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.

Sixth Circuit Upholds Dismissal of Sen. Rand Paul’s Challenge to FATCA

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August 22, 2017

On August 18, the Sixth Circuit issued an opinion upholding the dismissal of 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 who hold foreign accounts.  In the case, Crawford v. United States Department of the Treasury, Senator Paul and his co-plaintiffs 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.

In 2016, the district court dismissed the case on standing grounds (earlier coverage here).  The court evaluated the requirements necessary for Article III standing and concluded that no named plaintiff alleged actual or imminent injury from the FATCA withholding tax, and none of the named plaintiffs were 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, which the court deemed too abstract and thus insufficient to confer Article III standing.

The Sixth Circuit panel upheld the dismissal on standing grounds, explaining that the injuries suffered by the account holders resulted from the independent and voluntary actions of foreign financial institutions, not the Treasury.  The court explained that no plaintiff has alleged “any actual enforcement of FATCA” or FBAR, such as a demand for individual reporting or the imposition of a penalty for noncompliance, and no plaintiff holds sufficient foreign assets to bring a pre-enforcement challenge to FATCA or has alleged an intent to violate FBAR, a prerequisite for standing to bring a pre-enforcement FBAR challenge.  The court also rejected Senator Paul’s IGA-specific claim that  he was stripped of his constitutional right to vote against the IGAs, explaining that Senator Paul can still seek repeal of or amendment to FATCA itself.  The court denied the plaintiffs leave to amend their complaint, reasoning that amendment would be futile because the facts simply do not provide them standing to bring the alleged claims.

IRS Delays Mandatory Reporting for Issuers of Catastrophic Health Plans

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August 18, 2017

On August 3, the IRS issued Notice 2017-41 to extend the period of voluntary reporting by insurance issuers regarding “catastrophic plans” for 2017 coverage and to provide that information reporting penalties will not apply to such voluntary reporting.  “Catastrophic plans” provide essential health benefits as defined under the Affordable Care Act (ACA), but only to the extent they exceed the annual limit on cost-sharing under the ACA, and a limited number of primary care visits.  Catastrophic plans can generally only be sold to low-income individuals and those determined by HHS to have suffered undue hardship and satisfy the coverage requirement under Section 5000A when purchased by such individuals.  Such plans may be enrolled in through an Exchange, but purchasers are ineligible for a premium tax credit for such coverage.  Section 6055 requires all persons, including issuers, providing minimum essential coverage to file annual information returns with the IRS and the responsible individual, but the timing of the reporting is subject to IRS regulations.  Section 36B(f)(3) includes a similar reporting requirement for any health plan provided by an Exchange.

Under current IRS regulations, the IRS has interpreted “any health plan,” to exclude catastrophic plans.  Additionally, IRS regulations do not require issuers to report coverage enrolled in through an exchange, including coverage under a catastrophic plan.  The result is that no reporting is currently required on catastrophic plans by issuers or the exchanges.

As a result, the IRS has issued several stop-gap measures over the past couple of years.  In September 2015, the IRS issued Notice 2015-68, which provided for voluntary reporting by issuers regarding catastrophic plans and stated that it intended to require reporting for 2016 coverage, which would be done on Form 1095-B, “Health Coverage.”  In August 2016, the IRS published proposed regulations under Section 6055 that would be effective for 2017 coverage and require reporting by issuers of catastrophic plans purchased through an exchange.  Since the IRS has still not finalized these proposed regulations, it issued Notice 2017-41 to extend the period of voluntary reporting and communicate that information reporting penalties will not apply to such voluntary reporting in 2017.

There is debate over whether issuers are the appropriate avenue for reporting this information, as the statute suggests that Congress intended to assign this duty to the exchanges.  As discussed above, Section 36B(f)(3) requires that exchanges report on “any health plan,” but the IRS has interpreted that term to exclude catastrophic health plans.  This interpretation effectively reads “any health plan” to mean a “qualified health plan.”  Congress used the term “qualified health plan” repeatedly and consistently throughout Section 36B, so its use of the term “any health plan” in this instance suggests that Congress intended to encompass plans other than “qualified health plans” when creating the reporting requirement applicable to exchanges, including catastrophic health plans.  Placing the reporting obligation on the exchanges also makes sense from a policy perspective, as the exchanges already collect the information needed to comply with this reporting obligation directly from customers enrolling through them, so they are better positioned to meet this reporting obligation than the health insurance issuers, which must rely upon the exchanges to provide timely and accurate information to enable them to report.

Draft Instructions for Form 8966 (FATCA Report)

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August 14, 2017

The IRS recently posted draft instructions to the Form 8966 (FATCA Report) dated August 9, 2017, with some changes pertaining to participating foreign financial institutions (PFFIs) and others reflecting the final and temporary Chapter 4 regulations released in January of this year.  The Form 8966 reports information with respect to certain U.S. accounts, substantial U.S. owners of passive non-financial foreign entities (NFFEs), specified U.S. persons that own certain debt or equity interests in owner-documented FFIs, and certain other accounts as applicable based on the filer’s status under Chapter 4 of the Internal Revenue Code.  A Model 1 FFI files the Form 8966 (or its equivalent) with its host country’s tax authority which, pursuant to the Model 1 IGA, shares the information with the IRS.  A Model 2 FFI directly files a Form 8966 with the IRS pursuant to its FFI agreement (see prior coverage regarding deadline for renewal of FFI agreement).

