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Analysis of FATCA 2014 1042-S Instruction’s

Posted by William Byrnes on June 28, 2014


free chapter download here —> http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2457671   Number of Pages in PDF File: 58

Every person required to deduct and withhold any tax under chapter 3 or chapter 4 is liable for such tax.

Who Must File?

Every withholding agent must file an information return on Form 1042-S to report amounts paid during the preceding calendar year.

However, withholding agents who are individuals are not required to report a payment on Form 1042-S if they are not making the payment as part of their trade or business and no withholding is required to be made on the payment.

For example, an individual making a payment of interest that qualifies for the portfolio interest exception from withholding is not required to report the payment if the portfolio interest is paid on a loan that is not connected to the individual’s trade or business. However, an individual who is a withholding agent paying an amount that actually has been subject to withholding is required to report the payment. Also, an individual paying an amount on which withholding is required must report the payment, whether or not the individual actually withholds.

Who is a Withholding agent?

A withholding agent is any person, U.S. or foreign, that has control, receipt, or custody of an amount subject to withholding under chapter 3, who can disburse or make payments of an amount subject to withholding, or who makes a withholdable payment under chapter 4.

The withholding agent may be an individual, corporation, partnership, trust, association, or any other entity. The term withholding agent also includes, but is not limited to, a qualified intermediary (QI), a nonqualified intermediary (NQI), a withholding foreign partnership (WP), a withholding foreign trust (WT), a flow-through entity, a U.S. branch, a territory FI, a nominee under section 1446, and an authorized agent. A person may be a withholding agent even if there is no requirement to withhold from a payment or if another person has already withheld the required amount from a payment.

In most cases, the U.S. person who pays (or causes to be paid) the item of U.S. source income to a foreign person (or to its agent) must withhold. However, other persons may be required to withhold. For example, if a payment is made by a QI (whether or not it assumes primary withholding responsibility) and the QI knows that withholding was not done by the person from which it received the payment, then that QI is required to do the appropriate withholding. In addition, withholding must be done by any QI that assumes primary withholding responsibility under chapters 3 and 4, a WP, a WT, a U.S. branch that agrees to be treated as a U.S. person, or an authorized agent.

Finally, if a payment is made by an NQI or a flow-through entity that knows, or has reason to know, that withholding was not done, that NQI or flow-through entity is required to withhold since it also falls within the definition of a withholding agent.

What’s New for the 2014 Form 1042-S?

The Form 1042-S for 2014 has been modified to accommodate reporting of payments and amounts withheld under FATCA (chapter 4) in addition to those amounts required to be reported under chapter 3.  Form 1042-S requires the reporting of an applicable exemption to the extent withholding under chapter 4 does not apply to a payment of U.S source fixed or determinable annual or periodical (FDAP) income (including deposit interest) that is reportable on Form 1042-S.

When a financial institution reports a payment made to its financial account, Form 1042-S also requires the reporting of additional information about a recipient of the payment, such as the recipient’s account number, date of birth, and foreign taxpayer identification number, if any.

For withholding agents, intermediaries, flow-through entities, and recipients, Form 1042-S requires that the chapter 3 status (or classification) and, when the payment reported is a FATCA withholdable payment, the chapter 4 status be reported on the form according to a code for each type of income.

For withholding agents that report amounts withheld by another withholding agent, Form 1042-S requests the name and EIN of the withholding agent that withheld the tax. This information is optional for 2014.

Electronic filing requirement for financial institutions. Beginning January 1, 2014, financial institutions that are required to report payments made under chapters 3 or 4 must electronically file Forms 1042-S (regardless of the number of forms to file).

Use Form 1042-S to:

  • report income described under Amounts Subject to Reporting on Form 1042-S, later, and to report amounts withheld under chapter 3 or chapter 4.
  • report specified Federal procurement payments paid to foreign persons that are subject to withholding.
  • report distributions of effectively connected income by a publicly traded partnership or nominee.

