New CAAs on Exchange of CbC Reports Pushes Total to 20

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August 24, 2017

The IRS has concluded competent authority arrangements (“CAAs”) for the exchange of country-by-country (“CbC”) reports with Australia and the United Kingdom.  The CAA with Australia was signed in Australia on July 14 and by the United States on August 1.  The CAA with the United Kingdom was signed on August 16.  The new arrangements bring the number of CAAs for the exchange of CbC reports to 20. The CAAs for the exchange of CbC reports generally require the competent authorities of the foreign country and the United States to exchange annually, on an automatic basis, CbC reports received from each reporting entity that is a tax resident in its jurisdiction, provided that one or more constituent entities of the reporting entity’s group is a tax resident in the other jurisdiction, or is subject to tax with respect to the business carried out through a permanent establishment in the other jurisdiction.

In the United States, CbC reporting is required for U.S. persons that are the ultimate parent entity of a multinational enterprise (“MNE”) with revenue of $850 million or more in the preceding accounting year, for reporting years beginning on or after June 30, 2016, under the IRS’s final regulations issued last summer (see prior coverage).  Reporting entities must file a new Form 8975 (“Country by Country Report”) and Schedule A to Form 8975 (“Tax Jurisdiction and Constituent Entity Information”).  In Revenue Procedure 2017-23, the IRS announced that U.S. MNEs may voluntarily file Form 8975 with the IRS for taxable years beginning on or after January 1, 2016, and before June 30, 2016.  U.S. MNEs that do not voluntarily file with the IRS may be subject to CbC reporting in foreign jurisdictions in which they have constituent entities.

A CAA generally must be in force with a foreign jurisdiction for CbC reports filed with the IRS by a U.S. MNE to satisfy the CbC reporting requirements under foreign law.  This has raised concerns about the pace at which the IRS has concluded CAA negotiations with foreign jurisdictions.  Many foreign jurisdictions that have adopted CbC reporting requirements under the OECD’s Base Erosion and Profit Shifting Action 13 have done so with respect to reporting years beginning on or after January 1, 2016.  Most of those countries have signed a multilateral CAA, but the United States has chosen instead to pursue bilateral CAAs with each foreign jurisdiction—likely due to U.S. concerns regarding the use of the information contained in the CbC reports and potential public disclosure of the information.  The U.S. CAAs are substantially similar to the multilateral CAA, but numerous foreign jurisdictions have not yet signed a bilateral CAA with the IRS, including China, France, Germany, Mexico, and Japan.

The IRS maintains a status table of foreign jurisdictions on its CbC Reporting page.  With voluntary reporting for early reporting periods set to begin on September 1, U.S. MNEs should monitor continuing developments to determine whether delays in the U.S. CAA process may necessitate the filing of CbC reports in foreign jurisdictions.

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.

Mobile Workforce Bill Passes House Again, Senate Fate Uncertain

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July 7, 2017

On June 20, 2017, the House of Representatives passed legislation to simplify state income tax rules for employees who temporarily work outside their home state.  Under the Mobile Workforce State Income Tax Simplification Act of 2017 (H.R. 1393), a state generally could tax a nonresident’s wages earned in the state only if he or she is working in the state for more than 30 days during the year.  Likewise, employers would have no corresponding duty to withhold and report the tax unless the 30-workday threshold is met.  Propelled by bipartisan support, similar measures have twice passed in the House in 2012 and 2015 but failed to gain traction in the Senate.  Currently, legislation similar to the House bill is awaiting Senate consideration, and once again, faces an uphill battle amidst concerns that the bill would cause significant revenue losses to certain states—including New York—with large employment centers close to state borders.

The bill is intended to reduce confusion and compliance costs stemming from inconsistent state income tax laws on nonresident employees and their employers.  Currently, forty-three states impose personal income tax on wages, including nonresidents’ wages earned in the state.  Thus, a traveling employee working on temporary projects in multiple states may be obligated to file and pay taxes in each of those states, and the employer would have corresponding withholding and reporting obligations.  Although states have three main measures that reduce compliance costs, the measures are largely piecemeal and inconsistent.  First, states generally provide an income tax credit for income taxes paid to other states, but the credit system does not eliminate the travelling employee’s obligation to file a nonresident return and the employer’s obligation to withhold and report the tax.  Second, some states waive the income tax obligations of nonresident employees and employers based on de minimis earnings and/or time spent in the state, but the waiver thresholds vary, and not all states have them.  Third, some bordering states have entered into reciprocity agreements under which each state agrees not to tax each other’s residents’ wages (see prior coverage of NY-NJ reciprocity agreement).  But these agreements only cover one-third of the states, and are geared toward regular commuters living near state borders, rather than employees traveling to multiple states for temporary work.

