Updated FAQs on FFI Agreement Renewal

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July 19, 2017

Recently, the IRS updated its FATCA frequently asked questions to include four new FAQs addressing the renewal of foreign financial institution (FFI) agreements.  The new FAQs address the requirement that financial institutions (FIs) must renew their FFI agreements by July 31, 2017, pursuant to Revenue Procedure 2017-16, to be treated as having in effect an FFI agreement as of January 1, 2017.

FAQ#8 clarifies that, generally, FATCA requires the following types of FIs to renew their FFI agreements: participating FFIs not covered by an intergovernmental agreement (IGA); reporting Model 2 FFIs; reporting Model 1 FFIs operating branches outside of Model 1 jurisdictions (other than branches treated as nonparticipating FFIs under Article 4(5) of the Model 1 IGA).  By contrast, renewal is not required for the following types of entities: reporting Model 1 FFIs that are not operating branches outside of Model 1 jurisdictions; registered deemed-compliant FFIs (regardless of location); sponsoring entities; direct reporting non-financial foreign entities (NFFEs); and trustees of trustee-documented trust.

FAQ#9 provides that entities that do not need to renew their FFI agreements do not need to take any action—and do not even need to select “No” on the “Renew FFI Agreement” link—to remain on the FFI list and retain their Global Intermediary Identification Number (GIIN).

FAQ#10 clarifies that an entity that, before January 1, 2017, entered into the FFI agreement under Rev. Proc. 2014-38 (which terminated on December 31, 2016), and that failed to renew its FFI agreement by July 31, 2017, will be considered a nonparticipating FFI as of January 1, 2017, and will be removed from the FFI List.

If an entity that is required to renew its FFI agreement incorrectly selected “No” when asked if renewal is required, FAQ#11 provides that the entity can simply return to the FATCA FFI Registration system home page, click on the “Renew FFI Agreement” link, and select “Yes” to complete the renewal application before the deadline on July 31, 2017.

First Friday FATCA Update

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July 7, 2017

Since our last monthly FATCA update, the IRS has updated its online FATCA portal to allow foreign financial institutions to renew their FFI agreements (see prior coverage).

Recently, the Treasury released the Model 1B Intergovernmental Agreement (IGA) between the United States and Montenegro.  The IRS also released the Competent Authority Agreements (CAAs) implementing IGAs between the United States and the following treaty partners:

  • Bahrain (Model 1B IGA signed on January 18, 2017);
  • Croatia (Model 1A IGA signed on March 20, 2015);
  • Greenland (Model 1A IGA signed on January 17, 2017); and
  • Panama (Model 1A IGA signed on April 27, 2016).

Under FATCA, IGAs come in two forms: Model 1 or Model 2.  Under a Model 1 IGA, the foreign treaty partner agrees to collect information of U.S. accountholders in foreign financial institutions operating within its jurisdiction and transmit the information to the IRS.  Model 1 IGAs are drafted as either reciprocal (Model 1A) agreements or nonreciprocal (Model 1B) agreements.  By contrast, Model 2 IGAs are issued in only a nonreciprocal format and require FFIs to report information directly to the IRS.

A CAA is a bilateral agreement between the United States and the treaty partner to clarify or interpret treaty provisions.  A CAA implementing an IGA typically establishes and prescribes the rules and procedures necessary to implement certain provisions in the IGA and the Tax Information Exchange Agreement, if applicable.  Specific topics include registration of the treaty partner’s financial institutions, time and manner of exchange of information, remediation and enforcement, confidentiality and data safeguards, and cost allocation.  Generally, a CAA becomes operative on the later of (1) the date the IGA enters into force, or (2) the date the CAA is signed by the competent authorities of the United States and the treaty partner.

The Treasury Department website publishes IGAs, and the IRS publishes their implementing CAAs.

IRS FATCA Portal Now Accepting FFI Agreement Renewals

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June 6, 2017

Today, the IRS announced that it has updated the FATCA registration system to allow foreign financial institutions (FFIs) to renew their FFI agreements.  A new link, “Renew FFI Agreement” appears on the registration portal’s home page allowing a financial institution (FI) to determine whether it must renew its FFI agreement (see prior coverage).  The FI can review and edit its registration form and information, and renew its FFI agreement.

All FIs whose prior FFI agreement expired on December 31, 2016, and that wish to retain their Global Intermediary Identification Number (GIIN) must do so by July 31, 2017, to be treated as having in effect an FFI agreement as of January 1, 2017.  FFIs that are required to update their FFI agreement and that do not do so by July 31, 2017, will be treated as having terminated their FFI agreement as of January 1, 2017, and may be removed from the IRS’s FFI list, potentially subjecting them to withholding under FATCA.

First Friday FATCA Update

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June 2, 2017

Since our last FATCA Update, the IRS has published a reminder that foreign financial institutions (FFIs) required by FATCA to renew their FFI agreements must do so by July 31, 2017.  The IRS released an updated FFI agreement on December 30, 2016, that is effective on or after January 1, 2017 (see prior coverage).  All financial institutions (FIs) whose prior FFI agreement expired on December 31, 2016, and that wish to retain their Global Intermediary Identification Number (GIIN) must do so by July 31, 2017 to be treated as having in effect an FFI agreement as of January 1, 2017.  According to the IRS, a new “Renew FFI Agreement” link will become available on the FFI’s account homepage in a future update to the FATCA registration portal.

Generally, FATCA requires the following types of FIs to renew their FFI agreements: participating FFIs not covered by an intergovernmental agreement (IGA); reporting Model 2 FFIs; reporting Model 1 FFIs operating branches outside of Model 1 jurisdictions.  By contrast, renewal is not required for reporting Model 1 FFIs that are not operating branches outside of Model 1 jurisdictions; registered deemed-compliant FFIs (regardless of location); sponsoring entities; direct reporting non-financial foreign entities (NFFEs); and trustees of trustee-documented trust.

Since our last update, Treasury has not published any new intergovernmental agreements (IGAs), and the IRS has not published any new competent authority agreements (CAAs).  Under FATCA, IGAs come in two forms: Model 1 or Model 2.  Under a Model 1 IGA, the foreign treaty partner agrees to collect information of U.S. accountholders in foreign financial institutions (FFIs) operating within its jurisdiction and transmit the information to the IRS.  Model 1 IGAs are drafted as either reciprocal (Model 1A) agreements or nonreciprocal (Model 1B) agreements.  By contrast, Model 2 IGAs are issued in only a nonreciprocal format and require FFIs to report information directly to the IRS.

A CAA is a bilateral agreement between the United States and the treaty partner to clarify or interpret treaty provisions.  A CAA implementing an IGA typically establishes and prescribes the rules and procedures necessary to implement certain provisions in the IGA and the Tax Information Exchange Agreement, if applicable.  Specific topics include registration of the treaty partner’s financial institutions, time and manner of exchange of information, remediation and enforcement, confidentiality and data safeguards, and cost allocation.  Generally, a CAA becomes operative on the later of (1) the date the IGA enters into force, or (2) the date the CAA is signed by the competent authorities of the United States and the treaty partner.

The Treasury Department website publishes IGAs, and the IRS publishes their implementing CAAs.

First Friday FATCA Update

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May 5, 2017

Since our last monthly FATCA update, the OECD issued an array of guidance on country-by-country (CbC) reporting and automatic exchange of tax information (see prior coverage). In addition, the IRS released the Competent Authority Agreement (CAA) implementing the Model 1B Intergovernmental Agreement (IGA) between the United States and Algeria entered into on October 13, 2015.

Under FATCA, IGAs come in two forms: Model 1 or Model 2. Under a Model 1 IGA, the foreign treaty partner agrees to collect information of U.S. accountholders in foreign financial institutions (FFIs) operating within its jurisdiction and transmit the information to the IRS. Model 1 IGAs are drafted as either reciprocal (Model 1A) agreements or nonreciprocal (Model 1B) agreements. By contrast, Model 2 IGAs are issued in only a nonreciprocal format and require FFIs to report information directly to the IRS.

A CAA is a bilateral agreement between the United States and the treaty partner to clarify or interpret treaty provisions. A CAA implementing an IGA typically establishes and prescribes the rules and procedures necessary to implement certain provisions in the IGA and the Tax Information Exchange Agreement, if applicable. Specific topics include registration of the treaty partner’s financial institutions, time and manner of exchange of information, remediation and enforcement, confidentiality and data safeguards, and cost allocation. Generally, a CAA becomes operative on the later of (1) the date the IGA enters into force, or (2) the date the CAA is signed by the competent authorities of the United States and the treaty partner.

The Treasury Department website publishes IGAs, and the IRS publishes their implementing CAAs.

OECD Issues Array of Guidance on Country-by-Country Reporting and Automatic Exchange of Tax Information

In an effort to help jurisdictions implement consistent domestic rules that align with recent guidance issued by the Organization for Economic Co-operation and Development (OECD), the OECD issued a series of guidance to further explain its country-by-country (CbC) reporting, most importantly by clarifying certain terms and defining the accounting standards that apply under the regime.  Each of these efforts relate to Action 13 of the OECD’s Base Erosion and Profit Shifting (BEPS) project, which applies to tax information reporting of multinational enterprise (MNE) groups.  CbC reporting aims to eliminate tax avoidance by multinational companies by requiring MNE groups to report certain indicators of the MNE group’s economic activity in each country and allowing the tax authorities to share that information with one another.  For additional background on CbC reporting, please see our prior coverage.

The most substantial piece of the OECD’s new guidance is an update to the OECD’s “Guidance on the Implementation of Country-by-Country Reporting–BEPS Action 13.”  The update clarifies: (1) the definition of the term “revenues”; (2) the accounting principles and standards for determining the existence of and membership in a “group”; (3) the definition of “total consolidated group revenue”; (4); the treatment of major shareholdings; and (5) the definition of the term “related parties.”  Specifically with respect to accounting standards, if equity interests of the ultimate parent entity of the group are traded on a public securities exchange, domestic jurisdictions should require that the MNE group be determined using the consolidation rules of the accounting standards already used by the group.  However, if equity interests of the ultimate parent entity of the group are not traded on a public securities exchange, domestic jurisdictions may allow the group to choose to use either (i) local generally accepted accounting principles (GAAP) of the ultimate parent entity’s jurisdiction or (ii) international financial reporting standards (IFRS).

To further define its Common Reporting Standard (CRS) for exchanging tax information, the OECD also issued twelve new frequently asked questions on the application of the standard.

Finally, the OECD issued a second edition of its Standard for Automatic Exchange of Financial Account Information in Tax Matters, which contains an expanded XML Schema (see prior coverage for additional information), used to electronically report MNE group information in a standardized format.

First Friday FATCA Update

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April 7, 2017

Since our last monthly FATCA update, we have addressed the following recent FATCA developments:

  • The IRS updated the list of countries subject to bank interest reporting requirements (see prior coverage).
  • The IRS released new FATCA FAQs addressing date of birth and foreign TIN requirements for withholding certificates (see prior coverage).
  • The IRS extended the deadline for submitting qualified intermediary agreements and certain other withholding agreements from March 31, 2017 to May 31, 2017 (see prior coverage).

Recently, the IRS released the Competent Authority Agreement (CAA) implementing the Model 1B Intergovernmental Agreement (IGA) between the United States and the Bahamas entered into on November 3, 2014.

Under FATCA, IGAs come in two forms: Model 1 or Model 2.  Under a Model 1 IGA, the foreign treaty partner agrees to collect information of U.S. accountholders in foreign financial institutions (FFIs) operating within its jurisdiction and transmit the information to the IRS.  Model 1 IGAs are drafted as either reciprocal (Model 1A) agreements or nonreciprocal (Model 1B) agreements.  By contrast, Model 2 IGAs are issued in only a nonreciprocal format and require FFIs to report information directly to the IRS.

A CAA is a bilateral agreement between the United States and the treaty partner to clarify or interpret treaty provisions.  A CAA implementing an IGA typically establishes and prescribes the rules and procedures necessary to implement certain provisions in the IGA and the Tax Information Exchange Agreement, if applicable.  Specific topics include registration of the treaty partner’s financial institutions, time and manner of exchange of information, remediation and enforcement, confidentiality and data safeguards, and cost allocation.  Generally, a CAA becomes operative on the later of (1) the date the IGA enters into force, or (2) the date the CAA is signed by the competent authorities of the United States and the treaty partner.

The Treasury Department website publishes IGAs, and the IRS publishes their implementing CAAs.