Do not use Form 1042-S to report an item required to be reported on any of the following forms:

  • Form W-2 (wages and other compensation made to employees (other than compensation for dependent personal services for which the beneficial owner is claiming treaty benefits), including wages in the form of group-term life insurance).
  • Form 1099.
  • FIRPTA: Dispositions by Foreign Persons of U.S. Real Property Interests, or Form 8805 Foreign Partner’s Information Statement of Section 1446 Withholding Tax.
  • Form 8966, FATCA Report. Foreign financial institutions (FFIs) and withholding agents are required to report on Form 8966 certain account holders and payees.  However, an FFI or withholding agent may also be required to file Form 1042-S to report payments of U.S. source FDAP income made to such persons and to report tax deducted and withheld, if any.

Amounts Subject to Reporting on Form 1042-S

Amounts subject to reporting on Form 1042-S are amounts from U.S. sources paid to foreign persons (including persons presumed to be foreign) or included in a U.S. payee pool that are reportable under chapters 3 and 4, even if no amount is deducted and withheld from the payment because of a treaty or Code exception to taxation or if any amount withheld was repaid to the payee.  Amounts subject to reporting are amounts from sources within the United States that constitute:

(a) fixed or determinable annual or periodical (FDAP) income (including deposit interest);

(b) certain gains from the disposal of timber, coal, or domestic iron ore with a retained economic interest; and

(c) gains relating to contingent payments received from the sale or exchange of patents, copyrights, and similar intangible property.

A payment is also subject to reporting if withholding under chapter 4 is applied (or required to be applied) to the payment. Amounts subject to reporting on Form 1042-S include, but are not limited to, the following amounts to the extent from U.S. sources:

(a)     Interest on deposits paid to certain nonresident aliens. Interest described in section 871(i)(2)(A) aggregating $10 or more paid with respect to a deposit if such interest is paid to a nonresident alien individual who is a resident of a country identified, in Revenue Procedure 2012-24 (or a superseding Revenue Procedure) as of December 31, prior to the calendar year in which the interest is paid.

A payor may elect to report interest described above paid to any nonresident alien individual by reporting all such interest. See Revenue Procedure 2012-24 (or a superseding Revenue Procedure) for the current list of countries with which the United States has in effect an income tax or other convention or bilateral agreement relating to exchange information within the meaning of section 6103(k)(4).

(b)     Corporate distributions. The entire amount of a corporate distribution (whether actual or deemed) must be reported, regardless of any estimate of the part of the distribution that represents a taxable dividend. Any distribution, however, that is treated as gain from the redemption of stock is not an amount subject to withholding.

(c)     Interest. This includes the part of a notional principal contract payment that is characterized as interest.

(d)     Rents.

(e)     Royalties.

(f)      Compensation for independent personal services performed in the United States.

(g)     Compensation for personal services performed in the United States (but only if the beneficial owner is claiming treaty benefits).

(h)     Annuities.

(i)      Pension distributions and other deferred income.

(j)      Most gambling winnings.

(k)     Cancellation of indebtedness. Effectively connected income (ECI).

(l)      Notional principal contract income.

(m)   Insurance premiums.

(n)     REMIC excess inclusions.

(o)     Students, teachers, and researchers. However, amounts that are exempt from tax under section 117 are not subject to reporting.

(p)     Amounts paid to foreign governments, foreign controlled banks of issue, and international organizations.

(q)     Foreign targeted registered obligations.

(r)     Original Issue Discount (OID) from the redemption of an OID obligation.

(s)      Certain dispositions of U.S. real property interests.

(t)      Other U.S.-source dividend equivalent payments

(u)     Guarantee of indebtedness.

(v)     Specified Federal procurement payments.

Amounts That Are Not Subject to Reporting on Form 1042-S

  • Interest and OID from short-term obligations.
  • Registered obligations targeted to foreign markets. Reporting will be required on interest paid on any registered obligation (regardless of whether targeted to foreign markets) if the registered obligation is issued after December 31, 2015.
  • Bearer obligations targeted to foreign markets. Withholding is required on interest paid on any bearer obligations targeted to foreign markets if the obligation is issued after March 18, 2012.
  • Notional principal contract payments that are not ECI.
  • Accrued interest and OID.
  • Certain withholdable payments. Withholdable payments not subject to reporting for chapter 3 purposes (other than bank deposit interest paid to certain nonresident aliens) are not required to be reported if withholding is not applied (or required to be applied) under chapter 4.

How Are Disregarded Entities Reported?  

