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William Byrnes (Texas A&M) tax & compliance articles

IRS Changes US Withholding and Documentation Rules (Chapters 3 and 61) To Coordinate with FATCA

Posted by William Byrnes on February 24, 2014


The February 20, 2014 release of 565 total pages of commentary and amendments to the FATCA Regulations (these final regs issued January 17, 2013) included 336 pages of changes to the withholding and documentation rules of Chapters 3 and 61 –  over 50 discrete amendments and clarifications in total.  Treasury stated that it has taken “into account certain stakeholder suggestions regarding ways to further reduce burdens consistent with the compliance objectives of the statute”.

Key amendments and clarifications include:

(i)              the accommodation of direct reporting to the IRS, rather than to withholding agents, by certain entities regarding their substantial U.S. owners;

(ii)            the treatment of certain special-purpose debt securitization vehicles;

(iii)          the treatment of disregarded entities as branches of foreign financial institutions;

(iv)          the definition of an expanded affiliated group; and

(v)            transitional rules for collateral arrangements prior to 2017.

See the previous Friday article covering amendments to the FATCA Final regulations:  https://profwilliambyrnes.com/2014/02/21/irs-makes-substantial-amendments-to-fatca-regulations/  Below I cover the amendments for Coordination of FATCA with Pre-Existing Reporting and Withholding Rules.

Coordination of FATCA with Pre-Existing Reporting and Withholding Rules

The amendments also harmonize the requirements contained in pre-FATCA rules under chapters 3 and 61 and section 3406 of the Internal Revenue Code with those under FATCA.

Chapter 3 contains reporting and withholding rules relating to payments of certain U.S. source income (e.g., dividends on stock of U.S. companies) to non-US persons.

Chapter 61 and section 3406 address the reporting and withholding requirements for various types of payments made to certain U.S. persons (U.S. non-exempt recipients).

The amended regulations coordinate these pre-FATCA regimes with the requirements under FATCA to integrate these rules, reduce burden (including certain duplicative information reporting obligations), and conform the due diligence, withholding, and reporting rules under these provisions to the extent appropriate in light of the separate objectives of each chapter or section. The changes relate to four key areas:

I. Rules for Identification of Payees.

Documentation requirements are central to identification of payees under the chapter 3 and FATCA reporting and withholding regimes.

The documentation requirements for withholding agents and foreign financial institutions (FFIs) under FATCA differ in certain respects from the corresponding documentation requirements for withholding agents under chapter 3. The amendments to the regulations remove inconsistencies in the chapter 3 and FATCA documentation requirements (including inconsistencies regarding presumption rules in the absence of valid documentation) based, in part, on stakeholder comments.

II. Coordination of the Withholding Requirements under Chapter 3, Section 3406, and FATCA.

Chapter 3, section 3406, and FATCA require a payor to withhold under certain, potentially overlapping, circumstances.  These temporary regulations provide rules to ensure that payments are not subject to withholding under both chapters 3 and FATCA, or under both section 3406 and FATCA.

III. Coordination of Chapter 61 and FATCA Regarding Information Reporting with Respect to U.S. Persons.

FATCA generally requires FFIs to report certain information with respect to their U.S. accounts.  In some cases, this reporting may be duplicative of the information required to be reported on Form 1099 with respect to the same U.S. accounts when the holders of such accounts are U.S. non-exempt recipients or the benefits of Form 1099 reporting to increasing voluntary compliance is not outweighed by the burden of overlapping information reporting requirements with respect to the same accounts.

Form 1099 Duplicative Reporting

Under existing FATCA regulations, certain FFIs may be able to mitigate duplicative reporting under FATCA and chapter 61 by electing to satisfy their FATCA reporting obligations by reporting U.S. account holders on Form 1099 instead of reporting the account holder on the Form 8966 as required under FATCA. This election, however, is not expected to relieve burden for FFIs that are required to report on U.S. accounts pursuant to local laws implementing a Model 1 intergovernmental agreement (IGA). As previewed in Notice 2013-69, to further reduce burdens and mitigate instances of duplicative reporting under FATCA and chapter 61, these amendments generally relieve non-U.S. payors from chapter 61 reporting to the extent the non-

U.S. payor reports on the account in accordance with the FATCA regulations or an applicable IGA.