IRS Updates List of Countries Subject to Bank Interest Reporting Requirements

The IRS has issued Revenue Procedure 2017-31 to supplement the list of countries to subject to the reporting requirements of Code section 6049, which generally relate to reporting on bank interest paid to nonresident alien individuals.  This was an expected move, as this list of countries, originally set forth in Revenue Procedure 2014-64 and modified a handful of times since, will likely continue to expand as more countries enter into tax information exchange agreements with the U.S. in order to implement the Foreign Account Tax Compliance Act (FATCA).  Specifically, Revenue Procedure 2017-31 adds Belgium, Colombia, and Portugal to the list of countries with which Treasury and the IRS have determined the automatic exchange of information to be appropriate.  Unlike the last set of additions to the list, set forth in Revenue Procedure 2016-56 (see prior coverage), no countries were added to the list of countries with which the U.S. has a bilateral tax information exchange agreement.

Prior to 2013, interest on bank deposits was generally not required to be reported if paid to a nonresident alien other than a Canadian.  In 2012, the IRS amended Treas. Reg. § 1.6049-8 in an effort to provide bilateral information exchanges under the intergovernmental agreements between the United States and partner jurisdictions that were being agreed to as part of the implementation of FATCA.  In many cases, those agreements require the United States to share information obtained from U.S. financial institutions with foreign tax authorities.  Under the amended regulation, certain bank deposit interest paid on accounts held by nonresident aliens who are residents of certain countries must be reported to the IRS so that the IRS can satisfy its obligations under the agreements to provide such information reciprocally.

The bank interest reportable under Treas. Reg. § 1.6049-8(a) includes interest: (i) paid to a nonresident alien individual; (ii) not effectively connected with a U.S. trade or business; (iii) relating to a deposit maintained at an office within the U.S., and (iv) paid to an individual who is a resident of a country properly identified as one with which the U.S. has a bilateral tax information exchange agreement.  Under Treas. Reg. § 1.6049-4(b)(5), for such bank interest payable to a nonresident alien individual that exceeds $10, the payor must file Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” for the year of payment.

New FATCA FAQs Address Date of Birth and Foreign TIN Requirements for Withholding Certificates

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April 7, 2017

Yesterday, the IRS added three new FAQs to its list of frequently asked questions on compliance with the Foreign Account Tax Compliance Act (“FATCA”).  The questions address the need for withholding agents to obtain foreign TINs or dates of birth for nonresident alien or foreign entity on beneficial owner withholding certificates, e.g., Forms W-8BEN and W-8BEN-E.  The FAQs address the requirement under temporary regulations published in the Federal Register on January 6, 2017, that a beneficial owner withholding certificate contains a foreign TIN and, in the case of an individual, a date of birth in order to be considered valid.

FAQ #20 clarifies when a withholding agent must collect a foreign TIN or date of birth on a beneficial owner withholding certificate.  In general, withholding agents must obtain a foreign TIN if either (1) the foreign person is claiming a reduced rate of withholding under an income tax treaty and the foreign person does not provide a U.S. TIN and a TIN is required to make a treaty claim or (2) the foreign person is an account holder of a financial account maintained at a U.S. office or branch of the withholding agent and the withholding agent is a financial institution.  However, a withholding certificate that does not contain a foreign TIN may still be treated as valid with respect to payments made in 2017 in the absence of actual knowledge on the part of the withholding agent that the individual has a foreign TIN.  For payments made on or after January 1, 2018, a beneficial owner withholding certificate that does not contain a foreign TIN will be invalid unless the beneficial owner provides a reasonable explanation for its absence, such as that the country of residence does not issue TINs.

Consistent with the language of the temporary regulations, FAQ #21 clarifies that a withholding agent may treat a beneficial owner withholding certificate provided by an individual after January 1, 2017, as valid even if it does not contain a date of birth if the withholding agent otherwise has the individual’s date of birth in its records.

Finally, FAQ #22 clarifies that if a beneficial owner provides an otherwise valid withholding certificate that fails to include its foreign TIN, the beneficial owner may provide the foreign TIN to the withholding agent in a written statement (that may be an email) from the beneficial owner that includes the foreign TIN and a statement indicating that the foreign TIN is to be associated with the beneficial owner withholding certificate previously provided.  If the beneficial owner does not have a foreign TIN, the beneficial owner may provide the reasonable explanation required after January 1, 2018, in a similar written statement.

While helpful, the FAQs continue a growing trend toward subregulatory guidance from the IRS.  Because the guidance does not require the same level of review as more formal guidance, it can be issued more quickly.  However, informal guidance, such as FAQs, can be difficult to rely on because it may disappear or change without notice and typically is not binding on the IRS.

Entities Allowed Additional Time to Renew QI Agreements

In a Q&A on its list of questions and answers for qualified intermediaries (QIs), foreign withholding partnerships (WPs), and foreign withholding trusts (WTs) (see Q&A-22), the IRS today extended the deadline for submitting QI, WP, and WT agreement renewal requests from March 31, 2017, to May 31, 2017.  Applications submitted by the deadline will be granted a QI, WP, or WT agreement (as applicable) with an effective date of January 1, 2017.  This delay gives entities additional time to comply with the new application system (discussed in a prior post) and gather the necessary information to submit renewal requests.

The deadline for applications submitted for new QI agreements with an effective date of January 1, 2017, however, is extended to May 31, 2017, only if the QI is seeking qualified derivative dealer (QDD) status. To be granted an agreement with an effective date of January 1, 2017, applications for new QI agreements that are not seeking QDD status, WP agreements, and WT agreements must be submitted today.

IRS Negotiating CbC Information Exchange Agreements

The IRS is engaging in negotiations with individual countries to implement country-by-country (CbC) reporting according to Douglas O’Donnell, Commissioner of IRS’s Large Business and International Division.  In a March 10 speech at the Pacific Rim Tax Institute that, he clarified that the IRS is only negotiating with jurisdictions that have both an information exchange instrument and adequate information safeguards.  Mr. O’Donnell did not provide a definitive timeline for those negotiations, but he said that they would be completed in a timely manner.  The IRS’s approach to negotiating information exchange agreements is consistent with the United States’ existing approach to negotiating IGAs and related agreements under FATCA.

Companies are anxiously awaiting the agreements, as they could face reporting obligations in certain jurisdictions with which the United States does not have agreements in place, causing them to potentially prepare multiple CbC reports. Companies are also urging the IRS to release information on the expected scope of the U.S. information exchange network, as lack of knowledge on the scope could negatively impact companies’ ability to do business in certain countries if the companies do not comply with local filing requirements.

These information exchange agreements arise from recent recommendations provided by the Organization for Economic Co-Operation and Development (OECD) (additional information on OECD guidance on CbC reporting available here) on jurisdictions with respect to information on multinational corporations, requiring jurisdictions to exchange such information in a standardized format beginning in 2018 (please see prior post for additional background).  The IRS released final regulations in June 2016 imposing CbC reporting on U.S. persons that are the ultimate parent entity of a multinational enterprise group with revenue exceeding $850 million in the preceding accounting year (prior coverage).

First Friday FATCA Update

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March 3, 2017

Recently, the Treasury released the Model 1B Intergovernmental Agreement (IGA) entered into between the United States and Ukraine. The IRS released the Competent Authority Agreements (CAAs) implementing the IGAs between the United States and the following treaty partners:

  • Antigua and Barbuda (Model 1B IGA signed on August 31, 2016);
  • Vietnam (Model 1B IGA signed on April 1, 2016).

Under FATCA, IGAs come in two forms: Model 1 or Model 2.  Under a Model 1 IGA, the foreign treaty partner agrees to collect information of U.S. accountholders in foreign financial institutions (FFIs) operating within its jurisdiction and transmit the information to the IRS.  Model 1 IGAs are drafted as either reciprocal (Model 1A) agreements or nonreciprocal (Model 1B) agreements.  By contrast, Model 2 IGAs are issued in only a nonreciprocal format and require FFIs to report information directly to the IRS.

A CAA is a bilateral agreement between the United States and the treaty partner to clarify or interpret treaty provisions.  A CAA implementing an IGA typically establishes and prescribes the rules and procedures necessary to implement certain provisions in the IGA and the Tax Information Exchange Agreement, if applicable.  Specific topics include registration of the treaty partner’s financial institutions, time and manner of exchange of information, remediation and enforcement, confidentiality and data safeguards, and cost allocation.  Generally, a CAA becomes operative on the later of (1) the date the IGA enters into force, or (2) the date the CAA is signed by the competent authorities of the United States and the treaty partner.

The Treasury Department website publishes IGAs, and the IRS publishes their implementing CAAs.

First Friday FATCA Update

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February 3, 2017

Recently, the Treasury released the Intergovernmental Agreements (IGAs) entered into between the United States and the following treaty partners, in these respective forms:

  • Anguilla, Model 1B;
  • Bahrain, Model 1B;
  • Greece, Model 1A; and
  • Greenland, Model 1B.

Under FATCA, IGAs come in two forms: Model 1 or Model 2.  Under a Model 1 IGA, the foreign treaty partner agrees to collect information of U.S. accountholders in foreign financial institutions (FFIs) operating within its jurisdiction and transmit the information to the IRS.  Model 1 IGAs are drafted as either reciprocal (Model 1A) agreements or nonreciprocal (Model 1B) agreements.  By contrast, Model 2 IGAs are issued in only a nonreciprocal format and require FFIs to report information directly to the IRS.

A CAA is a bilateral agreement between the United States and the treaty partner to clarify or interpret treaty provisions.  A CAA implementing an IGA typically establishes and prescribes the rules and procedures necessary to implement certain provisions in the IGA and the Tax Information Exchange Agreement, if applicable.  Specific topics include registration of the treaty partner’s financial institutions, time and manner of exchange of information, remediation and enforcement, confidentiality and data safeguards, and cost allocation.  Generally, a CAA becomes operative on the later of (1) the date the IGA enters into force, or (2) the date the CAA is signed by the competent authorities of the United States and the treaty partner.

The Treasury Department website publishes IGAs, and the IRS publishes their implementing CAAs.

First Friday FATCA Update

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January 6, 2017

Since our last monthly FATCA update, we have addressed several other recent FATCA developments, including a flurry of FATCA-related regulations released by the IRS and Treasury Department:

  • Late Friday, December 30, 2016, the IRS and Treasury Department released four regulation packages related to its implementation of FATCA (see previous coverage).   These regulations largely finalized the 2014 temporary FATCA regulations and 2014 temporary FATCA coordination regulations with the changes that the IRS had previously announced in a series of notices.
  • The final regulations released by the IRS under FATCA on December 30, 2016, finalized the temporary presumption rules promulgated on March 6, 2014 with no substantive changes, but several changes were made to the final coordinating regulations under Chapter 3 and Chapter 61, also released on the same date (see previous coverage).
  • In the preamble to the final FATCA regulations released on December 30, 2016, the IRS rejected a request from a commenter that the regulations be modified to permit a non-financial foreign entity (NFFE) operating in an IGA jurisdiction to determine its Chapter 4 status using the criteria specified in the IGA (see previous coverage).
  • The IRS released final agreements for foreign financial institutions (FFIs) and qualified intermediaries (QIs) to enter into with the IRS, set forth in Revenue Procedure 2017-16 and Revenue Procedure 2017-15, respectively (see previous coverage).
  • Two FATCA transition rules expired on January 1, 2017:  One related to limited branches and limited FFIs, and one related to the deadline for sponsoring entities to register their sponsored entities with the IRS (see previous coverage).
  • The IRS issued Revenue Procedure 2016-56 to add to the list of countries subject to the reporting requirements of Code section 6049, which generally relate to reporting on bank interest paid to nonresident alien individuals (see previous coverage).
  • The IRS issued Notice 2016-76 providing phased-in application of certain section 871(m) withholding rules applicable to dividend equivalents, and easing several reporting and withholding requirements for withholding agents and qualified derivatives dealers (QDDs) (see previous coverage).

In addition, the Treasury Department recently released the Intergovernmental Agreements (IGA) entered into between the United States and the following treaty partners, in these respective forms:

  • Grenada, Model 1B;
  • Macau, Model 2;
  • Taiwan, Model 2.

Further, the IRS released the Competent Authority Agreement (CAA) implementing the Model 1A IGA between the United States and Guyana entered into on October 17, 2016.

Under FATCA, IGAs come in two forms: Model 1 or Model 2.  Under a Model 1 IGA, the foreign treaty partner agrees to collect information of U.S. accountholders in foreign financial institutions (FFIs) operating within its jurisdiction and transmit the information to the IRS.  Model 1 IGAs are drafted as either reciprocal (Model 1A) agreements or nonreciprocal (Model 1B) agreements.  By contrast, Model 2 IGAs are issued in only a nonreciprocal format and require FFIs to report information directly to the IRS.