If a U.S. withholding agent makes a payment to a disregarded entity (other than a limited branch of an FFI) that is not a hybrid entity making a treaty claim, and receives a valid Form W-8BEN-E or W-8ECI from a foreign person that is the single owner of the disregarded entity, the withholding agent must file a Form 1042-S in the name of the foreign single owner. The taxpayer identifying number (TIN) on the Form 1042-S, if required, must be the foreign single owner’s TIN.

Example. WA, a withholding agent, makes a withholdable payment of interest to LLC, a foreign limited liability company that is not an FFI. LLC is wholly-owned by FC, a foreign corporation that is an excepted non-financial foreign entity. LLC is treated as a disregarded entity. WA has a Form W-8BEN-E from FC on which it states that it is the beneficial owner of the income paid to LLC. WA reports the interest payment on Form 1042-S showing FC as the recipient. The result would be the same if LLC was a domestic entity.

How Are Amounts paid to a NQI or Flow-Through Entity Reported? 

If a U.S. withholding agent makes a payment to an NQI or a flow-through entity (other than a nonparticipating FFI) with respect to a withholdable payment, it must complete a separate Form 1042-S for each recipient on whose behalf the NQI or flow-through entity acts as indicated by its withholding statement and the documentation associated with its Form W-8IMY.

Example. WA, a withholding agent, makes a withholdable payment of interest to FFI 1, a reporting model 1 FFI. FFI 1 provides WA with a valid Form W-8IMY with which it associates a withholding statement that allocates 80% of the payment to FFI 2, a participating FFI, and 20% of the payment to a pool of nonparticipating FFIs. FFI 1 also provides WA with FFI 2’s Form W-8IMY with which it associates a withholding statement that allocates 100% of the payment to recalcitrant pool-no U.S. indicia. WA must complete a Form 1042-S for the interest allocated to a pool of nonparticipating FFIs with FFI 1 as the recipient and must complete another Form 1042-S for the interest allocated to a pool of recalcitrant account holders-no U.S. indicia with FFI 2 as the recipient.

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1,200 pages of analysis of the compliance challenges, over 54 chapters by 70 FATCA contributing experts from over 30 countries.  Besides in-depth, practical analysis, the 2015 edition includes examples, charts, time lines, links to source documents, and compliance analysis pursuant to the IGA and local regulations for many U.S. trading partners and financial centers.   The Lexis Guide to FATCA Compliance, designed from interviews with over 100 financial institutions and professional firms, is a primary reference source for financial institutions and service providers, advisors and government departments.  No filler of forms and regs – it’s all beef !  See Lexis’ order site and request a copy of the forthcoming 2015 edition – http://www.lexisnexis.com/store/catalog/booktemplate/productdetail.jsp?pageName=relatedProducts&prodId=prod19190327

A free download of the first of the 34 chapters is available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2457671

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  • Chapter 1 Background and Current Status of FATCA
  • Chapter 1A The International Financial System and FATCA
  • Chapter 2 Practical Considerations for Developing a FATCA Compliance Program
  • Chapter 2A FATCA Internal Policy
  • Chapter 3 FATCA Compliance and Integration of Information Technology
  • Chapter 4 Financial Institution Account Remediation
  • Chapter 4A FATCA Customer Outreach
  • Chapter 5 FBAR and Form 8938 Reporting and List of International Taxpayer IRS Forms
  • Chapter 6 Determining U.S. Ownership of Foreign Entities
  • Chapter 7 Foreign Financial Institutions
  • Chapter 7A Account reporting under FATCA
  • Chapter 8 Non-Financial Foreign Entities
  • Chapter 9 FATCA and the Offshore Trust Industry
  • Chapter 10 FATCA and the Insurance Industry
  • Chapter 11 Withholding and Qualified Intermediary
  • Chapter 12 FATCA Withholding Compliance
  • Chapter 13 “Withholdable” Payments
  • Chapter 13A Reporting Payments
  • Chapter 14 Determining and Documenting the Payee
  • Chapter 14A W8 Equivalents
  • Chapter 15 Framework of Intergovernmental Agreements
  • Chapter 16 Analysis of Current Intergovernmental Agreements
  • Chapter 17 European Union Cross Border Information Reporting
  • Chapter 18 The OECD Role in Exchange of Information: The Trace Project, FATCA, and Beyond
  • Chapter 19 Germany
  • Chapter 20 Ireland
  • Chapter 21 Japan
  • Chapter 22 Mexico
  • Chapter 23 Switzerland
  • Chapter 24 United Kingdom
  • Chapter 25 Brazil
  • Chapter 26 British Virgin Islands
  • Chapter 27 Canada
  • Chapter 28 Spain
  • Chapter 29 China
  • Chapter 30 Netherlands
  • Chapter 31 Luxembourg
  • Chapter 32 Russia
  • Chapter 33 Turkey
  • Chapter 34 India
  • Chapter 35 Argentina
  • Chapter 36 Aruba
  • Chapter 37 Australia
  • Chapter 38 Bermuda
  • Chapter 39 Colombia
  • Chapter 40 Cyprus
  • Chapter 41 Hong Kong
  • Chapter 42 Macau
  • Chapter 43 Portugal
  • Chapter 44 South Africa
  • Chapter 45 France
  • Chapter 46 Gibraltar
  • Chapter 47 Guernsey
  • Chapter 48 Italy