The bill would impose a 30-workday threshold on state income taxation of nonresidents, but would not prevent states from adopting higher or other types of thresholds.  Reciprocity agreements of bordering states, for instance, would still be effective.  Moreover, the bill allows an employer to avoid withholding and reporting penalties if they simply rely on their employees’ annual determination of days to be spent working in the nonresident state (barring actual knowledge of fraud, collusion, or use of a daily time and attendance system).  The bill also defines what constitutes a workday to minimize double counting.  The bill would not cover the wages of professional athletes, professional entertainers, certain production employees, and prominent public figures paid on a per-event basis.  Additionally, the bill does not specifically address equity or trailing compensation and employees who work for more than one related employer.

The bill likely faces an uphill battle in the Senate because the bill would cause significant revenue losses to certain states.  Generally, states that have large employment centers close to a state border (e.g., Illinois, Massachusetts, California, and New York) would lose the most revenue, while their neighboring states (e.g., New Jersey) from which employees travel would gain revenue.  Notably, New York would likely lose between $55 million and $120 million per year—an amount greater than the estimated revenue impact on all the other states combined (a $55 million to $100 million loss).  For these reasons, three members of the House Committee on the Judiciary opposed the bill and proposed to replace the 30-workday threshold with a 14‑workday threshold.  This is, not coincidentally, the threshold New York currently has in place for employer withholding obligations (but not for employee income tax liability or employer reporting obligations).  Although rejected, the effort to reduce the threshold may ultimately reshape the bill in the Senate or signal its continued lack of action.

With the Senate preoccupied with other legislative matters such as health reform (see prior coverage of health insurance reporting under the American Health Care Act) and opposition from some powerful Senators, it is unclear whether the Senate will consider the mobile workforce bill despite bipartisan interest.  In the meantime, employers with employees temporarily working in multiple states must continue to meet their nonresident state income tax withholding and reporting obligations.  We will continue to monitor further developments on the mobile workforce bill and its impact on state income tax filing, withholding, and reporting rules.

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.

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.

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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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.

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 Finalizes Regulations Imposing Reporting Obligations on Foreign-Owned U.S. Entities

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December 13, 2016

Yesterday, the IRS issued final regulations that impose reporting obligations on a domestic disregarded entity wholly owned by a foreign person (foreign-owned DDE).  The final regulations amend Treasury Regulation § 301.7701-2(c) to treat a foreign-owned DDE as separate from its owner for purposes of reporting, recordkeeping, and other compliance requirements imposed under Code section 6038A.  The effect of these final regulations is to enhance the IRS’s access to information needed to enforce tax laws and international treaties and agreements.

We discussed the substance of these regulations in an earlier post, and the final regulations reflect the proposed regulations with only minor clarifying changes.  The primary clarification relates to the intent of the IRS to disallow the exceptions to the requirements of Code section 6038A for a foreign-owned DDE.  The proposed regulations explicitly disallowed two of these exceptions, but the application of two additional exceptions was left unclear.  In the final regulations, the IRS expressly prevents a foreign-owned DDE from utilizing either of the remaining two exceptions to the Code section 6038A reporting requirements.

Under the regulations, a transaction between a foreign-owned DDE and its foreign owner (or another disregarded entity of the same owner) would be considered a reportable transaction for purposes of the reporting and recordkeeping rules under Code section 6038A, even though the transaction involves a disregarded entity and generally would not be considered a transaction for other purposes (e.g., adjustment under Code section 482).  Thus, a foreign-owned DDE will be required to file Form 5472 for reportable transactions between the entity and its foreign owner or other foreign-related parties, and maintain supporting records.  Further, to file information returns, a foreign-owned DDE would have to obtain an Employer Identification Number by filing a Form SS-4 that includes responsible party information.

The final regulations reflect several other minor changes intended to ease the compliance burden for foreign-owned DDEs.  Specifically, a foreign-owned DDE has the same tax year as its foreign owner if the foreign owner has a U.S. tax return filing obligation, and if not, the foreign-owned DDE’s tax year is generally the calendar year.  The final regulations are applicable to tax years of entities beginning after December 31, 2016 and ending after December 12, 2017.

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.

Beware of Errors in Limitations on Benefits Table on IRS Website When Vetting Treaty Claims on Forms W-8BEN-E

Earlier this year, the IRS changed the Form W-8BEN-E to require beneficial owners to identify the applicable limitation on benefits (“LOB”) test under the LOB article (if an LOB exists under the treaty) to claim tax treaty benefits. Income tax treaties often contain LOB articles to prevent treaty shopping by residents of a third country by limiting treaty benefits to residents of the treaty country that satisfy one of the tests specified in the LOB article. The form change requires additional complexity on the part of beneficial owners and additional due diligence on the part of withholding agents when vetting treaty claims. In the revised Instructions to the Form W-8BEN-E, the IRS includes a URL to an IRS table that summarizes the major tests within the LOB articles of U.S. tax treaties (“IRS LOB Table”) to document an entity’s claim for treaty benefits. The table can be found here.  After reviewing a recent treaty claim on Form W-8BEN-E, we discovered that the table contains some errors and misleading information with respect to several countries.