A CAA is a bilateral agreement between the United States and the treaty partner to clarify or interpret treaty provisions.  A CAA implementing an IGA typically establishes and prescribes the rules and procedures necessary to implement certain provisions in the IGA and the Tax Information Exchange Agreement, if applicable.  Specific topics include registration of the treaty partner’s financial institutions, time and manner of exchange of information, remediation and enforcement, confidentiality and data safeguards, and cost allocation.  Generally, a CAA becomes operative on the later of (1) the date the IGA enters into force, or (2) the date the CAA is signed by the competent authorities of the United States and the treaty partner.

The Treasury Department website publishes IGAs, and the IRS publishes their implementing CAAs.

 

Final Regulations Make Minor Changes to FATCA and Chapter 3 Presumption Rules

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January 5, 2017

The final regulations released by the IRS under the Foreign Account Tax Compliance Act (FATCA) on December 30, 2016 finalized the temporary presumption rules promulgated on March 6, 2014 with no substantive changes, but several changes were made to the final coordinating regulations under Chapter 3 and Chapter 61, also released on the same date.

Under FATCA, withholding agents must conduct certain due diligence to identify the Chapter 4 status of their payees.  In the absence of information sufficient to reliably identify a payee’s Chapter 4 status, withholding agents must apply specific presumption rules to determine that status.

According to the preamble to the final FATCA regulations, a commenter requested that a reporting Model 1 foreign financial institution (FFI) receiving a withholdable payment as an intermediary or making a withholdable payment to an account held by an undocumented entity be permitted to treat such an account as a U.S. reportable account.  The IRS rejected the commenter’s suggestion, explaining that a reporting Model 1 FFI that follows the due diligence procedures required under Annex I of the IGA should not maintain any undocumented accounts.  In the absence of information to determine the status of an entity account, a reporting Model 1 FFI must obtain a self-certification, and in the absence of both the required information and a self-certification, the reporting Model 1 FFI must apply the presumption rules contained in the Treasury Regulations by treating the payee as a nonparticipating FFI and withholding.

The discussion in the preamble is consistent with the rules set forth in the IGAs, which require reporting Model 1 or Model 2 FFIs to withhold on withholdable payments made to nonparticipating FFIs in certain circumstances.  The reasoning provided is also the same as provided with respect to reporting Model 2 FFIs in Revenue Procedure 2017-16, setting forth the updated FFI agreement.

Although the IRS declined to make the requested change to the final Chapter 4 regulations, it did make a number of changes to the presumption rules in the final FATCA coordination regulations.  It also rejected some changes that were requested by commenters.

Under the temporary coordination regulations, a withholding agent must presume that an undocumented entity payee that is an exempt recipient is a foreign person if the name of the payee indicates that it is a type of entity that is on the per se list of foreign corporations.   However, an entity name that contains the word “corporation” or “company” is not required to be presumed foreign because such information in itself it is not indicative of foreign status.  According to the preamble, a commenter requested that the IRS amend the presumption rules to allow a presumption of foreign status for an entity whose name contains “corporation” or “company,” if the withholding agent has a document that reasonably demonstrates that the entity is incorporated in the relevant foreign jurisdiction on the per se list.  The IRS adopted this change to the coordination regulations.

In contrast, the IRS rejected a commenter’s other suggested changes to the presumption rules.  One commenter requested that a withholding agent making a payment other than a withholdable payment to an exempt recipient be permitted to rely on documentary evidence to presume the payee is foreign.  The IRS reasoned that the documentary evidence rule was not worthwhile because it would be limited in scope because an existing rule, which requires a withholding agent to presume a payee that is a certain type of exempt recipient is foreign with respect to withholdable payments, may be applied by the withholding agent to all payments with respect to an obligation whether or not they are withholdable payments.  The IRS also expressed concern about how the proposed change would work in the context of payments made to foreign partnerships with partners who are non-exempt recipients and for which different presumption rules apply.

The IRS also declined to make a suggested change that would permit an undocumented entity to be presumed foreign if the withholding agent has a global intermediary identification number (GIIN) on file for the payee and the payee’s name appears on the IRS FFI list.  The IRS rejected the proposed change because U.S. entities can register and obtain a GIIN (for example, as a sponsoring entity), so the existence of a GIIN does not necessarily indicate the payee is foreign.

IRS Says NFFEs Must Determine their Chapter 4 Status Under Treasury Regulations

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January 5, 2017

In the preamble to the final FATCA regulations released on December 30, 2016, the IRS rejected a request from a commenter that the regulations be modified to permit a non-financial foreign entity (NFFE) operating in an IGA jurisdiction to determine its Chapter 4 status using the criteria specified in the IGA.

In the preamble, the IRS responded to the request by indicating that although an NFFE may use the IGA to determine whether it is a foreign financial institution (FFI) or a NFFE,  it must look to U.S. Treasury Regulations to determine its Chapter 4 status once it determines it is an NFFE.  As a result, different sets of rules apply to determine an entity’s specific Chapter 4 status depending upon whether the entity is determining its status for purposes of documenting its status to a withholding agent or documenting its status to an FFI in its own jurisdiction.  Similarly, the IRS said a passive NFFE will be required to report U.S. controlling persons to FFIs in IGA jurisdictions and report substantial U.S. owners to participating FFIs and U.S. withholding agents.  As a justification for its response, the IRS said that the rules in the IGAs are intended only for FFIs and not for NFFEs.

Many practitioners believe that it is illogical for a single entity to have different Chapter 4 statuses depending upon who is documenting its status or where its status is being documented.  As a result, many practitioners believed it was appropriate for an entity resident in an IGA jurisdiction to determine its Chapter 4 status under the terms of the applicable IGA.  Because different rules apply to determine the entity’s status in different jurisdictions, an NFFE could otherwise have one Chapter 4 status when receiving payments from a U.S. withholding agent and a different Chapter 4 status in an IGA jurisdiction.

From a policy perspective, the IRS’s decision appears somewhat irrational—it requires NFFEs to follow U.S. Treasury Regulations to identify their Chapter 4 status, rather than using the rules for determining their status that are in the IGA that was agreed to by Treasury and the tax authorities in their own jurisdictions.  The impact of this goes beyond mere nomenclature, as the specific type of NFFE determines an entity’s responsibilities under FATCA.  Fortunately, since the two sets of rules contain significant overlap, applying the different rules will lead to the same Chapter 4 status in many situations.  To the extent that the two sets of rules would arrive at different results, the entities affected will have additional compliance burdens, as they will have to be familiar with both the rules under the U.S. Treasury Regulations and under the applicable IGA.

IRS Releases Four FATCA-Related Regulation Packages

Late Friday, December 30, 2016, the IRS and Treasury Department released four regulation packages related to its implementation of the Foreign Account Tax Compliance Act (FATCA).  Two of the packages include final and temporary regulations and two contain proposed regulations.  The packages are:

  • Final and Temporary Regulations under Chapter 4 that largely finalize the temporary regulations issued in 2014 and update those temporary regulations to reflect the guidance provided in Notices 2014-33, 2015-66, and 2016-08 and in response to comments received by the IRS.
  • Final and Temporary FATCA Coordinating Regulations under Chapter 3 and Chapter 61 that largely finalize the temporary coordination regulations issued under Chapter 3 and Chapter 61 in 2014 and update those temporary regulations to reflect the guidance provided in Notices 2014-33, 2014-59, and 2016-42 and in response to comments received by the IRS.
  • Proposed Regulations under Chapter 4 that describe the verification and certification requirements applicable to sponsoring entities; the certification requirements and IRS review procedures applicable to trustee-documented trusts; the IRS review procedures applicable to periodic certifications of compliance by registered deemed-compliant FFIs; and the certification of compliance requirements applicable to participating FFIs in consolidated compliance groups. The proposed regulations also reflect the language of the temporary Chapter 4 regulations described above.
  • Proposed Coordinating Regulations under Chapter 3 and Chapter 61 that reflect the language of the temporary coordination regulations described above.

We are reviewing the regulations and preparing a series of articles discussing various provisions in the regulations.  We will post the articles over the next several days.

IRS Releases Final Qualified Intermediary and Foreign Financial Institution Agreements

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December 30, 2016

With the end of the year upon them, the IRS has kicked into high gear with a flurry of new administrative guidance. On the heels of yesterday’s release of final reporting rules on slot machine, bingo, and keno winnings, proposed rules on horse track, dog track, and jai lai winnings, and a revenue procedure on Certified Professional Employer Organizations, the IRS released final agreements for foreign financial institutions (FFIs) and qualified intermediaries (QIs) to enter with the IRS, set forth in Revenue Procedure 2017-16 and Revenue Procedure 2017-15, respectively.

FFI Agreement

FFIs enter into an FFI agreement with the IRS to become participating FFIs for purposes of Foreign Account Tax Compliance Act (FATCA) withholding and reporting obligations. The final FFI agreement set forth in Revenue Procedure 2017-16, which was previously published in Revenue Procedure 2014-38, applies to FFIs seeking to become participating FFIs under FATCA, as well as FFIs and branches of FFIs treated as reporting financial institutions under a Model 2 intergovernmental agreement (IGA).  The update was necessary because Revenue Procedure 2014-38 was set to expire on December 31, 2016.  Accordingly, the FFI agreement contained in Revenue Procedure 2017-16 applies to FFIs with an FFI agreement effective beginning January 1, 2017.

Changes were made to the FFI agreement generally to align with subsequent changes to IRS regulations, such as the withholding and reporting rules applicable to U.S. branches that are not U.S. persons. Additionally, several changes reflect the expiration of certain transitional rules provided in the 2014 FATCA regulations including those related to limited branches and limited FFIs.  (For additional information on the expiration of the transition relief for limited branches and limited FFIs, please see our prior post).  The FFI agreement also clarifies the presumption rules applicable to Model 2 FFIs, and the ability of Model 2 FFIs to rely on certain documentation for purposes of the due diligence requirements.

The FFI agreement also contains new certification requirements applicable to FFIs attempting to terminate an FFI agreement and clarifies that the obligations imposed with respect to the period the agreement was in force survive the termination of the agreement.

QI Agreement

A QI serves as an intermediary for payments of U.S. source income made to non-U.S. persons, and it must collect a taxpayer identification number from the payee, or else it must withhold 30% on the payment. When an intermediary acts as a QI, it may agree to assume the primary withholding and reporting obligations with respect to payments made through it for purposes of Chapter 3, Chapter 4, and/or Chapter 61 and backup withholding under Section 3406 of the Code.  When a QI assumes such responsibility, it is not required to provide a withholding statement to the withholding agent/payor making payment to it.  FFIs, foreign clearing organizations, and foreign branches of U.S. financial institutions and clearing organizations are eligible to enter into QI agreements by completing Form 8957 through the IRS website, as well as Form 14345.

Notice 2016-42 set forth a proposed QI agreement (prior coverage), which made revisions to the previous final QI agreement published in Revenue Procedure 2014-39.  The proposed QI agreement created a new regime that allowed certain entities to act as qualified derivatives dealers and act as the primary withholding agent on all dividend equivalent payments they make.  Several changes in the final QI agreement were made in response to comments on the rules applicable to qualified derivatives dealers (QDDs), including provisions that reflect changes to the treatment of dividend equivalents from U.S. sources and provisions clarifying that entities acting as QIs and QDDs must file separate Forms 1042-S when acting in each distinct capacity.  Some of the changes in the final QI agreement were previously announced in Notice 2016-76 (prior coverage).  However, the final QI agreement makes further changes based on anticipated revisions to the regulations under Section 871(m), which are expected to be published in January.

Additionally, the final QI agreement provides greater detail on the internal compliance measures that are to replace the external audit procedures previously applicable to QIs. The final QI agreement also eliminates the ability of limited FFIs to enter into QI agreements, as limited FFI status will no longer be available beginning January 1, 2017.  Additionally, QIs seeking to use documentary evidence to document an entity claiming reduced withholding under a treaty must collect certain information regarding the applicable limitation on benefits provision, though the IRS has enabled a two-year transition period for QIs to gather this information.  The final agreement also eliminates the ability of an NFFE seeking to become an intermediary with respect to its shareholders to enter into a QI agreement.  The QI agreement also contains a modified standard of knowledge to align with the reason-to-know standard adopted in regulations, and modified documentation requirements and presumption rules to align with IGA requirements.  Finally, the term of validity for a QI agreement is six calendar years, extended from the three years provided in the proposed agreement.  The updated final QI agreement is effective beginning January 1, 2017.