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FFI Agreements Amended by IRS One Week Before Withholding Starts

Posted by William Byrnes on June 24, 2014


On June 24, 2014 the IRS released an updated version of the FATCA FFI Agreement for Participating FFI and Reporting Model 2 FFI, just one week before FATCA withholding begins July 1st.   The previous FFI agreement version was released January 13th as Revenue Procedure 2014-13 (see my article link).

The IRS has updated the FFI agreement make it consistent with the coordination temporary regulations under chapter 4 of the 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 changes).

This revenue procedure also provides guidance to FFIs and branches of FFIs treated as reporting financial institutions under an applicable Model 2 intergovernmental agreement (IGA) (reporting 2 Model 2 FFIs) on complying with the terms of the FFI agreement, as modified by the Model 2 IGA. The FFI agreement does not apply to a reporting Model 1 FFI, or any branch of such an FFI, unless the reporting Model 1 FFI has registered a branch located outside of a Model 1 IGA jurisdiction so that such branch may be treated as a participating FFI or reporting Model 2 FFI. In such a case, the terms of the applicable FFI agreement apply to the operations of such branch.

A reporting Model 2 FFI should apply the FFI agreement by substituting the term “reporting Model 2 FFI” for “participating FFI” throughout the FFI agreement, except in cases where the FFI agreement explicitly refers to a reporting Model 2 FFI.  The FFI agreement in section 5 of this revenue procedure shall apply to an FFI that has submitted a FATCA registration with the IRS to be treated as a participating FFI (including a reporting Model 2 FFI) and that has received a global intermediary identification number (GIIN), regardless of whether the FFI receives a GIIN before or after the effective date of this revenue procedure.

How Many FFIS are Impacted by this Change? 

About 26% (19,960) of the registered FFIs are impacted by the FFI agreement changes, in addition to any new registrations from the current 9 Model 2 countries/jurisdictions and 171 countries/jurisdictions without an IGA.

77,353 financial institutions and their branches registered from 205 countries and jurisdictions, of a total of 250 countries and jurisdictions recognized by the USA.

Of this total registered, 71,219  FFIs (92%) registered from the 79 countries and jurisdictions that as of June 23rd have an IGA.  57,393 FFIs registered from Model I IGA jurisdictions probably either as a category of a Model 1 Deemed Compliant FFI or as a branch.  However, 13,826 of these registered as Model 2 reporting FFIs or branches.  At least these 13,826 are impacted by the FFI Agreement changes.

Model 2 IGAs – 9 (13,826 FFI Registered)

  1. Armenia (5-8-2014): 27
  2. Austria (4-29-2014): 2,978
  3. Bermuda (12-19-2013): 1,242
  4. Chile (3-5-2014): 324
  5. Hong Kong (5-9-2014): 1.539
  6. Japan (6-11-2013): 3,251
  7. Paraguay (6-6-2014): 17
  8. Switzerland (2-14-2013): 4,040
  9. Taiwan: 408

Non IGA Registrations (Participating FFI and other)

Only 6,134 FFIs registered from the remaining non-IGA countries / jurisdictions either as Participating FFIs or branches.   These 6,134 are also impacted by the FFI agreement changes.

