In a Notice, IRS has liberalized rules that require financial institutions to provide certain information with respect to their account holders under the Code’s Foreign Account Tax Compliance Act (FATCA) provisions and the chapter 3 nonresident alien and foreign corporation withholding provisions.
Background—FATCA. FATCA requires certain foreign financial institutions (FFIs) to report to IRS information about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold certain ownership interests. Code Sec. 1471 requires withholding agents to withhold 30% of certain payments to an FFI unless the FFI has entered into a “FFI agreement” with IRS to meet these requirements. Code Sec. 1472 imposes withholding, documentation, and reporting requirements on withholding agents with respect to certain payments made to certain non-financial foreign entities.
In order to facilitate the exchange of information on financial accounts held by U.S. taxpayers, the Treasury Department collaborated with foreign governments to develop two alternative model intergovernmental agreements (IGAs) (Model 1 IGA and Model 2 IGA) that are intended to provide an effective and efficient means for complying with FATCA while reducing the burden FATCA compliance imposes on financial institutions. The Model 1 IGA provides that a reporting Model 1 FFI will report certain information on U.S. reportable accounts maintained by the FFI to the partner jurisdiction tax authority, which will automatically exchange such information with the U.S. Competent Authority.
Each Model 1 IGA provides that a reporting Model 1 FFI will be treated as complying with, and not subject to withholding under, Code Sec. 1471 if the partner jurisdiction complies with its obligations under the IGA with respect to such financial institution and such financial institution complies with its reporting and registration obligations in accordance with the IGA. Each Model 1 IGA also provides that the U.S. will not require a reporting Model 1 FFI to withhold tax under Code Sec. 1471 or Code Sec. 1472 with respect to an account held by a recalcitrant account holder (as defined in Code Sec. 1471(d)(6)) or to close such account if the U.S. Competent Authority receives certain information specified in the Model 1 IGA with respect to such account.
The information required to be reported by a reporting Model 1 FFI includes the U. S. Taxpayer identification number (U.S. TIN) of each specified U.S. person that is an account holder and, in the case of a non-U.S. entity with one or more specified U.S. persons who are controlling persons, the U.S. TIN of each controlling person (required U.S. TINs). Notwithstanding this reporting requirement, before 2017, a reporting Model 1 FFI was not required to report a required U.S. TIN for an account maintained as of the determination date specified in the applicable Model 1 IGA (preexisting account) that is a U.S. reportable account if the U.S. TIN was not in the reporting Model 1 FFI’s records. Similarly, a reporting Model 1 FFI was required to report the date of birth only if the date of birth was in the reporting Model 1 FFI’s records.
Partner jurisdictions have committed to establish rules for 2017 and subsequent years requiring reporting Model 1 FFIs to obtain and report the required U.S. TINs for such accounts.
If a reporting Model 1 FFI fails to report required U.S. TINs for U.S. reportable accounts, the U.S. Competent Authority may notify the partner jurisdiction competent authority that there is significant non-compliance with respect to the reporting Model 1 FFI, in accordance with the Model 1 IGA. If the reporting Model 1 FFI remains noncompliant for 18 months after such notification, under the relevant Model 1 IGA, the U.S. may treat the reporting Model 1 FFI as a nonparticipating financial institution that is subject to withholding under Code Sec. 1471.
Background—chapter 3. 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.)
Reg. § 1.1441-1T(e)(2)(ii)(B) provides that, beginning Jan. 1, 2017, a beneficial owner withholding certificate provided to document an account maintained at a U.S. branch or office of a withholding agent that is a financial institution is required to contain the account holder’s Foreign TIN and, in the case of an individual account holder, the account holder’s date of birth, in order for the withholding agent to treat the withholding certificate as valid. For withholding certificates associated with payments made on or after Jan. 1, 2018, an account holder that does not provide a Foreign TIN must provide a reasonable explanation for its absence in order for the withholding certificate not to be considered invalid under Reg. § 1.1441-1T(e)(2)(ii)(B). The temporary chapter 3 regs also provide that if the withholding certificate does not contain the account holder’s date of birth and the withholding agent has the date of birth in its files, the withholding certificate will not be considered invalid.
The term “withholding certificate” means Forms W-8BEN, W-8BEN-E, W-8ECI, W-8EXP and, with respect to a qualified intermediary acting as a qualified derivatives dealer (QDD) claiming treaty benefits for dividends, Form W-8IMY. The term “withholding agent” refers to a withholding agent that is a U.S. branch or office of a financial institution.