Two Notable FATCA Transition Rules Set to Expire January 1, 2017

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December 29, 2016

The Foreign Account Tax Compliance Act (FATCA) provided several transition rules that are set to expire on January 1, 2017, one related to limited branches and limited foreign financial institutions (FFIs), and one related to the deadline for sponsoring entities to register their sponsored entities with the IRS.

Limited Branches and Limited FFIs

FATCA included a transition rule to temporarily ease compliance burdens for certain FFI groups with members otherwise unable to comply with FATCA that will no longer be available beginning January 1, 2017. Under Treas. Reg. § 1.1471-4(a)(4), an FFI that is a member of an expanded affiliated group (EAG) can become a participating FFI or a registered deemed-compliant FFI, but only if all FFIs in its EAG are participating FFIs, registered deemed-compliant FFIs, or exempt beneficial owners.

However, certain FFIs in an EAG may be located in a country that prevents them from becoming participating FFIs or registered deemed-compliant FFIs. This can arise when the country does not have an intergovernmental agreement (IGA) with the United States to implement FATCA, and when domestic law in that country prevents FFIs located within its borders from complying with FATCA (e.g., preventing FFIs from entering into FFI agreements with the IRS).

The IRS included a transition rule for so-called “limited branches” and “limited FFIs” that eased the often harsh consequences of this rule by providing temporary relief for EAGs that included FFIs otherwise prevented from complying with FATCA, but the transition rule was only intended to ease the burden while the countries either negotiated IGAs with the United States or modified its local laws to permit compliance with FATCA, or while the EAGs decided whether to stop operating in that country. While the IRS announced in Notice 2015-66 its intent to extend the transition rule originally set to expire December 31, 2015 through December 31, 2016, no additional extension has been announced.  Accordingly, this transition rule will expire on January 1, 2017.

EAGs with limited branches or limited FFIs doing business in countries with local laws that prevent compliance with FATCA may be faced with a choice. If the EAG has FFIs located in non-IGA jurisdictions, the EAG will either need to stop doing business in those countries or the FFIs within the EAG that are resident in non-IGA jurisdictions will be treated as noncompliant with FATCA even if they could otherwise comply as participating FFIs.  FFIs resident in countries that have entered into IGAs will generally be unaffected by a “related entity” (generally, an entity within the same EAG) or branch that is prevented from complying with FATCA by local law, so long as each other FFI in the EAG treats the related entity as a nonparticipating financial institution, among other requirements.

This provision is contained in Article IV, Section 5 of all iterations of Treasury’s model IGA (e.g., Reciprocal Model 1A with a preexisting tax agreement, Nonreciprocal Model 1B and Model 2 with no preexisting tax agreements).  The primary effect of this IGA provision is that only the nonparticipating FFIs become subject to FATCA withholding while the EAG as a whole can remain untainted.

Sponsored Entity Registration

Another transition rule set to expire is the ability of sponsored entities to use the sponsoring entity’s global intermediary identification number (GIIN) on Forms W-8. Under FATCA, withholding is not required on payments to certain entities that are “sponsored” by entities that are properly registered with the IRS, under the theory that all FATCA requirements imposed on the sponsored entity (due diligence, reporting, withholding, etc.) will be completed by the sponsoring entity.  Under the transition rule, sponsored entities have been able to use the sponsoring entity’s GIIN on forms such as the W-8BEN-E, but beginning on January 1, 2017, certain sponsored entities will need to include their own GIIN.  This means that the sponsoring entity must register the sponsored entity with the IRS before that date.  If a sponsored entity required to include its own GIIN after December 31, 2016, on a withholding certificate furnishes a form containing only the sponsoring entity’s GIIN, a withholding agent may not rely on that withholding certificate under FATCA’s due diligence requirements.  In such instance, the withholding agent will be required to withhold 30% of any payment made to the sponsored entity.  Originally, sponsored entities were required to be registered with the IRS by December 31, 2015, but the deadline was extended by Notice 2015-66.  The IRS has not announced any additional extension and the FATCA registration portal began allowing sponsoring entities to register sponsored entities earlier this year.

IRS Adds to Lists of Countries Subject to Bank Interest Reporting Requirements

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December 9, 2016

Earlier this week, the IRS issued Revenue Procedure 2016-56 to add to the list of countries subject to the reporting requirements of Code section 6049, which generally relate to reporting on bank interest paid to nonresident alien individuals.  Specifically, the Revenue Procedure adds Saint Lucia to the list of countries with which the U.S. has a bilateral tax information exchange agreement, and adds Saint Lucia, Israel, and the Republic of Korea to the list of countries with which Treasury and IRS have determined the automatic exchange of information to be appropriate.

Prior to 2013, interest on bank deposits was generally not required to be reported if paid to a nonresident alien other than a Canadian. In 2012, the IRS amended Treas. Reg. § 1.6049-8 in an effort to provide bilateral information exchanges under the intergovernmental agreements between the United States and partner jurisdictions that were being agreed to as part of the implementation of the Foreign Account Tax Compliance Act (FATCA).  In many cases, those agreements require the United States to share information obtained from U.S. financial institutions with foreign tax authorities.  Under the amended regulation, certain bank deposit interest paid on accounts held by nonresident aliens who are residents of certain countries must be reported to the IRS so that the IRS can satisfy its obligations under the agreements to provide such information reciprocally.

The bank interest reportable under Treas. Reg. § 1.6049-8(a) includes interest: (i) paid to a nonresident alien individual; (ii) not effectively connected with a U.S. trade or business; (iii) relating to a deposit maintained at an office within the U.S., and (iv) paid to an individual who is a resident of a country properly identified as one with which the U.S. has a bilateral tax information exchange agreement.  Under Treas. Reg. § 1.6049-4(b)(5), for such bank interest payable to a nonresident alien individual that exceeds $10, the payor must file Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” for the year of payment.

The list of countries will likely continue to expand as more countries enter into tax information exchange agreements with the U.S. in order to implement FATCA.

IRS Guidance Provides Transition Relief for Withholding Agents and Qualified Derivative Dealers under Section 871(m)

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December 7, 2016

Last week, the IRS issued Notice 2016-76 providing phased-in application of certain section 871(m) withholding rules applicable to dividend equivalents.  In addition to providing good-faith relief to certain transactions in 2017 and 2018, the Notice eases several reporting and withholding requirements for withholding agents and qualified derivatives dealers (QDDs).

Section 871(m) of the Code imposes withholding on certain payments that are determined by reference to or contingent upon the payment of a U.S. source dividend.  Thus, when a foreign financial institution issues derivatives based on U.S. equities to non-U.S. investors, it must withhold on the dividend payments it makes to the non-U.S. investors.  In 2015, the IRS issued final and temporary regulations (T.D. 9734) specifying certain withholding and reporting requirements under section 871(m).  Earlier this summer, the IRS proposed a qualified intermediary (QI) agreement (Notice 2016-42) that spells out a new QDD regime, which was developed to mitigate cascading withholding that would occur as a result of the withholding requirements imposed on dividend equivalents (see prior coverage).

Good-Faith Relief

Notice 2016-76 provides good-faith transition relief during 2017 for delta-one transactions and during 2018 for non-delta-one transactions.  (Delta means the “ratio of a change in the fair market value of a contract to a small change in the fair market value of the property referenced by the contract.”  A delta-one transaction is a transaction in which changes in the fair market value of the derivative precisely mirror changes in the fair market value of the underlying property.)  The IRS will take into account the extent to which a taxpayer or withholding agent made “a good faith effort” to comply with the section 871(m) regulations.  Relevant factors include a withholding agent’s efforts to build or update documentation and withholding systems and comply with the transition rules under Notice 2016-76.

Quarterly Deposit of Withholdings in 2017

During 2017, a withholding agent will be considered to have satisfied the deposit requirements for section 871(m) dividend equivalent payments if it deposits amounts withheld during any calendar quarter by the last day of that quarter.  The agent should write “Notice 2016-76” on the center, top portion of the 2017 Form 1042.

Qualified Derivative Dealers

The Notice also eased, in four ways, the reporting obligations of intermediaries applying for QDD status.  First, the IRS’s enforcement of the QDD rules and the 871(m) regulations in 2017 will take into account good-faith efforts by intermediaries to comply with the regulations and the QI agreement.

Second, the Notice allows an intermediary to certify its QDD status during interim periods.  Generally, a QDD must provide a valid Form W-8IMY certifying QDD status to a withholding agent, and the agent is not required to withhold on its payments regarding a potential or actual section 871(m) transaction to a QDD in its QDD capacity.  An intermediary that has submitted a QI application by March 31, 2017 may claim QDD status on Form W-8IMY for six months after submitting the application, pending approval of its QI agreement and QDD status.  If an intermediary has not yet submitted a QI application but intends to do so by March 31, 2017, it may claim QDD status on Form W-8IMY until the end of the sixth full month after the month in which it actually submits the QI application (provided the application is submitted by March 31, 2017).  An intermediary may not represent QDD status if it no longer intends to submit an application by March 31, 2017, or if its application has been denied.

Third, the Notice allows an intermediary to provide a Form W-8IMY certifying its QDD status to a withholding agent before it has received a QI-EIN from the IRS.  The intermediary must write “awaiting QI-EIN” on line 8 of Part I of the Form W-8IMY.  While the intermediary must provide its QI-EIN to the withholding agent as soon as practicable after receiving it, the intermediary need not provide a newly executed form, provided the original form remains accurate and valid.  If QDD status is denied, however, an intermediary must notify the withholding agent immediately, and the agent must notify the IRS such notification when it files its Form 1042, listing the name and EIN (if available) of any intermediary whose QDD status was withdrawn for any of these reasons.

A withholding agent may rely on the “awaiting QI-EIN” statement unless it knows or has reason to know that the intermediary cannot validly represent that it is a QDD.  Thus, a withholding agent is not required to determine when a QDD has applied for or actually possesses a QI agreement.  Nor is it required to verify whether a QDD’s EIN is a QI-EIN.  A withholding agent may only rely on an “awaiting QI-EIN” statement for up to six months after receiving the form, unless a QI-EIN is provided within that time.

Fourth, the Notice provides that failure-to-deposit penalties will not be assessed against a QDD before it actually receives its QI-EIN (which the IRS issues upon approving a QI application).  This relief from penalty is available only if the QDD deposits the amounts withheld within 3 days of receiving its QI-EIN.  Extended relief is available to a QDD that applies to enroll in the Electronic Federal Tax Payment Systems (EFTPS) within 30 days of receiving a QI-EIN, provided that the QDD deposits the amounts withheld within 3 days of enrolling in EFTPS.

Other Rules

The Notice also addressed other issues under the section 871(m) regulations.  Specifically, the Notice provided: (a) a simplified standard that withholding agents may use to determine whether transactions are combined transactions under Treas. Reg. §1.871-15(n); (b) a net-delta exposure test for a QDD’s section 871(m) amount; and (c) transition relief for certain existing exchange-traded notes listed in section V.d of the Notice until January 1, 2020.

First Friday FATCA Update

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December 2, 2016

Recently, the IRS released the Competent Authority Agreements (CAAs) implementing the intergovernmental agreements (IGAs) between the United States and the following treaty partners:

  • Qatar (Model 1B IGA signed on January 7, 2015);
  • Kosovo (Model 1B IGA signed on February 26, 2015).

Under FATCA, IGAs come in two forms: Model 1 or Model 2.  Under a Model 1 IGA, the foreign treaty partner agrees to collect information of U.S. accountholders in foreign financial institutions (FFIs) operating within its jurisdiction and transmit the information to the IRS.  Model 1 IGAs are drafted as either reciprocal (Model 1A) agreements or nonreciprocal (Model 1B) agreements.  By contrast, Model 2 IGAs are issued in only a nonreciprocal format and require FFIs to report information directly to the IRS.

A CAA is a bilateral agreement between the United States and the treaty partner to clarify or interpret treaty provisions.  A CAA implementing an IGA typically establishes and prescribes the rules and procedures necessary to implement certain provisions in the IGA and the Tax Information Exchange Agreement, if applicable.  Specific topics include registration of the treaty partner’s financial institutions, time and manner of exchange of information, remediation and enforcement, confidentiality and data safeguards, and cost allocation.  Generally, a CAA becomes operative on the later of (1) the date the IGA enters into force, or (2) the date the CAA is signed by the competent authorities of the United States and the treaty partner.