45 countries and jurisdictions did not have a single FFI or branch registration on the GIIN List.  Presumably, FFIs and / or branches from these countries, such as Kosovo, will find their way unto the July 1st GIIN list.

Meanwhile, 30% withholding on all withholdable payments to nonparticipating FFIs in the 171 non-IGA countries begins next week on July 1.  Most commentators expect a rush of over 300,000 FFI registrations by the end of 2014.  Some predict more than a half million entities must still register, based on the UK’s HMRC estimate that 75,000 entities are impacted by FATCA within the United Kingdom (where less than 6,300 are currently registered on the GIIN list).

Updates to FFI Agreement

Definitions

Several definitions in section 2 of the FFI agreement are updated. For example, the terms chapter 4 withholding rate pool (including the U.S. payee pool) and chapter 4 reporting pool have been redefined and are further clarified.

Incorporating Six Month Extension for Entities

Section 3.02 of the FFI agreement is revised to incorporate the allowance for treating an obligation held by an entity that is issued, opened, or executed on or after July 1, 2014, and before January 1, 2015 as a preexisting obligation for purposes of applying the due diligence procedures under chapter 4 and the regulations thereunder, except that an FFI may not apply the documentation exception.

Back Up Withholding in Certain Situations

Sections 4.01(D), 4.02(B), 6.05(A)(2), 6.07, and 9.02(B) of the FFI agreement are also updated to reflect that a participating FFI may elect to backup withhold under section 3406 rather than to withhold under chapter 4 on a withholdable payment that is a reportable payment made to certain U.S. non-exempt recipients only if the participating FFI complies with the information reporting rules under chapter 61 with respect to payments made to such account holders.

Depositing Withheld Tax

In addition, section 5.02 of the FFI agreement (regarding tax withheld and set aside in escrow with respect to withholdable payments to certain dormant accounts) is revised to conform to the temporary chapter 4 regulations for when the tax must be deposited.

Lead FFI Responsibility

Section 11.02(B) of the FFI agreement is revised to clarify that the responsibilities of a lead FI are only with respect to members of the FFI group that have designated the participating FFI to act as lead FI on their behalf. Additionally, if an FFI group has a consolidated compliance program, the participating FFI that is also the compliance FI for the members of the FFI group that are included in such compliance program must act as the lead FI for each such member of the FFI group.

PFFI Reporting NFFE Account Holder as a U.S. Account

Section 9.02(B) of the FFI agreement also is revised to allow a participating FFI that receives a withholdable payment that is allocable to an account holder of the FFI that is a passive NFFE with one or more substantial U.S. owner(s) (or, in the case of a reporting Model 2 FFI, with one or more controlling persons as defined under the applicable IGA) to certify on a withholding statement provided to the withholding agent that the FFI is reporting the account holder as a U.S. account under the terms of the FFI agreement.

When finalizing the temporary chapter 4 regulations, the Treasury Department and the IRS intend to amend the regulations to allow a withholding agent to rely on such a certification provided by a participating FFI, reporting Model 2 FFI, or reporting Model 1 FFI, which, absent a reason to know that the certificate is incorrect or unreliable, would relieve the withholding agent of its obligation to obtain and report information about a passive NFFE with substantial U.S. owners under section 1472. This amendment is intended to eliminate duplicative reporting of substantial U.S. owners (or controlling persons) of passive NFFEs required under section 1472 as well as under the U.S. account reporting requirements of a participating FFI, reporting Model 2 FFI, or reporting Model 1 FFI under chapter 4 or an applicable IGA.

Portional Allocation of Withholdable Payments

Section 9.02(B) is also revised to provide that a participating FFI may allocate a portion of a withholdable payment to a group of documented account holders (other than nonqualified intermediaries or flow-through entities) for whom withholding and reporting is not required under chapter 3, 4, or 61. For example, a participating FFI may allocate a payment of bank deposit interest to a pool of documented foreign account holders rather than providing specific information and a valid withholding certificate or other appropriate documentation for each such payee. The Treasury Department and the IRS intend to amend the regulations to incorporate this change when the temporary chapter 4 regulations are finalized.

