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.