The Treasury Department website publishes IGAs, and the IRS publishes their implementing CAAs.

First Friday FATCA Update

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November 4, 2016

Recently, the Treasury released the Model 1A Intergovernmental Agreement (IGA) entered into between the United States and Guyana.  The IRS also released the Competent Authority Agreement (CAA) implementing the Model 1B IGA between the United States and Kuwait entered into on April 29, 2015.

Since our last monthly FATCA update, we have also addressed one other recent FATCA development:

  • Rep. Edward R. Royce (R-Calif.) recently introduced in the House of Representatives a bill that would exempt premiums paid on non-cash-value property and casualty insurance from coverage under FATCA (see previous coverage).

Under FATCA, IGAs come in two forms: Model 1 or Model 2.  Under a Model 1 IGA, the foreign treaty partner agrees to collect information of U.S. accountholders in foreign financial institutions (FFIs) operating within its jurisdiction and transmit the information to the IRS.  Model 1 IGAs are drafted as either reciprocal (Model 1A) agreements or nonreciprocal (Model 1B) agreements.  By contrast, Model 2 IGAs are issued in only a nonreciprocal format and require FFIs to report information directly to the IRS.

A CAA is a bilateral agreement between the United States and the treaty partner to clarify or interpret treaty provisions.  A CAA implementing an IGA typically establishes and prescribes the rules and procedures necessary to implement certain provisions in the IGA and the Tax Information Exchange Agreement, if applicable.  Specific topics include registration of the treaty partner’s financial institutions, time and manner of exchange of information, remediation and enforcement, confidentiality and data safeguards, and cost allocation.  Generally, a CAA becomes operative on the later of (1) the date the IGA enters into force, or (2) the date the CAA is signed by the competent authorities of the United States and the treaty partner.

The Treasury Department website publishes IGAs, and the IRS publishes their implementing CAAs.

New Bill Would Exempt Premiums Paid on Non-Cash-Value Property Insurance From FATCA Withholding

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October 13, 2016

Rep. Edward R. Royce (R-Calif.) recently introduced in the House of Representatives a bill that would exempt premiums paid on non-cash-value property and casualty insurance from coverage under the Foreign Account Tax Compliance Act (FATCA).  Specifically, H.R. 6159 would amend the definition of “withholdable payment,” to which FATCA reporting and withholding rules apply, under Code Section 1473(1) to exempt premiums paid for any insurance contract that has an aggregate cash value of zero or less, and that is not considered for purposes of determining whether the insurance company is a life insurance company under Code Section 816.  Cash value generally means the amount that is payable to the policyholder upon policy surrender or termination, or that can be borrowed, except that cash value does not include any death, sickness, or casualty loss benefit, refund of and dividends not exceeding premiums paid (less cost of insurance charges), and certain advance premium or deposit.  In other words, the proposed bill would exclude from FATCA coverage premiums paid on property and casualty insurance that does not have an investment or earnings component.

Currently, FATCA withholding potentially applies to all insurance premiums, regardless of whether the premiums are for life insurance, annuities, or property and casualty coverage, if the payments are made to a nonparticipating FFI or passive NFFE.  However, many non-U.S. property and casualty insurers are excepted NFFEs that are not subject to withholding.  The proposed legislation would streamline the documentation process required for withholding agents making property and casualty insurance premium payments for U.S. risks as the withholding agents would no longer be required to document the FATCA status of the insurance company they are paying.  Because such premiums are generally not subject to Chapter 3 withholding, the premium payments could in many cases be made without the need for a Form W-8BEN-E from the insurer.  Some insurance buyers currently pay premiums to foreign insurance companies through a U.S. insurance broker to avoid the requirement to collect documentation from non-U.S. insurers because the FATCA rules treat such payments as a payment to a U.S. person, provided that the buyer does not know or have reason to know that the broker will not comply with its withholding obligations under FATCA.

First Friday FATCA Update

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October 7, 2016

Recently, the Treasury released the Model 1A Intergovernmental Agreement (IGA) entered into between the United States and the Dominican Republic.  The IRS also released the Competent Authority Agreement (CAA) implementing the Model 1B IGA between the United States and the Vatican City State entered into on June 10, 2015.

Since our last monthly FATCA update, we have also addressed other recent FATCA developments:

  • New legislation, H.R. 5935, has been introduced in Congress to repeal FATCA, on the basis that FATCA violates Americans’ Fourth Amendment privacy rights (see previous coverage).
  • On September 1, Justice Hanan Meltzer of Israel’s High Court of Justice issued a temporary injunction preventing exchange of tax information under FATCA with the United States (see previous coverage).  After a hearing on September 12, however, a three-judge panel lifted the injunction, rejecting the plaintiffs’ arguments that this exchange of tax information under FATCA violates human rights and privacy laws.

Under FATCA, IGAs come in two forms: Model 1 or Model 2.  Under a Model 1 IGA, the foreign treaty partner agrees to collect information of U.S. accountholders in foreign financial institutions (FFIs) operating within its jurisdiction and transmit the information to the IRS.  Model 1 IGAs are drafted as either reciprocal (Model 1A) agreements or nonreciprocal (Model 1B) agreements.  By contrast, Model 2 IGAs are issued in only a nonreciprocal format and require FFIs to report information directly to the IRS.

A CAA is a bilateral agreement between the United States and the treaty partner to clarify or interpret treaty provisions.  A CAA implementing an IGA typically establishes and prescribes the rules and procedures necessary to implement certain provisions in the IGA and the Tax Information Exchange Agreement, if applicable.  Specific topics include registration of the treaty partner’s financial institutions, time and manner of exchange of information, remediation and enforcement, confidentiality and data safeguards, and cost allocation.  Generally, a CAA becomes operative on the later of (1) the date the IGA enters into force, or (2) the date the CAA is signed by the competent authorities of the United States and the treaty partner.

The Treasury Department website publishes IGAs, and the IRS publishes their implementing CAAs.

Another Attempt to Repeal FATCA Is Introduced to Congress

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September 12, 2016

New legislation, H.R. 5935, has been introduced in Congress to repeal the Foreign Account Tax Compliance Act (FATCA), on the basis that FATCA violates Americans’ Fourth Amendment privacy rights.  Rep. Mark Meadows (R-NC) introduced the bill to the House on September 7, along with two original cosponsors.  The alleged privacy violations stem from requirements in FATCA that force foreign financial institutions to report all account holdings and assets of U.S. taxpayers to the IRS, or else face potential penalties in the form of 30% withholding on all U.S. source income.  According to Rep. Meadows’s press release, FATCA “requires a level” of disclosure that violates the Fourth Amendment, though Rep. Meadows offers no specific support for this claim.

If history is any indication, this latest repeal effort will fall flat. Prior attempts have been made to repeal FATCA, such as Senate Amendment 621 and Senate Bill 663, but none have succeeded.  Though S. 663 has not yet been officially defeated, its sponsor, Sen. Rand Paul, has pursued a lawsuit making similar claims without success, as we discussed in a prior post.

Israeli Court Threatens to Undermine FATCA Agreement

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September 8, 2016

Israel was nearing completion of the steps required to comply with the Foreign Account Tax Compliance Act (FATCA), but its attempt to comply may be in sudden jeopardy thanks to a recent Israeli court decision.  FATCA exchanges were to begin on September 1, but Justice Hanan Meltzer issued a temporary injunction that day that prevents FATCA-related regulations that would have permitted the exchange of information with the United States from going into effect.  The injunction was issued in response to a request filed August 8 by a group named Republicans Overseas Israel.  An emergency hearing is scheduled for September 12.

In July 2014, Israel signed an intergovernmental agreement with the United States to implement FATCA, under which it agreed to pass regulations to bring Israel into compliance with the agreement.  The Israeli parliament (Knesset) approved such regulations on August 2, which would have required Israeli financial institutions to report on certain accounts held by U.S. citizens to the Israel tax authority by September 20.  Financial institutions that failed to comply would face monetary penalties, in addition to the penalties that are required under FATCA, including 30% withholding on payments from the United States.

First Friday FATCA Update

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September 2, 2016

Recently, the Treasury released the Model 1A Intergovernmental Agreement (IGA) entered into between the United States and Trinidad and Tobago.

The IRS also released the Competent Authority Agreements (CAAs) implementing the IGAs between the United States and the following treaty partners:

  • Cambodia (Model 1B IGA signed on September 14, 2015);
  • United Arab Emirates (Model 1B IGA signed on June 17, 2015);
  • Turks and Caicos Islands (Model 1B IGA signed on December 1, 2014).

Under FATCA, IGAs come in two forms: Model 1 or Model 2.  Under a Model 1 IGA, the foreign treaty partner agrees to collect information of U.S. accountholders in foreign financial institutions (FFIs) operating within its jurisdiction and transmit the information to the IRS.  Model 1 IGAs are drafted as either reciprocal (Model 1A) agreements or nonreciprocal (Model 1B) agreements.  By contrast, Model 2 IGAs are issued in only a nonreciprocal format and require FFIs to report information directly to the IRS.

A CAA is a bilateral agreement between the United States and the treaty partner to clarify or interpret treaty provisions.  A CAA implementing an IGA typically establishes and prescribes the rules and procedures necessary to implement certain provisions in the IGA and the Tax Information Exchange Agreement, if applicable.  Specific topics include registration of the treaty partner’s financial institutions, time and manner of exchange of information, remediation and enforcement, confidentiality and data safeguards, and cost allocation.  Generally, a CAA becomes operative on the later of (1) the date the IGA enters into force, or (2) the date the CAA is signed by the competent authorities of the United States and the treaty partner.

The Treasury Department website publishes IGAs, and the IRS publishes their implementing CAAs.

First Friday FATCA Update

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August 5, 2016

Recently, the IRS released the Competent Authority Agreements (CAAs) implementing the Intergovernmental Agreements (IGAs) between the United States and the following treaty partners:

  • Georgia (Model 1B IGA signed on July 10, 2015);
  • British Virgin Islands (Model 1B IGA signed on June 30, 2014).

Since our last monthly FATCA update, we have also addressed other recent FATCA developments:

  • The IRS announced that on January 1, 2017, Treasury will update the IGA list to provide that certain jurisdictions that have not brought their IGA into force will no longer be treated as if they have an IGA in effect (see previous coverage).
  • The United States and Singapore issued a joint statement announcing that they are negotiating a Tax Information Exchange Agreement and Reciprocal Model 1A IGA to replace the nonreciprocal Model 1B IGA currently in effect (see previous coverage).

Under FATCA, IGAs come in two forms: Model 1 or Model 2.  Under a Model 1 IGA, the foreign treaty partner agrees to collect information of U.S. accountholders in foreign financial institutions (FFIs) operating within its jurisdiction and transmit the information to the IRS.  Model 1 IGAs are drafted as either reciprocal (Model 1A) agreements or nonreciprocal (Model 1B) agreements.  By contrast, Model 2 IGAs are issued in only a nonreciprocal format and require FFIs to report information directly to the IRS.

A CAA is a bilateral agreement between the United States and the treaty partner to clarify or interpret treaty provisions.  A CAA implementing an IGA typically establishes and prescribes the rules and procedures necessary to implement certain provisions in the IGA and the Tax Information Exchange Agreement, if applicable.  Specific topics include registration of the treaty partner’s financial institutions, time and manner of exchange of information, remediation and enforcement, confidentiality and data safeguards, and cost allocation.  Generally, a CAA becomes operative on the later of (1) the date the IGA enters into force, or (2) the date the CAA is signed by the competent authorities of the United States and the treaty partner.

The Treasury Department website publishes IGAs, and the IRS publishes their implementing CAAs.

Singapore Seeks Reciprocal IGA to replace Nonreciprocal IGA Currently In Effect

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August 3, 2016

During a state visit by Singapore Prime Minister Lee Hsien Loong, Singapore and the United States announced they were negotiating a reciprocal Model 1 IGA.  The countries had previously entered into a nonreciprocal Model 1 IGA in 2014 that went into effect on March 28, 2015.  Unless Congress enacts legislation providing for greater collection of information from U.S. financial institutions, the reciprocal agreement will provide for limited exchange of information regarding Singapore residents who maintain accounts with U.S. financial institutions.  The obligations of Singapore financial institutions would be unchanged.  As part of the effort, the countries are negotiating the terms of a Tax Information Exchange Agreement (TIEA), and continue to discuss whether an income tax treaty should be negotiated.  According to the statement, the countries hope to complete negotiations on the TIEA and reciprocal IGA by the end of 2017.