FFI Agreement Sections

Section 1. Purpose And Scope
Section 2. Definitions
Section 3. Due Diligence Requirements For Documentation And Identification Of Account Holders And Nonparticipating FFI Payees
Section 4. Withholding Requirements
Section 5. Deposit Requirements
Section 6. Information Reporting And Tax Return Obligations
Section 7. Legal Prohibitions On Reporting U.S. Accounts And On Withholding
Section 8. Compliance Procedures
Section 9. Participating FFI Withholding Certificate
Section 10. Adjustments For Overwithholding And Underwithholding And Refunds
Section 11. FFI Group
Section 12. Expiration, Modification, Termination, Default, And Renewal Of This Agreement
Section 13. Miscellaneous Provisions

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The LexisNexis® Guide to FATCA Compliance (2nd Edition) comprises 34 Chapters by 50 industry experts grouped in three parts: compliance program (Chapters 1–4), analysis of FATCA regulations (Chapters 5–16) and analysis of Intergovernmental Agreements (IGAs) and local law compliance challenges (Chapters 17–34), including intergovernmental agreements as well as the OECD’s TRACE initiative for global automatic information exchange protocols and systems.   A free download of the first of the 34 chapters is available at http://www.lexisnexis.com/store/images/samples/9780769853734.pdf

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new Form W-8IMY Instructions released June 19!

Posted by William Byrnes on June 19, 2014


W-8IMY: Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting

On June 19, 2014 the IRS released the new Form W-8IMY instructions.

Form W-8IMY is submitted generally by a payment recipient (the “filer”) with non-beneficial owner status, i.e. an intermediary.  Such intermediary can be a U.S. branch, a qualified intermediary, a non-qualified intermediary, foreign partnership, foreign grantor or a foreign simple trust.  Form W-8IMY requires a tax identification number.

The new Form W-8IMY has 28 parts whereas the previous August 2013 FATCA draft W-8IMY only contained 26.  The new 2014 Form W-8IMY is vastly different from the seven-part 2006 predecessor form.

Who Must File?

An entity should provide Form W-8IMY when receiving a reportable amount or withholdable payment on behalf of another person or as a flow-through entity.

Form W-8IMY must be provided by the following persons:

  •  A foreign person, or a foreign branch of a U.S. person, to establish that it is a qualified intermediary that is not acting for its own account, to represent that it has provided or will provide a withholding statement, as required, or, if applicable, to represent that it has assumed primary withholding responsibility under chapters 3 and 4 of the Code and/or primary Form 1099 reporting and backup withholding responsibility.
  •  A foreign person to establish that it is a nonqualified intermediary that is not acting for its own account, to certify its chapter 4 status (if required), to certify whether it reports U.S. accounts under chapter 4 (if required), and to indicate, if applicable, that it is using the form to transmit withholding certificates and/or other documentary evidence and has provided, or will provide, a withholding statement, as required.  A U.S. person cannot be a nonqualified intermediary
  •  A U.S. branch that is acting as an intermediary to represent that the income it receives is not effectively connected with the conduct of a trade or business within the United States and either that it is using the form (a) to evidence it is treated as a U.S. person under Regulations section 1.1441-1(b)(2)(iv)(A) with respect to any payments associated with the Form W-8IMY, or (b) to certify to its chapter 4 status and to transmit the documentation of the persons for whom it receives a payment and has provided, or will provide, a withholding statement, as required.
  •  A financial institution incorporated or organized under the laws of a U.S. territory that is acting as an intermediary or is a flow-through entity to represent that it is a financial institution (other than an investment entity that is not also a depository institution, custodial institution, or specified insurance company) and either that it is using the form (a) to evidence it is treated as a U.S. person under Regulations section 1.1441-1(b)(2)(iv)(A) with respect to any payments associated with the Form W-8IMY, or (b) to certify that it is transmitting documentation of the persons for whom it receives a payment and has provided, withholding statement, as required.
  •  A foreign partnership or a foreign simple or grantor trust to establish that it is a withholding foreign partnership or withholding foreign trust under the regulations for sections 1441 and 1442 and to certify its chapter 4 status (if required).
  •  A foreign partnership or a foreign simple or grantor trust to establish that it is a nonwithholding foreign partnership or nonwithholding foreign simple or grantor trust for purposes of sections 1441 and 1442, to certify to its chapter 4 status (if required), and to represent that the income is not effectively connected with a U.S. trade or business, that the form is being used to transmit withholding certificates and/or documentary evidence, and that it has provided or will provide a withholding statement as required.
  •  A foreign partnership or foreign grantor trust to establish that it is an upper-tier foreign partnership or foreign grantor trust for purposes of section 1446 and to represent that the form is being used to transmit withholding certificates and/or documentary evidence and that it has provided, or will provide, a withholding statement, as required.
  •  A flow-through entity (including a foreign reverse hybrid entity) transmitting withholding certificates and/or other documentary evidence to claim treaty benefits on behalf of its owners, to certify its chapter 4 status (if required), and to certify that it has provided, or will provide, a withholding statement, as required.
  •  A nonparticipating FFI acting as an intermediary or that is a flow-through entity using this form to transmit a withholding statement and withholding certificates or other documentation for exempt beneficial owners described in Regulations section 1.1471-6.
  •  A QSL certifying to a withholding agent that it is acting as a QSL with respect to U.S. source substitute dividends received from the withholding agent pursuant to a securities lending transaction (as described in Notice 2010-46).
  •  A foreign intermediary or flow-through entity not receiving withholdable payments or reportable amounts that is holding an account with a participating FFI or registered deemed-compliant FFI providing this form for purposes of documenting the chapter 4 status of the account holder.  However, no withholding statement is required to be provided along with Form W-8IMY if it is being provided by an FFI solely to document such an account when no withholdable payments or reportable amounts are made to the account. Also note that the entity may instead provide Form W-8BEN-E when it is not receiving withholdable payments or reportable amounts to document its status as an account holder.