Chapter 61 Duplicative Reporting

The amendments do not provide a similar exception to reporting under chapter 61 for U.S. payors. While some of the information reported by FFIs under FATCA on Form 8966 and under chapter 61 on Form 1099 may overlap, there are also significant differences. Most notably, the requirement under chapter 61 to furnish a copy of Form 1099 to the payee facilitates voluntary compliance, and there is no equivalent requirement for payee statements under FATCA. Moreover, U.S. payors generally have well-established systems for reporting and are subject to reporting on a broader range of payments under chapter 61 than non-U.S. payors. In light of these differences, the benefits of chapter 61 reporting by U.S. payors to the voluntary compliance system outweigh the reduction in burden that would be achieved by eliminating this reporting for U.S. payors that report on the same account under FATCA or an applicable IGA.

New, Limited Exception for Payments Not Subject to Withholding under Chapter 3

The amendments provide a new, limited exception to reporting under chapter 61 for both U.S. payors and non-U.S. payors that are FFIs required to report under chapter 4 or an applicable IGA with respect to payments that are not subject to withholding under chapter 3 or section 3406 and that are made to an account holder that is a presumed (but not known) U.S. non-exempt recipient.

FFIs that are required to report under chapter 4 or an applicable IGA will provide information regarding account holders who are presumed U.S. non-exempt recipients. Moreover, such presumed U.S. non-exempt recipients may not actually be U.S. persons for whom the recipient copy of Form 1099 would be relevant to facilitate voluntary compliance. As a result, the IRS and Treasury believe that reporting under chapter 61 should be eliminated on payments to account holders who are presumed U.S. non-exempt recipients and for whom there is FATCA reporting.

New, Limited Exception for Stock Transfer Agents

The amendments provide a new, limited exception from reporting under chapter 61 for U.S. payors acting as stock transfer agents or paying agents of distributions from certain passive foreign investment companies (PFICs) made to U.S. persons. This exception is based, in part, on comments suggesting ways to reduce duplicative reporting with respect to PFIC shareholders. This exception would reduce burden while not significantly impacting taxpayer compliance.

IV. Conforming Changes to the Regulations Implementing the Various Regimes.

The amendments include numerous conforming changes, including:

(i)              revising the examples in chapters 3 and 61 to take into account that payments in those examples may now be subject to FATCA;

(ii)            ensuring that defined terms in the FATCA regulations that are used in chapters 3 and 61 are appropriately cross-referenced; and

(iii)          unifying definitions of terms used in chapters 3, 4 and 61.

The 336 pages of changes and explanation of the FATCA coordination changes with Chapter 3 and Chapter 61, is available at http://www.irs.gov/pub/irs-utl/Chapters-3-61-coordinating-regs.pdf

The 229 pages of changes and explanation of the FATCA changes to the FATCA Final Regulations is available at http://www.irs.gov/Businesses/Corporations/Additional-FATCA-Guidance-Submitted-for-Publication

Attached I have highlighted the significant FATCA Final Regulation changes from the 229 page document:  Highlighted FATCA Changes 2-20-14

For previous analysis of FATCA updates, see my blog articles: https://profwilliambyrnes.com/category/fatca/

LexisNexis FATCA Compliance Manual

book coverFifty contributing authors from the professional and financial industry provide 600 pages of expert analysis within the LexisNexis® Guide to FATCA Compliance (2nd Edition): many perspectives – one voice crafted by the primary author William Byrnes.

The LexisNexis® Guide to FATCA Compliance (2nd Edition) comprises 34 Chapters grouped in three parts: compliance program (Chapters 1–4), analysis of FATCA regulations (Chapters 5–16) and analysis of FATCA’s application for certain trading partners of the U.S. (Chapters 17–34), including intergovernmental agreements as well as the OECD’s TRACE initiative for global automatic information exchange protocols and systems. The 34 chapters include many practical examples to assist a compliance officer contextualize the regulations, IGA provisions, and national rules enacted pursuant to an IGA.  Chapters include by example an in-depth analysis of the categorization of trusts pursuant to the Regulations and IGAs, operational specificity of the mechanisms of information capture, management and exchange by firms and between countries, insights as to the application of FATCA and the IGAs within new BRIC and European country chapters.

One Response to “IRS Changes US Withholding and Documentation Rules (Chapters 3 and 61) To Coordinate with FATCA”

  1. […] Code, chapters 3 and 61 of the Code, and section 3406, which were released on February 20, 2014. (link to my article on these US Withholding and Documentation Rules […]

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