Treasury to Remove Jurisdictions from List of Countries Treated as Having IGAs in Effect

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August 1, 2016

Last week, the IRS announced that on January 1, 2017, the U.S. Treasury will remove some jurisdictions from the list of foreign jurisdictions that are treated as having intergovernmental agreements (IGAs) in effect.  To remain on the list after December 31, 2016, each jurisdiction that seeks to continue to be treated as having an IGA in effect must provide to the Treasury a detailed explanation of its failure to bring an IGA into force and a step-by-step plan and timeline for signing the IGA, or if the IGA has already been signed, to bring the IGA into force.  Since 2013, the Treasury has provided a list of jurisdictions that are as having an IGA in force as long as the jurisdiction is taking “reasonable steps” or showing “firm resolve” to sign the IGA (if no IGA has been signed) or to bring the IGA into force.

As of today, the United States has signed IGAs with 83 jurisdictions and 61 of those IGAs are in effect.  Another 30 jurisdictions are considered to have an agreement in substance, but have not yet signed an IGA.  The jurisdictions who are treated as having an IGA in effect that have not yet signed an agreement or who have signed an agreement but not yet brought it into effect are: Anguilla, Antigua and Barbuda, Armenia, Bahrain, Belgium, Cabo Verde, Cambodia, Chile, Costa Rica, Croatia, Curaçao, Dominica, Dominican Republic, Georgia, Greece, Greenland, Grenada, Guyana, Haiti, Hong Kong, Indonesia, Iraq, Israel, Kazakhstan, Macao, Malaysia, Montenegro, Montserrat, Nicaragua, Paraguay, Peru, Philippines, Portugal, San Marino, Saudi Arabia, Serbia, Seychelles, South Korea, St. Lucia, Taiwan, Thailand, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Ukraine, United Arab Emirates, and Uzbekistan.

Under FATCA, an IGA is a bilateral agreement between the United States and a foreign jurisdiction to collect information related to U.S. accountholders at foreign financial institutions (FFIs) in the foreign jurisdiction and transmit the information to the IRS.  If a foreign jurisdiction lacks an IGA in force, then FFIs in that jurisdiction face greater FATCA compliance burdens.  First, they must register with the IRS as participating FFIs (rather than registered deemed compliant FFIs) to avoid the mandatory 30% withholding on payments of U.S. source FDAP income that they receive.  This subjects them to the full requirements of the Treasury Regulations governing FATCA rather than the streamlined procedures in the IGAs.  Further, they are often subject to conflicting obligations, because the foreign jurisdiction may have privacy or bank laws that conflict with the disclosure requirements of FATCA.

In the announcement, the IRS stressed that a jurisdiction initially determined to have shown firm resolve to bring an IGA into force will not retain that status indefinitely (e.g., if the jurisdiction fails to follow its proposed plan and timeline for bringing an IGA into force).  If the IRS determines that a jurisdiction ceases to be treated as having an IGA effect, an FFI in the jurisdiction generally will have to enter into a FFI Agreement to comply with the FFI’s FATCA reporting obligations within 60 days.

FATCA Update*

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July 12, 2016

Recently, the IRS released the Competent Authority Agreements (CAAs) implementing the Intergovernmental Agreements (IGAs) between the United States and the following treaty partners:

  • Portugal (Model 1A IGA signed on August 6, 2015);
  • St. Vincent and the Grenadines (Model 1B IGA signed on August 18, 2015).

Since our last monthly FATCA update, we have also addressed other recent FATCA developments:

  • The IRS announced that it will conduct a test of the International Data Exchange Services (IDES) system beginning on July 18, 2016 (see previous coverage).
  • The IRS issued a proposed qualified intermediary (QI) agreement (Notice 2016-42) that spells out the new qualified derivatives dealer (QDD) regime (see previous coverage).
  • Argentina’s Federal Administration of Public Revenue (AFIP) was reported to begin negotiating an IGA with the U.S. Treasury Department to ease compliance with FATCA (see previous coverage).
  • The Supreme Court denied the petition for certiorari filed by two bankers associations that sought to challenge the validity of FATCA regulations that impose a penalty on banks that fail to report interest income earned by nonresident aliens on accounts in U.S. banks (see previous coverage).

Under FATCA, IGAs come in two forms: Model 1 or Model 2.  Under a Model 1 IGA, the foreign treaty partner agrees to collect information of U.S. accountholders in foreign financial institutions (FFIs) operating within its jurisdiction and transmit the information to the IRS.  Model 1 IGAs are drafted as either reciprocal (Model 1A) agreements or nonreciprocal (Model 1B) agreements.  By contrast, Model 2 IGAs are issued in only a nonreciprocal format and require FFIs to report information directly to the IRS.

A CAA is a bilateral agreement between the United States and the treaty partner to clarify or interpret treaty provisions.  A CAA implementing an IGA typically establishes and prescribes the rules and procedures necessary to implement certain provisions in the IGA and the Tax Information Exchange Agreement, if applicable.  Specific topics include registration of the treaty partner’s financial institutions, time and manner of exchange of information, remediation and enforcement, confidentiality and data safeguards, and cost allocation.  Generally, a CAA becomes operative on the later of (1) the date the IGA enters into force, or (2) the date the CAA is signed by the competent authorities of the United States and the treaty partner.

The Treasury Department website publishes IGAs, and the IRS publishes their implementing CAAs.

* This post should have been published on Friday, July 1, but was delayed.  We typically publish the First Friday FATCA updates on the first Friday of each month.

Testing Period Scheduled for Form 8966 Electronic Submission Process

The IRS announced that it will conduct a test of the International Data Exchange Services (IDES) system beginning on July 18, 2016.  The IDES system allows financial institutions and foreign tax authorities to securely transmit data directly to the IRS.  One of the forms that financial institutions must submit through the IDES system is Form 8966, “FATCA Report,” which is used by foreign financial institutions to report certain U.S. accounts, substantial U.S. owners of passive non-financial foreign entities, and other required information.

Any foreign financial institution that will submit a Form 8966 through the IDES system once the system goes into effect may want to participate in this testing period.  Participation in the testing period is open to any financial institution that has completed IDES Enrollment before 5:00pm EST on July 14, 2016, which can be done online.  The testing period is scheduled to close on July 29, 2016.

Proposed QI Agreement Includes Rules for Qualified Derivatives Dealers

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July 7, 2016

The IRS recently issued a proposed qualified intermediary (QI) agreement (Notice 2016-42) that spells out the new qualified derivatives dealer (QDD) regime.  The final QI agreement will be issued later in 2016 and will apply to agreements in starting January 1, 2017, replacing the 2014 QI agreement that will expire on December 31, 2016.  The QDD regime replaces the qualified securities lender (QSL) regime in Notice 2010-46.  The QSL rules will continue to apply for substitute dividend payments made under sale-repurchase or securities lending transactions.

The QDD regime was developed to mitigate cascading withholding that would occur as a result of the withholding requirements imposed on “dividend equivalents.”  Section 871(m) of the Code imposes withholding on certain payments that are determined by reference to or contingent upon the payment of a U.S. source dividend.  As a result, when a foreign financial institution holds U.S. equities and issues derivatives to non-U.S. investors that are based on the stock, it may be subject to withholding on dividend payments made with respect to the underlying equities and have to withhold on the payments it makes to the holders of the derivatives.

Under the proposed QI agreement, only a subset of QIs called “eligible entities” will be permitted to act as QDDs.  Eligible entities are: (1) regulated securities dealers; (2) regulated banks; and (3) certain entities wholly-owned by regulated banks.  Under the QDD regime, a dividend payment to a QDD is not subject to withholding if the QDD provides the withholding agent with a Form W-8IMY indicating the QDD’s status.  The QDD certification is made on Form W-8IMY even though the QDD is acting as a principal with respect to the transaction.

If a QI acts as a QDD, it must act as a QDD for all payments made as a principal with respect to potential Section 871(m) transactions, including any sale-repurchases or securities lending transactions that qualify as such, and all payments received as a principal with respect to potential Section 871(m) transactions and underlying securities, excluding payments effectively connected with a U.S. trade or business. All securities lending and sale-repurchase transactions the QI enters into that are Section 871(m) transactions will be deemed to be entered into by the QI as a principal.

When a QI is acting as a QDD, it must assume primary withholding responsibilities under Chapters 3 and 4 and primary Form 1099 reporting and Section 3406 backup withholding responsibility for all payments related to potential Section 871(m) transactions that it receives as a principal—even if such payments are not dividend equivalent payments.  As a consequence, a QDD will be required to withhold to the extent required for the applicable dividend on the dividend payment date.  In contrast, when a QI is acting as intermediary, i.e., not as a principal, with respect to such a payment, it may choose to act as a QI (and choose whether or not to assume primary withholding and reporting responsibility with respect to the payment) or a nonqualified intermediary (NQI).

A QDD is liable for any tax on any dividends and dividend equivalents it receives in its dealer capacity to the extent the QDD is not contractually required to make offsetting payments that reference the same dividend or dividend equivalent that it received as a dealer.  For purposes of determining the QDD tax liability, payments received by a QDD acting as a proprietary trader are treated as payments received in a non-dealer capacity, while transactions properly reflected in a QDD’s dealer book are presumed to be held in its dealer capacity.  A QDD will reports its QDD tax liability on Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons.  When a foreign branch of a U.S. financial institution acts as a QDD, the branch is not required to report the QDD tax liability for income related to potential Section 871(m) transactions and underlying securities; instead, the U.S. financial institution will file the appropriate tax return to report and pay its tax liability.

The proposed QI agreement also updated requirements relating to periodic review and certification of compliance, substitute interest, limitation of benefits for treaty claims, and other items.

Argentina Reported To Begin Negotiating IGA With United States

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June 27, 2016

In the next few weeks, Argentina’s Federal Administration of Public Revenue (AFIP) will begin negotiating an intergovernmental agreement (IGA) with the U.S. Treasury Department to ease compliance with the Foreign Account Tax Compliance Act (“FATCA”), according to La Nacion. Neither AFIP nor the U.S. Treasury or the IRS, however, has announced possible negotiations. Argentina and Russia are the only two individual countries in the G20 that have yet to enter into IGAs with the United States. Many banks operating in Argentina registered with the IRS as participating FFIs to avoid mandatory 30% withholding on payments of U.S. source FDAP income that they receive. The lack of an IGA complicates compliance because the Argentinian bank secrecy and privacy laws conflict with the disclosure requirements of FATCA. The banks sought to avoid violating such laws by seeking consent from U.S. account holders to disclose the information required by FATCA.

Under FATCA, IGAs come in two forms: Model 1 or Model 2. Under a Model 1 IGA, the foreign treaty partner agrees to collect information of U.S. accountholders in foreign financial institutions (FFIs) operating within its jurisdiction and transmit the information to the IRS. Model 1 IGAs are drafted as either reciprocal (Model 1A) agreements or nonreciprocal (Model 1B) agreements. By contrast, Model 2 IGAs are issued in only a nonreciprocal format and require FFIs to report information directly to the IRS. The report in La Nacion does not indicate which model Argentina plans to seek, but suggests that they may seek to put in place a Model 1A agreement that would allow for the exchange of information on Argentinian citizens with accounts in U.S. financial institutions.

U.S. Supreme Court Denies Cert Petition in Case Challenging Information Reporting Requirements

The Supreme Court denied the petition for certiorari filed by two bankers associations that sought to challenge the validity of IRS regulations issued under the Foreign Account Tax Compliance Act (FATCA) that impose a penalty on banks that fail to report interest income earned by nonresident aliens on accounts in U.S. banks.

The denial leaves in place a divided D.C. Circuit panel decision holding that the Anti-Injunction Act (AIA) bars the bankers associations from challenging the validity of the regulations.  The associations argued that a recent Supreme Court decision regarding the similar Tax Injunction Act, which relates to state taxation, allowed them to file suit under the Administrative Procedure Act to enjoin certain IRS information reporting requirements when the information is not subject to domestic taxation and the noncompliance penalty does not constitute a restraint on the “assessment or collection” of a tax.  The D.C. Circuit accepted the government’s contention that because the penalties for noncompliance under Sections 6721 and 6722 are treated as a tax, the AIA bars pre-assessment challenges to the reporting requirements of the regulations.

The decision leaves those required to file information returns without recourse to challenge an information reporting requirement unless they forego the required reporting and are assessed a penalty under Section 6721 or 6722.

Additional discussion of this case can be found in our April 27 and March 1 posts.