Giving Form W-8IMY to the withholding agent. Do not send Form W-8IMY to the IRS. Instead, give it to the person who is requesting it. Generally, this person will be the one from whom you receive the payment, who credits your account, or a partnership that allocates income to you.

When to provide Form W-8IMY to the withholding agent? Give Form W-8IMY to the person requesting it before income is paid, credited, or allocated to your account.

Expiration of Form W-8IMY. Generally, a Form W-8IMY remains valid until the status of the person whose name is on the certificate is changed in a way relevant to the certificate or there is a change in circumstances that makes the information on the certificate no longer correct. The indefinite validity period does not extend, however, to any other withholding certificates, documentary evidence, or withholding statements associated with the certificate.

Change in circumstances. If a change in circumstances makes any information on the Form W-8IMY (or any documentation or a withholding statement associated with the Form W-8IMY) have submitted incorrect for purposes of chapter 3 or chapter 4 (when relevant), the intermediary must notify the withholding agent within 30 days and file a new Form W-8IMY or provide new documentation or a new withholding statement (as applicable).

The information associated with Form W-8IMY must be updated as often as is necessary to enable the withholding agent to withhold at the appropriate rate on each payment and to report such income.

See Regulations sections 1.1441-1(e)(4)(ii)(D) for the definition of a change in circumstances for purposes of chapter 3. See Regulations section 1.1471-3(c)(6)(ii)(E) for the definition of a change in circumstances for purposes of chapter 4.

Chapter 3 and Chapter 4 Status

In general, intermediaries and flow-through entities receiving reportable amounts will be required to provide both their chapter 3 status and the chapter 3 status of persons for whom they receive such payments.

An intermediary or flow-through entity receiving a withholdable payment will be required to provide its chapter 4 status and the chapter 4 status of persons for whom it receives a withholdable payment when required for chapter 4 purposes.

Partnership Allocations

Form W-8IMY may be submitted and accepted to satisfy documentation requirements for purposes of withholding on certain partnership allocations to foreign partners under section 1446. Section 1446 generally requires withholding when a partnership is conducting a trade or business in the United States and allocates income effectively connected with that trade or business (ECI) to foreign persons that are partners in the partnership. Section 1446 can also apply when certain income is treated as effectively connected income of the partnership and is so allocated.

Form W-8IMY

Part I of the W8-IMY Form adds FATCA classification.   Part I of the form requires general information, the Chapter 3 QI status, and the Chapter 4 FATCA classification of the filer.