The changes reflected in the draft instructions are summarized below.  The draft instructions are before the official release.

  • Reporting on accounts held by nonparticipating FFIs. For 2017, a PFFI (including a Reporting Model 2 FFI) does not need to report on accounts held by nonparticipating FFIs in Parts II and V of the Form 8966.  Specifically, PFFIs should not check the box for “nonparticipating FFI” on line 5 of Part II, should not check the pooled reporting type “nonparticipating FFI” on line 1 of Part V, and should not complete line 3 of Part V.  This reporting obligation only applied for 2015 and 2016.
  • Limited FFIs and limited branches. The statuses for limited FFIs and limited branches expired on December 31, 2016.  Accordingly, the references to limited FFI and limited branch statuses are removed for the 2017 Form 8966.
  • Reporting Model 2 FFI related entities or branches. The instructions for limited FFIs and limited branches are revised to apply to Reporting Model 2 FFIs with related entities and branches that are required by the applicable Model 2 IGA to report U.S. accounts to the IRS to the extent permitted.  Thus, a related entity or branch of a Reporting Model 2 FFI filing Form 8966 should select the filer category code for limited branch or limited FFI (code 03) on line 1b of Part I.
  • Reporting Model 2 FFIs reporting on non-consenting U.S. accounts. For a preexisting account that is a non-consenting U.S. account, the Reporting Model 2 FFI should use the pooled reporting category for either recalcitrant account holders that are U.S. persons or recalcitrant account holders that have U.S. indicia.  For a new individual account that has a change in circumstances that causes the Reporting Model 2 FFI to know or have reason to know that the original self-certification is incorrect or unreliable, and the Reporting Model 2 FFI is unable to obtain a valid self-certification establishing whether the account holder is a U.S. citizen or resident, the Reporting Model 2 FFI should use the pooled reporting category for recalcitrant account holders with U.S. indicia.
  • U.S. branches. The draft instructions under Special Rules for Certain Form 8966 Filers reflect the updated reporting requirements for U.S. branches in the final Chapter 4 regulations published in January 2017.  On line 1b of Part I, all U.S. branches of a FFI not treated as U.S. persons should select the filer category code for PFFIs (code 01), and U.S. branches that are treated as U.S. persons should select the code for withholding agents (code 10).
  • PFFIs (including Reporting Model 2 FFIs) that are partnerships. The draft instructions for line 4d of Part IV for PFFIs (including Reporting Model 2 FFIs) are updated to conform to temporary Chapter 4 regulations published in January 2017 with respect to the amounts required to be reported by a partnership-PFFI reporting a partner’s interest in the partnership.
  • Mergers and bulk acquisitions of accounts.  New instructions under Special Rules for Certain Form 8966 Filers are added for combined reporting after a merger or bulk acquisition of accounts.

First Friday FATCA Update

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August 4, 2017

Since our last monthly FATCA update, the IRS has updated its FATCA frequently asked questions to include four new FAQs addressing the renewal of foreign financial institution (FFI) agreements and extending the deadline for renewing FFI agreements to October 24, 2017 (discussed here and here).

Recently, the Treasury released the Model 1B Intergovermental Agreement (IGA) between the United States and Turkmenistan.

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 Competent Authority Agreement (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 Extends Deadline for FFI Agreement Renewal

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August 2, 2017

Following the July 31, 2017, deadline for renewing an FFI agreement (prior coverage), the IRS announced in a new FAQ that a participating FFI (including a reporting model 2 FFI) that renews its FFI agreement by October 24, 2017, will continue to be treated as a participating FFI.  Rev. Proc. 2017-16, which includes the current FFI agreement, provides that a participating FFI that fails to renew its FFI agreement by July 31, 2017, will be treated as having terminated its FFI agreement as of January 1, 2017, and will be treated as a nonparticipating FFI and removed from the IRS FFI list.  Registration FAQ #10, added only a few weeks ago, reiterated that result (prior coverage).

On August 1, the IRS added Registration FAQ #12 providing that a participating FFI that has otherwise complied with the terms of its FFI agreement (including the current FFI agreement since January 1, 2017), will not be removed from the IRS FFI list provided that it renews its FFI agreement by October 24, 2017.  Participating FFIs that fail to renew their FFI agreements by October 24, 2017, will be removed from the IRS FFI list in November.  The reprieve will be welcome news for participating FFIs that were unable to renew their FFI agreement before the July 31 deadline.  Those participating FFIs that still need to renew their FFI agreements should ensure they are complying with the new FFI agreement (prior coverage) and take steps to renew their agreements sooner rather than later to avoid inadvertently missing the extended deadline.