First Friday FATCA Update

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June 3, 2016

Since our last monthly FATCA update, the Treasury Department has not released any new Intergovernmental Agreements nor has the IRS released any new Competent Authority Agreements under the Foreign Account Tax Compliance Act (FATCA). There have been, however, two recent FATCA developments:

  • On June 2, 2016, an IRS official stated that proposed and temporary regulations limiting refunds and credits claimed by nonresident alien individuals and foreign corporations for taxes withheld under Chapter 3 and Chapter 4 (FATCA) of the Code will soon be released (see previous coverage).
  • On May 27, 2016, the IRS updated the technical FAQs (see previous coverage) for the International Data Exchange Service (IDES) used by foreign financial institutions (FFIs) and other organizations to file information returns required by FATCA.

Regulations Limiting Refunds and Credits for Chapter 3 and Chapter 4 Withholding Due Soon

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June 3, 2016

John Sweeney, Branch 8 Chief in the IRS Office of Associate Chief Counsel International, said on June 2 that proposed and temporary regulations limiting refunds and credits claimed by nonresident alien individuals and foreign corporations for taxes withheld under Chapter 3 and Chapter 4 of the Code will be released soon.  According to Sweeney, who was speaking at the Federal Bar Association Insurance Tax Seminar, most of the work on the regulations is complete.

The IRS announced its intent to amend the regulations under Chapter 3 and Chapter 4 last year in Notice 2015-10.  According to the notice, the temporary regulations will amend Treas. Reg. §§ 1.1464-1(a) and 1.1474-5(a)(1) to provide that, subject to section 6401(b), a refund or credit is allowable with respect to an overpayment only to the extent the relevant withholding agent has deposited (or otherwise paid to the Treasury Department) the amount withheld and such amount is in excess of the claimant’s tax liability.  The IRS said the regulation is needed because allowing a credit or refund based on the amount reported as withheld on Form 1042-S represents a risk to the Treasury if a foreign withholding agent fails to deposit the withheld tax with the U.S. Treasury.  The IRS has limited ability to pursue foreign withholding agents for such failures making it difficult to recover the amounts allowed to be claimed as credits or refunds.

According to Sweeney, the regulations will adopt the pro rata method described in Notice 2015-10 for allocating the amount available for refund or credit with respect to each claimant. Under this method, a withholding agent’s deposits made to its Form 1042 account will be divided by the amount reported as withheld on all Forms 1042-S filed by the withholding agent to arrive at a “deposit percentage.”  Each claimant will then be allowed to claim as a credit or refund the amount reported on its Form 1042-S multiplied by the deposit percentage for the withholding agent.  The pro rata approach is necessary because of the inability for the IRS to trace deposits back to specific payments made to a claimant based on the information reported on Form 1042 and Form 1042-S.

IRS Updates IDES Technical FAQs for FATCA

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May 31, 2016

On May 27, the IRS updated the technical FAQs for the International Data Exchange Service (IDES) used by foreign financial institutions (FFIs) and other organizations to file information returns required by the Foreign Account Tax Compliance Act.  Among other changes, the IRS provided a work-around for direct-reporting non-financial foreign entities (direct reporting NFFEs) that must register with the IRS and file annual FATCA reports disclosing certain information regarding their substantial U.S. owners.

In general, passive NFFEs provide information on their substantial U.S. owners to withholding agents on Form W-8BEN-E.  However, a passive NFFE may register as a direct reporting NFFE and receive a global intermediary identification number (GIIN)  from the IRS.  A direct reporting NFFE provides information on its substantial U.S. owners to the IRS and provides its GIIN on Form W-8BEN-E rather than providing the information on its substantial U.S. owners to withholding agents.

Because FFIs in Model 1 IGA jurisdictions report information on their U.S. account holders to local tax authorities who then exchange the information with the IRS via IDES, the IDES system does not accept registrations from entities in Model 1 IGA jurisdictions.  This is a problem for direct-reporting NFFEs in Model 1 IGA jurisdictions that must use IDES to file Form 8966 (FATCA Report).  As a workaround, FAQ A17 instructs such direct-reporting NFFEs to register using “Other” as their country of tax residence in Question 3A, provide its country of jurisdiction/tax residence tax identification number in question 3B, and select “None of the Above” for the entity’s FATCA Classification in its country of jurisdiction/tax residence.

Other updates included the addition of FAQ B11 regarding which issues were corrected in an April 2016 maintenance release, an update to FAQ E21 regarding the exchange of the initialization vector as part of CBC cipher mode, and the addition of FAQ E22 regarding the effect on recently uploaded files of updating the public key certificate.

First Friday FATCA Update

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May 6, 2016

Recently, the IRS released the Intergovernmental Agreements (IGAs) entered into between the United States and the following foreign treaty partners, in these respective forms:

  • Vietnam, Model 1B;
  • Panama, Model 1A.

The IRS also released the Competent Authority Agreements (CAAs) implementing the IGAs between the United States and the following treaty partners:

  • Bulgaria (Model 1B IGA signed on December 5, 2014);
  • Curacao (Model 1A IGA signed on December 16, 2014);
  • Cyprus (Model 1A IGA signed on December 12, 2014);
  • France (Model 1A IGA signed on November 14, 2013);
  • Israel (Model 1A IGA signed on June 30, 2014);
  • Philippines (Model 1A IGA signed on July 13, 2015);
  • Saint Lucia (Model 1A IGA signed on November 19, 2015);
  • Slovak Republic (Model 1A IGA signed on July 31, 2015).

Since our last monthly FATCA update, we have also addressed other recent FATCA developments:

  • The U.S. government filed its brief in opposition to a petition for certiorari seeking Supreme Court review of FATCA reporting requirements for foreign account holders (see previous coverage).
  • The U.S. District Court for the Southern District of Ohio, in Crawford v. United States Department of the Treasury, dismissed a challenge to FATCA brought by Senator Rand Paul and several current and former U.S. citizens living abroad on standing grounds (see previous coverage).
  • The IRS released a new Form W-8BEN-E – which is used by foreign entities to report their U.S. tax status and identity to withholding agents – along with updated instructions (see previous coverage).

Under FATCA, IGAs come in two forms: Model 1 or Model 2.  Under a Model 1 IGA, the foreign treaty partner agrees to collect information of U.S. accountholders in foreign financial institutions (FFIs) operating within its jurisdiction and transmit the information to the IRS.  Model 1 IGAs are drafted as either reciprocal (Model 1A) agreements or nonreciprocal (Model 1B) agreements.  By contrast, Model 2 IGAs are issued in only a nonreciprocal format and require FFIs to report information directly to the IRS.

A CAA is a bilateral agreement between the United States and the treaty partner to clarify or interpret treaty provisions.  A CAA implementing an IGA typically establishes and prescribes the rules and procedures necessary to implement certain provisions in the IGA and the Tax Information Exchange Agreement, if applicable.  Specific topics include registration of the treaty partner’s financial institutions, time and manner of exchange of information, remediation and enforcement, confidentiality and data safeguards, and cost allocation.  Generally, a CAA becomes operative on the later of (1) the date the IGA enters into force, or (2) the date the CAA is signed by the competent authorities of the United States and the treaty partner.

The Treasury Department website publishes IGAs, and the IRS publishes their implementing CAAs.

Government Files Brief Opposing Supreme Court Review of Bankers Associations’ Challenge to FATCA Reporting Requirements

The government filed its brief in opposition to a petition for certiorari seeking Supreme Court review of a decision holding that the Anti-Injunction Act prevents two banking associations from challenging a Treasury regulation requiring banks to report the amount of interest earned by nonresident alien account holders.  The banks are concerned with the substantial numbers of nonresident customers that have closed their accounts out of fear that the banks will disclose their information to the customers’ home governments.  As discussed in greater detail in a previous post, the bankers associations have gained support in the form of three amicus briefs, which generally highlight the tendency of the IRS to overstep its statutory authority and the unfairness that would result if banks are required to violate the rule and expose themselves to possible civil and criminal penalties in order to legally challenge the substance of the rule.

The government’s brief in opposition argues that the Court of Appeals for the D.C. Circuit was correct to deny the challenge on the grounds that the Anti-Injunction Act prevents the suit, stating that the holding does not conflict with any existing court of appeals decision.  However, the government had to address a new argument raised by the bankers associations in its petition for certiorari—that the Anti-Injunction Act does not apply because the alternative method of judicial review, to pay the penalty and then sue for a refund, is inadequate.  The government argued that this position was not raised until the petition for rehearing, and thus the position is time-barred.

Court Dismisses Sen. Rand Paul’s Challenge to FATCA

The U.S. District Court for the Southern District of Ohio dismissed a challenge to the Foreign Account Tax Compliance Act (FATCA) brought by Senator Rand Paul and several current and former U.S. citizens living abroad on standing grounds (Crawford v. United States Department of the Treasury).  The plaintiffs had argued that FATCA’s withholding and reporting requirements imposed on individuals and foreign financial institutions (FFIs), certain intergovernmental agreements (IGAs) negotiated by the Treasury, and the requirement to file a foreign bank account report (FBAR) by U.S. persons with financial accounts that exceed $10,000 in a foreign country were unconstitutional.

The court evaluated the requirements necessary for Article III standing and concluded that none of the individuals named in the suit had suffered or was about to suffer injury under the FATCA withholding tax, and, since all were individuals, none of the named plaintiffs could be FFIs subject to the requirements imposed on such entities.  Instead of asserting concrete particularized injuries, such as penalties brought for failure to comply with FATCA or FBAR requirements, the plaintiffs argued general “discomfort” with the disclosure requirements (Senator Paul also asserted a loss of political power), which the court deemed too abstract and thus insufficient to confer Article III standing.

IRS Releases New W-8BEN-E and Instructions

On April 13, the IRS released a revised version of Form W-8BEN-E, which is used by foreign entities to report their U.S. tax status and identity to withholding agents. Accompanying updated instructions were also released. The new Form W-8BEN-E, which had not been updated since 2014, includes several notable new items. First, 10 check boxes have been added to Part III, Item 14b, “Claim of Tax Treaty Benefits,” to require the foreign entity to identify which limitations on benefits provision it satisfies. The updated instructions include substantial information on these limitations on benefits provisions.

The second significant change relates to the requirement that certain disregarded entities complete Part II. Disregarded entities generally do not complete Form W-8BEN-E, but disregarded entities that receive withholdable payments and either (i) have a Global Intermediary Identification Number (GIIN) or (ii) is a branch of a foreign financial institution (FFI) in a country other than the FFI’s country of residence. Part II previously did not state that a disregarded entity with a GIIN must complete Part II.

The third notable change is in Part IV and Part XII, which now contains a place for sponsored entities and sponsoring entities to provide their GIINs. In Notice 2016-66, the IRS extended the deadline for sponsored entities to obtain their own GIINs to December 31, 2016, from December 31, 2015. In October 2015, the IRS updated the FATCA registration portal to allow sponsoring entities to register their sponsored entities and obtain GIINs for them. The change to the Form W-8BEN-E reflects the increase in sponsored entities receiving their own GIINs as the deadline approaches.

The FATCA regulations permit withholding agents to accept prior versions of Form W-8BEN-E for up to six months following the revision date shown on the new form, and withholding agents may continue to rely on prior versions of the form for the validity period provided under the FATCA regulations. Accordingly, withholding agents may accept the February 2014 version of the Form W-8BEN-E through October 2016. For Form W-8BEN-E, the validity period generally starts on the signature date and ends on the last day of the third subsequent calendar year, absent a change in circumstances.

First Friday FATCA Update

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April 1, 2016

Recently, the Internal Revenue Service released the Competent Authority Agreement (CAA) between the United States and Turkey.  This CAA implements the Model 1A Intergovernmental Agreement (IGA) the parties entered into on July 29, 2015.

Since our last monthly FATCA update, we have also addressed other recent FATCA developments:

  • The Canadian government expressed support for FATCA despite concerns about how FATCA impacts Canadian citizens’ privacy rights (see previous coverage).
  • New Zealand released guidance explaining how FATCA applies to New Zealand trusts that maintain or hold financial accounts (see previous coverage).

Under FATCA, IGAs come in two forms: Model 1 or Model 2.  Under a Model 1 IGA, the foreign treaty partner agrees to collect information of U.S. accountholders in foreign financial institutions (FFIs) operating within its jurisdiction and transmit the information to the IRS.  Model 1 IGAs are drafted as either reciprocal (Model 1A) agreements or nonreciprocal (Model 1B) agreements.  By contrast, Model 2 IGAs are issued in only a nonreciprocal format and require FFIs to report information directly to the IRS.

