating FFIs and reporting Model 2 FFIs are excepted from reporting gross proceeds paid to U.S. accounts and accounts held by owner-documented FFIs for calendar year 2015.

Noting that the transitional reporting for accounts of nonparticipating FFIs under Reg. § 1.1471-4(d)(2)(ii)(F) was not intended to require more information to be reported than would be required for U.S. accounts or accounts held by owner-documented FFIs under Reg. § 1.1471-4(d), IRS has announced that the regs will be amended to provide that, with respect to calendar year 2015, a participating FFI, reporting Model 2 FFI, or registered deemed-compliant FFI is not required to report gross proceeds paid to or with respect to an account held by a nonparticipating FFI.

Electronically furnished Forms W-8 and W-9. Reg. § 1.1441-1(e)(4)(iv) provides that a withholding agent may establish a system for a beneficial owner or payee to electronically furnish a Form W-8, an acceptable substitute Form W-8, or such other form as IRS may prescribe, and provides requirements for such a system.Reg. § 1.1441-1(e)(4)(iv)(B) requires, among other things, that the electronic system provide that the Form W-8 be signed electronically and under penalties of perjury by the person whose name is on the Form W-8. When the requirements set forth in Reg. § 1.1441-1(e)(4)(iv) are met, a withholding agent may accept the electronic version of the Form W-8 as an original. These requirements for an electronic system also apply for chapter 4 purposes as provided in Reg. § 1.1471-3(c)(6)(iv).Ann. 98-27, 1998-1 CB 865, provides similar standards for purposes of establishing an electronic system for Form W-9.

A foreign intermediary or flow-through entity that has not entered into a qualified intermediary, foreign withholding partnership, or foreign withholding trust agreement is a nonqualified intermediary (NQI), nonwithholding foreign partnership (NWP), or nonwithholding foreign trust (NWT) under the chapter 3 regs. An NQI, NWP, or NWT that receives a payment on behalf of its account holders, partners, owners, or beneficiaries is required to provide documentation to its withholding agent so that the withholding agent may reliably associate the payment (or portion of the payment) with valid documentation upon which it may rely to determine its requirement to withhold under Reg. § 1.1441-1(b). The regs under Code Sec. 1441 further provide that a withholding agent that receives documentation for a payee or beneficial owner through an NQI, NWP, or NWT (including a U.S. branch or territory financial institution described in Reg. § 1.1441-1(b)(2)(iv), other than a U.S. branch or territory financial institution that is treated as a U.S. person) may rely on such documentation unless the withholding agent knows that the documentation is unreliable or incorrect as described. (Reg. § 1.1441-7(b)(10) (referred to as the standards of knowledge)) Similar standards of knowledge rules are provided for chapter 4 purposes in Reg. § 1.1471-3(e)(4)(vi).

IRS intend to provide, in the standards of knowledge in Reg. § 1.1441-7(b)(10) and Reg. § 1.1471-3(e)(4)(vi)(A)(2), that a withholding agent may rely on a Form W-8 or W-9 that has been collected from the beneficial owner or payee of the payment through an electronic system maintained by an NQI, NWP, or NWT and furnished to the withholding agent by such NQI, NWP, or NWT. In order for such reliance to apply, the NQI, NWP, or NWT must be a direct or indirect account holder of the withholding agent, the withholding agent must obtain from the NQI, NWP, or NWT a written statement confirming that the electronic documentation was generated from a system that meets the requirements in Reg. § 1.1441-1(e)(4)(iv), Reg. § 1.1471-3(c)(6)(iv), or Ann. 98-27, as applicable, and the withholding agent must not have actual knowledge that such statement is incorrect.

References: For withholding under Chapter 3, see FTC 2d/FIN ¶  O-11900  ; United States Tax Reporter ¶  14,414  . For withholding under FATCA, see Federal Tax Coordinator 2d ¶  O-13070  et seq.; United States Tax Reporter ¶  14,714  et seq.

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