For calendar year 2017, the instructions for Form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding) provide that a withholding agent that is a U.S. office or branch of a financial institution is required to report on Form 1042-S a recipient’s Foreign TIN when the recipient has furnished documentation that provides a Foreign TIN. The instructions provide that, beginning for the 2017 calendar year, the withholding agent is also required to report on Form 1042-S an individual recipient’s date of birth when the recipient has furnished documentation that provides a date of birth or the recipient’s date of birth is identified in any of the withholding agent’s files.
Relaxation of FATCA rules. Acknowledging that some reporting Model 1 FFIs need additional time to implement practices and procedures to obtain and report required U.S. TINs for preexisting accounts that are U.S. reportable accounts, IRS has now announced that, for calendar years 2017, 2018, and 2019, the U.S. Competent Authority will not determine that there is significant non-compliance with the obligations under an applicable Model 1 IGA with respect to a reporting Model 1 FFI solely because of a failure to obtain and report each required U.S. TIN, provided that the reporting Model 1 FFI: (1) obtains and reports the date of birth of each account holder and controlling person whose U.S. TIN is not reported; (2) requests annually from each account holder any missing required U.S. TIN; and (3) before reporting information that relates to calendar year 2017 to the partner jurisdiction, searches electronically searchable data maintained by the reporting Model 1 FFI for any missing required U.S. TINs. IRS expects to provide further instructions regarding appropriate reporting for the TIN data element for preexisting accounts that are U.S. reportable accounts with missing required U.S. TINs.
Nothing in the Notice affects a reporting Model 1 FFI’s obligations under chapter 3 or 61 (“Information and returns”) with respect to a reportable amount or reportable payment.
Relaxation of chapter 3 rules. Acknowledging that withholding agents have been having difficulty obtaining and reporting Foreign TINs and dates of birth from account holders in the time provided, IRS, in the Notice, has announced that it intends to amend existing temporary chapter 3 regs to:
…narrow the circumstances in which a Foreign TIN and date of birth are required;
…provide exceptions from the Foreign TIN requirement for certain account holders;
…provide a phase-in of the rules for obtaining a Foreign TIN; and
…provide relief from obtaining a date of birth with respect to certain withholding certificates signed before Jan. 1, 2018.
- IRS believes that it is not necessary for a withholding agent to obtain a Foreign TIN (or a reasonable explanation for why the account holder has not been issued a Foreign TIN) or (for an individual) a date of birth on a withholding certificate that the withholding agent obtains solely to avoid Form 1099 reporting and backup withholding or in other cases where a payment associated with a withholding certificate is not otherwise subject to reporting on Form 1042-S. Therefore, IRS intends to amend Reg. § 1.1441-1T(e)(2)(ii)(B) to limit its scope for this purpose such that a withholding certificate is required to be treated as invalid under Reg. § 1.1441-1T(e)(2)(ii)(B) only for payments of U.S. source income reportable on Form 1042-S (before the application of Reg. § 1.1441-1T(e)(2)(ii)(B)). Due to this limitation, a withholding agent will not, for example, be required to withhold under Code Sec. 3406 (“Backup withholding”) on gross proceeds paid to an individual account holder as a result of the application of the Code Sec. 1441 presumption rules when the account holder provides a withholding certificate that is valid but for the absence of a Foreign TIN and the account holder’s date of birth.
- The following exceptions from the foreign TIN requirement for the following accounts will be provided: a) accounts held by residents in jurisdictions with which the U.S. does not have an agreement relating to the exchange of tax information in force; b) accounts held by residents in jurisdictions that do not issue Foreign TINs; and c) accounts held by a government, international organization, foreign central bank of issue, or resident of a U.S. territory.
- The requirement to obtain a Foreign TIN under the temporary chapter 3 regs will be phased in over a period ending on Dec. 31, 2019.
Taxpayer reliance on Chapter 3 provisions in the Notice. Before the issuance of the amendments to the temporary chapter 3 regs described under “Relaxation of chapter 3 rules” above, taxpayers may rely on the provisions of the Notice regarding the content of the amendments.
References: For reporting under FATCA, see Federal Tax Coordinator 2d ¶ O-13070 et seq.; United States Tax Reporter ¶ 14,714 et seq. For Chapter 3 withholding on nonresident aliens, foreign corporations, and foreign partnerships, see Federal Tax Coordinator 2d ¶ O-11900; United States Tax Reporter ¶ 14,414.
Notice 2017-46, 2017-41 IRB