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

April 7, 2017 by  
Filed under FATCA

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.

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.

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

August 1, 2016 by  
Filed under FATCA, IRS

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.

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

June 3, 2016 by  
Filed under Chapter 3, FATCA, IRS

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.