The new requirement to report the LOB provision on Form W-8BEN-E is onerous because it essentially requires withholding agents to pull the income tax treaty and protocols for each treaty claim submitted on a Form W-8BEN-E to validate that the appropriate LOB test is accurately reflected by the box checked on the form. There are two potential pitfalls for withholding agents reviewing these claims using information found on the IRS website. First, withholding agents must carefully review the U.S. income tax treaties and protocols made available to the public on the IRS website, which is a challenge for many Form W-8BEN-E reviewers who may be untrained or inexperienced regarding these documents. Many withholding agents are sure to either skip or struggle with this validation approach. Second, the table provided by the IRS is essentially incomplete and contains errors, so in certain cases it cannot be relied upon. This is particularly concerning in light of the “reason to know” standard as it applies to treaty claims set forth under Temp. Treas. Reg. §1.1441-6T(b) and the Instructions for the Requester of Forms W-8, which require diligence on the part of withholding agents with respect to treaty claims.

The IRS should be more careful before it releases informal guidance to the public, but it has repeatedly warned taxpayers over the years that the public relies upon informal guidance at its own peril. In fact, courts have upheld penalties assessed against taxpayers for relying on such guidance, holding that administrative guidance contained in IRS publications is not binding on the government. Accordingly, prudent withholding agents are best served to “trust but verify” when relying on the IRS LOB Table.

The errors we discovered in the IRS LOB Table are described below.

U.S. – Australia Treaty

The Australia entry should cite to Section 16(2)(h) (rather than Section 16(1)(h)) as the provision that permits a recognized company headquarters to claim treaty benefits.

U.S. – Bulgaria Treaty

The IRS LOB Table also fails to reflect a 2008 protocol modifying the 2007 U.S. – Bulgaria income tax treaty, which added a triangular provision that provides a safe harbor for certain companies resident in a partner state that derive income from the other partner state attributable to a permanent establishment located in a third jurisdiction. This triangular provision is set forth in new Section 21(5) of the treaty. The Bulgaria entry in the IRS LOB Table also contains the wrong citation for the provision permitting discretionary determinations of treaty eligibility. Because the 2008 protocol set forth a new Section 21(5), the discretionary provision was relocated to Section 21(6).

U.S. – China Treaty

The China entry does not specify the correct protocol in which certain LOB tests are located. The United States and China entered into protocols in 1984 and 1986, both of which are still in effect and neither of which actually supplement or modify the text of the U.S. – China income tax treaty—in other words, the text of the original treaty is left as-is and the protocols simply layer on top of it. This is a unique scenario, since protocols generally supplement or modify the original text of the treaty. In fact, we are only aware of one other country (Italy) with which the United States has entered into protocols that did not supplement or modify the original treaty text. The two China protocols, which do not contain provisions titled “Limitations on Benefits” and instead require a careful reading to identify the presence of LOB provisions, must therefore be read in tandem with the underlying treaty. The existence of multiple protocols, the second of which was solely created to modify a provision in the first protocol, serves as the cause of the errors in the IRS LOB Table. Specifically, the citations for the publicly traded company and stock ownership and base erosion test provisions should read “P2(1)(b)” and “P2(1)(a),” respectively.

U.S. – France Treaty

The IRS LOB Table makes several mistakes with respect to the 1994 U.S. – France income tax treaty, one of which relates to a 2009 protocol to the treaty. The 2009 protocol added new Section 30(3) to the treaty, which sets forth a provision on derivative benefits that allows a company to claim treaty benefits if a percentage of its shares is owned by persons who would be entitled to treaty benefits had they received the income directly. However, the IRS LOB Table currently states that Section 30(3) permits a recognized headquarters company to claim treaty benefits—the 2009 protocol eliminated the company headquarters safe harbor. In addition to this error, the U.S. – France treaty entry in the IRS LOB Table mistakenly points to Section 30(1)(c)–(f) as the location for three safe harbors (safe harbors for publicly traded companies or their subsidiaries, tax exempt organizations and pension funds, and persons satisfying the stock ownership and base erosion test), all of which are actually set forth in Section 30(2)(c)–(f).