A CAA is a bilateral agreement between the United States and the treaty partner to clarify or interpret treaty provisions.  A CAA implementing an IGA typically establishes and prescribes the rules and procedures necessary to implement certain provisions in the IGA and the Tax Information Exchange Agreement, if applicable.  Specific topics include registration of the treaty partner’s financial institutions, time and manner of exchange of information, remediation and enforcement, confidentiality and data safeguards, and cost allocation.  Generally, a CAA becomes operative on the later of (1) the date the IGA enters into force, or (2) the date the CAA is signed by the competent authorities of the United States and the treaty partner.

The Treasury Department website publishes IGAs, and the IRS publishes their implementing CAAs.

Canadian Government Expresses Support for FATCA Despite Concerns

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March 22, 2016

Canadian politicians have been at odds over enforcement of the United States-Canada Intergovernmental Agreement (IGA), an agreement providing for the exchange of FATCA-related information, as some assert that the information exchange obligations arising from the IGA violate privacy rights of Canadian citizens.  However, recently elected Liberal Party leaders, who previously voiced these concerns regarding the IGA, now support its enforcement and insist that all FATCA-related information exchanges will fully comply with Canadian privacy rights.

One Canadian organization has gone so far as to challenge the constitutionality of the IGA, asserting that it violated the Canadian Charter of Rights and Freedoms, but the Federal Court of Canada upheld the IGA, leading to the first transfer of FATCA-related information in September 2015.  However, Democratic Party leaders in the Canadian Parliament have not backed down, as evidenced by one member requesting discussion of the IGA among the Standing Committee on Access to Information, Privacy and Ethics.  Although these efforts may cast some doubt on the future of enforcement efforts in Canada, the new government’s support and insistence on privacy compliance suggest that enforcement of the IGA will, for now, continue uninterrupted.

New Zealand Releases Guidance Explaining Application of FATCA to Trusts

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March 10, 2016

The New Zealand Inland Revenue issued guidance notes explaining the application of FATCA to New Zealand trusts that maintain or hold financial accounts.  The nearly 40-page document explains cases where trusts should be treated as financial institutions, as well as the due diligence and reporting obligations of Reporting New Zealand Financial Institution “investment entity” trusts.  The guidance notes address four different types of trusts: unit trusts, family trusts, trading trusts, and charitable trusts.  Solicitors’ trust accounts will be addressed separately in upcoming guidance.  If the trust is deemed a Reporting New Zealand Financial Institution, then it must register with the IRS and will have FATCA reporting and due diligence obligations.

IRS Signals Intent to Scrutinize Foreign Payments

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March 10, 2016

The IRS intends to more closely scrutinize payments made to foreign corporations, as indicated by its creation of a new international LB&I “practice unit,” which will provide guidance for IRS auditors.  With respect to foreign corporations, auditors are instructed to focus significantly on whether FDAP income is paid to foreign corporations, and if it is, whether 30% withholding should apply under Chapter 3. Though the practice unit does not issue official pronouncements of law, its guidance to the field can provide taxpayers with valuable insights into issues of importance to the IRS.  Further, guidance issued by the new unit can help to educate taxpayers on the process auditors will use to analyze transactions.  The development of this new practice unit highlights the IRS’s focus on compliance with respect to outbound payments of U.S.-source income.  Taxpayers should ensure that they carefully consider the character and source of payments to determine whether withholding might apply under either Chapter 3 or Chapter 4 (FATCA) of the Code.  Failure to withhold as required subjects withholding agents to secondary liability for amounts that should have been withheld.

First Friday FATCA Update

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March 4, 2016

Recently, the Internal Revenue Service released the Model 1A Intergovernmental Agreement (IGA) entered into between the United States and Thailand.  The IRS also released the Competent Authority Agreement (CAA) between the United States and Colombia.  This CAA implements the Model 1A IGA the parties entered into on May 20, 2015.

In the past month, we have also addressed other recent FATCA developments:

  • The United States and Switzerland announced on March 1, 2016 that they have amended their CAA to exempt certain accounts maintained by lawyers and notaries (see previous coverage).
  • The IRS recently corrected Notice 2016-8 to reduce reporting burdens on foreign financial institutions (see previous coverage).
  • Two bankers associations filed a petition for certiorari seeking U.S. Supreme Court review of FATCA reporting requirements for foreign account holders (see previous coverage).

Under FATCA, IGAs come in two forms: Model 1 or Model 2.  Under a Model 1 IGA, the foreign treaty partner agrees to collect information of U.S. accountholders in foreign financial institutions (FFIs) operating within its jurisdiction and transmit the information to the IRS.  Model 1 IGAs are drafted as either reciprocal (Model 1A) agreements or nonreciprocal (Model 1B) agreements.  By contrast, Model 2 IGAs are issued in only a nonreciprocal format and require FFIs to report information directly to the IRS.

A CAA is a bilateral agreement between the United States and the treaty partner to clarify or interpret treaty provisions.  A CAA implementing an IGA typically establishes and prescribes the rules and procedures necessary to implement certain provisions in the IGA and the Tax Information Exchange Agreement, if applicable.  Specific topics include registration of the treaty partner’s financial institutions, time and manner of exchange of information, remediation and enforcement, confidentiality and data safeguards, and cost allocation.  Generally, a CAA becomes operative on the later of (1) the date the IGA enters into force, or (2) the date the CAA is signed by the competent authorities of the United States and the treaty partner.

The Treasury Department website publishes IGAs, and the IRS publishes their implementing CAAs.

United States and Switzerland Amend FATCA Competent Authority Agreement to Exempt Certain Accounts Maintained by Lawyers and Notaries

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March 3, 2016

The Swiss competent authority released an announcement on March 1, 2016, that a new clause was added to the U.S.-Switzerland FATCA international governmental agreement (IGA) to exclude certain accounts maintained by lawyers and notaries licensed in Switzerland for their clients from FATCA coverage. Only accounts that are held in connection with certain activities protected by law under professional confidentiality fall under the exception (generally custodial and depository accounts), as the purpose of the new clause is to ensure that Swiss law protects the confidentiality of lawyers and notaries and their clients. The accounts will also only be protected if the underlying assets are directly related to a legal matter; a list of such items is set forth in the addition to the U.S.-Switzerland FATCA agreement. If the lawyer or notary certifies in writing to the bank maintaining the account that it falls within the exception, the bank is not required to identify the clients involved with the account. This addition is permitted under Annex II of the FATCA IGA, which allows additional accounts, entities, or products to be added pursuant to an agreement between the competent authorities of each country.

The announcement also reaffirmed that negotiations on a new FATCA IGA are ongoing, as required by a Swiss federal government mandate issued October 8, 2014. The new agreement will be a Model 1 IGA, which comes with reciprocal automatic information exchange obligations between the United States and Switzerland, unlike the current Model 2 IGA. Under the new IGA, Swiss financial institutions will report to Swiss authorities on U.S. account holders rather than reporting directly to the IRS.

IRS Clarifies Notice 2016-8 to Reduce Reporting Burden on FFIs

The IRS recently corrected Notice 2016-8, previously released on January 19, 2016.  The notice announced that the IRS intended to modify several portions of the FATCA regulations to ease burdens on foreign financial institutions (FFIs), largely in response to practitioner comments and provided that taxpayers may rely on the notice until the regulations are amended.  The Notice was amended to clarify that the time allowed for a participating FFI or reporting Model 2 FFI to provide the preexisting account certification also requires a certification that the FFI did not maintain practices and procedures to assist account holders in the avoidance of Chapter 4 of the Code.  Second, the Notice was amended to remove a requirement in the regulations that obligated registered deemed-compliant FFIs that manage accounts of nonparticipating FFIs to provide transitional reporting to the IRS of all “foreign reportable amounts” paid to or with respect to the account.  The changes made to the FATCA regulations in Notice 2016-8 can now be summarized as follows:

1. Certain financial institutions will have more time to certify accounts, as the timing requirements are eased for certain reporting of participating FFIs, reporting Model 2 FFIs, and local FFIs or restricted funds.  Under current rules, participating FFIs and reporting Model 2 FFIs must certify that they did not have practices and procedures to assist account holders in the avoidance of Chapter 4 (“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.  Additionally, financial institutions are required to periodically certify to the IRS that they have complied with the terms of the FFI agreement.  Notice 2016-8 delays the date by which such FFIs must furnish the preexisting account certification, stating that they need not furnish it until the date on which the first periodic certification is due.  Notice 2016-8 also delays the date on which the first periodic certification is due, making it due on or before the July 1 of the calendar year following the certification period.  These same changes are made with respect to reporting for registered deemed-compliant FFIs that are local FFIs or restricted funds, but the certification period date is also delayed to the later of the date the FFI registered as a certified deemed-compliant FFI or June 30, 2014.

2. Reporting of accounts of nonparticipating FFIs maintained by participating FFIs has been delayed, with the IRS stating that it did not intend for the regulations to require such reporting prior to the date by which participating FFIs are required to report financial information of U.S. accounts.  Accordingly, Notice 2016-8 eliminates 2015 reporting of “foreign reportable amounts” with respect to nonparticipating FFI accounts maintained by a participating FFI.  Such reporting is now not needed until 2016.

3. Withholding agents will be able to rely on electronic Forms W-8 and W-9 collected by intermediaries and flow-through entities.  In general, electronic Forms W-8 and W-9 must be collected through an electronic system that meets certain requirements, including that the form be signed electronically under penalties of perjury by the person whose name appears on the form. Withholding agents have been reluctant to accept electronic Forms W-8 and W-9 collected by nonqualified intermediaries, nonwithholding partnerships, and nonwithholding trusts because they could not confirm the electronic signature.  Notice 2016-8 makes clear that withholding agents may rely on electronic Forms W-8 and W-9 provided by NQIs, NWPs and NWTs collected through an electronic system provided that the NQI, NWP or NWP provides a written statement verifying that the system meets the requirements of Treas. Reg. § 1.1441-1(e)(4)(iv), § 1.1471-3(c)(6)(iv), or Announcement 98-27, as applicable, and the withholding agent does not have actual knowledge that the statement is false.

Banking Associations Challenge IRS Reporting Requirements for Foreign Account Holders

On January 29, two bankers associations filed a petition for certiorari seeking U.S. Supreme Court review of a decision from the United States Court of Appeals for the District of Columbia Circuit that the Anti-Injunction Act prevents them from challenging a Treasury regulation requiring banks to report the amount of interest earned by nonresident alien account holders.  The regulations, contained in Treas. Reg. §§ 1.6049-4 and -8, were issued pursuant to Treasury’s authority granted to it by Congress in the Foreign Account Tax Compliance Act (FATCA).  The regulations are intended to help the U.S. comply with its obligation to turn over certain information about foreign assets held in U.S. banks in exchange for other countries providing information to Treasury about U.S. assets held overseas.

The bankers associations argue that the IRS requirements will cause far more harm to banks than anticipated, asserting that the IRS violated laws mandating a cost benefit analysis of certain regulations.  Though the focus of the litigation has been a procedural hurdle preventing the lawsuit, the case could have significant implications if the bankers associations are able to challenge the regulations.  Currently, the banks claim that the regulations have caused substantial numbers of nonresident customers to close their accounts out of fear that the banks will disclose their information to the customers’ home governments.  The banks are concerned that the outflow of these deposits will outweigh the revenue benefits of the FATCA regulations, which are supposed to arise from a clampdown on U.S. tax evaders.  As a result, the bankers associations seek to overturn the appeals court decision preventing them from challenging the rule without first violating it, since violation could result in institutional fines and criminal imprisonment of their officers.  The Court of Appeals rules that the Anti-Injunction Act prevents the court from enjoining the reporting requirement because the penalty for noncompliance with the reporting obligation is the imposition of penalties under section 6721, and such penalties are treated as taxes.

In late February, the bankers associations’ request  gained support in the form of three amicus briefs.  The first, written by Minnesota Law School professor Kristin E. Hickman, argues that the IRS has a history of overstepping its statutory authority and has done so again with the regulations at issue.  The second, filed by the Cause of Action Institute, argues that more robust judicial review of IRS rulemaking is required and that a taxpayer should not be required to violate the law before having the ability to challenge the legality of the rule.  The final amicus brief, filed by the National Federation of Independent Business Legal Center and the Cato Institute, similarly argues that Treasury has strayed from the requirements of the Administrative Procedure Act and that the Supreme Court should resolve the interpretative split between the Anti-Injunction Act and the Tax Injunction Act to allow lower courts to properly adjudicate challenges to tax regulations.