U.S. – New Zealand Treaty

Yet another protocol not reflected in the IRS LOB Table is New Zealand’s 2008 protocol, which replaced the entire LOB article in the 1982 U.S. – New Zealand income tax treaty. The new LOB article still contains safe harbors for publicly traded companies and companies that satisfy the stock ownership and base erosion test, but the section references should be Section 16(2)(c) and 16(2)(e), respectively. The safe harbor categorized as “Other” in the IRS LOB Table, which required New Zealand and the United States to consult each other before denying benefits under the LOB article, no longer exists, so it should be removed from the table. However, the 2008 protocol added safe harbors for: (i) tax exempt organizations and pension funds, set forth in new Section 16(2)(d); (ii) certain active trades or businesses in new Section 16(3); (iii) persons that qualify under a triangular provision in new Section 16(5); and (iv) persons deemed to qualify under a discretionary determination made by the appropriate partner country in new Section 16(4).

U.S. – Tunisia Treaty

The provision in the Tunisia treaty permitting discretionary determinations is Article 25(7), not Article 25(5)(7).

Miscellaneous Issues with IRS LOB Table

The IRS LOB Table includes various non-substantive issues that signal that the document has not been subject to a final, careful review by the IRS. The footnotes set forth in the document are incomplete and, in certain cases, incorrect. The column headings for each LOB test refer to a footnote, but the footnotes at the end of the table seem to either merely restate the name of the LOB test or, in many cases, do not even align with the linked column headings. For example, the “Derivative Benefits” heading cites to footnote 8, which only states “Derivative benefits test –,”and the “Active Business” heading cites to footnote 9, which actually states “triangular provisions” (curiously, the “Triangular Provision” heading does not cite to a footnote). Most perplexing, however, are the blank footnotes. For example, the title of the chart, “Limitation on Benefits Tests (Safe Harbors)” cites to footnote 2, yet footnote 2 contains no text. A taxpayer might then turn to the “LOB Test Category Codes” to ease this confusion, which are located directly above the IRS LOB Table on the first page and appear to possibly correlate with the column headings. However, these Codes provide no detail beyond merely restating the headings themselves, or in the case of “01” and “02,” do not seem to correlate to anything in the Table.

Another non-substantive oversight relates to a lack of citations in the entry describing the LOB provisions for the U.S. – U.S.S.R. treaty (listed as “Comm. of Independent States”). Though the U.S. – U.S.S.R. treaty is no longer in effect, the LOB provisions are likely still relevant to many beneficial owners and withholding agents, as the IRS LOB Chart states that the U.S. – U.S.S.R. treaty still applies to nine former members of the Soviet Union.

Conclusion

The IRS LOB Table has the potential to be a helpful resource for withholding agents to use when reviewing new Forms W-8BEN-E submitted with treaty claims, but withholding agents should verify the information set forth in the table with the related treaties and protocols that are also available on the IRS website.

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.

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.

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.

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.

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.

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.

OECD Seeks Additional Proposals on Treaty Benefits for Non-CIV Funds

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March 25, 2016

On March 24, 2016, the Organization for Economic Co-operation and Development (OECD) issued a consultation document soliciting public comments regarding treaty entitlement of non-collective investment vehicle (non-CIV) funds. While collective investment vehicle funds are defined under the 2010 OECD Report and are entitled to treaty benefits subject to specific rules, commenters have sought treaty benefits for non-CIVs, which have yet to be defined.

The consultation document states that the OECD will continue to examine policy considerations regarding treaty entitlement of non-CIV funds. Further, the OECD plans to address two key concerns of OECD members about granting treaty benefits with respect to non-CIV funds. In particular, these concerns are that non-CIV funds should not be used to obtain treaty benefits for investors not otherwise entitled to such benefits and that investors should not be able to defer recognition of income on treaty benefits that have been granted.

The consultation document also asks commenters to clarify how non-CIV funds work, e.g., what types of vehicles would be defined as non-CIV funds; whether these funds are able to determine the identities and tax-residences of the beneficial owners; what is the intermediary-level tax; and at what point would taxation occur. In particular, the consultation document focuses on proposals concerning the impact on non-CIV funds of new limitation on benefits (LOB) rules, the principal purpose test, anti-conduit rules, and special tax regimes. Regarding the LOB rules, the document raised questions to commenters’ requests that: (a) treaty benefits be granted to regulated and/or widely-held non-CIV funds; (b) non-CIV funds be allowed to elect treatment as fiscally transparent entities for treaty purposes; (c) certain non-CIV funds be granted treaty benefits where a large proportion of the investors would be entitled to the same or better benefits; (d) the LOB rules not deny benefits to a non-CIV resident of a State with which the non-CIV has a sufficiently substantial connection; and (e) a “Global Streamed Fund” regime be adopted.

Fundamental objectives of the OECD include combating international tax avoidance and evasion by preventing multinationals from artificially shifting profits to low or no-tax jurisdictions and developing and encouraging the promulgation of clear guidance that identifies which country’s tax should apply under particular arrangements. The OECD’s analysis of how non-CIV funds should be taxed is part and parcel of this core mission.

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.