Question 4 of Part I requests the QI status:

  • If the filer is a Qualified Intermediary, then the filer must complete Part III Qualified Intermediary.  If the filer is a Nonqualified Intermediary, then the filer must complete Part IV Nonqualified Intermediary.
  • Territory Financial Institutions complete Part V. U.S. Branches complete Part VI.
  • Withholding Foreign Partnership or Withholding Foreign Trusts complete Part VII.
  • Nonwithholding Foreign Partnership, Nonwithholding Foreign Simple Trust, and Nonwithholding foreign grantor trusts must complete Part VIII.

Question 5 requests the FATCA classification of the filer. The classification indicated determines which one of the Parts IX through XXVII must be completed.

Part II of this form is to be completed if the entity is a disregarded entity or a branch receiving payment as an intermediary. Part II only applies to branches of an FFI outside the FFI’s country of residence.

Chapter 3 Status Certifications  Parts III – VIII

Parts III – VIII of this form address the QI Status of the entity. Part III is to be completed if the entity is a QI, and requires the entity to certify that it is a QI and has provided appropriate documentation. Part IV is to be completed if the entity is a Nonqualified Intermediary (NQI), and requires the entity to certify that it is a NQI not acting for its own account.

Part V is to be completed if the entity is a Territory Financial Institution. Part VI is to be completed by a U.S. branch only if the branch certifies on the form that it is the U.S. branch of a U.S. bank or insurance company, and that the payments made are not effectively connected to a U.S. trade or business. Part VII is to be completed if the entity is a Foreign Withholding Partnership (WP) or a Withholding Foreign Trust (WT). Part VIII is to be completed if the entity is either a Nonwithholding Foreign Partnership, Simple Trust, or Grantor Trust.

Chapter 4 Status Certifications Parts IX – XXVI

Parts IX – XXVI of this form address the FATCA Status of the entity. These classifications include the new classification of a Restricted Distributor (Part XVI), but do not include the new classification of a Reporting NFFE.

Statement of Certification

Part XXVIII requires certification, under penalty of perjury, by the payee or a person authorized to sign on the payee’s behalf. Finally, the form contains the following language: “I agree that I will submit a new form within 30 days if any certification made on this form becomes incorrect.”

Structure of New Form Form W-8IMY

  • Part I Identification of Entity
  • Part II Disregarded Entity or Branch Receiving Payment.

Chapter 3 Status Certifications

  • Part III Qualified Intermediary
  • Part IV Nonqualified Intermediary
  • Part V Territory Financial Institution
  • Part VI Certain U.S. Branches
  • Part VII Withholding Foreign Partnership (WP) or Withholding Foreign Trust (WT)
  • Part VIII Nonwithholding Foreign Partnership, Simple Trust, or Grantor Trust

Chapter 4 Status Certifications

  • Part IX Nonparticipating FFI with Exempt Beneficial Owners
  • Part X Sponsored FFI That Has Not Obtained a GIIN
  • Part XI Owner-Documented FFI
  • Part XII Certified Deemed-Compliant Nonregistering Local Bank
  • Part XIII Certified Deemed-Compliant FFI with Only Low-Value Accounts
  • Part XIV Certified Deemed-Compliant Sponsored, Closely Held Investment Vehicle
  • Part XV Certified Deemed-Compliant Limited Life Debt Investment Entity
  • Part XVI Restricted Distributor
  • Part XVII Foreign Central Bank of Issue
  • Part XVIII Nonreporting IGA FFI
  • Part XIX Exempt Retirement Plans
  • Part XX Excepted Nonfinancial Group Entity
  • Part XXI Excepted Nonfinancial Start-Up Company
  • Part XXII Excepted Nonfinancial Entity in Liquidation or Bankruptcy
  • Part XXIII Publicly Traded NFFE or NFFE Affiliate of a Publicly Traded Corporation
  • Part XXIV Excepted Territory NFFE
  • Part XXV Active NFFE
  • Part XXVI Passive NFFE
  • Part XXVII Sponsored Direct Reporting NFFE

book coverPractical Compliance Aspects of FATCA and GATCA

The LexisNexis® Guide to FATCA Compliance (2nd Edition) comprises 34 Chapters by 50 industry experts grouped in three parts: compliance program (Chapters 1–4), analysis of FATCA regulations (Chapters 5–16) and analysis of Intergovernmental Agreements (IGAs) and local law compliance challenges (Chapters 17–34), including intergovernmental agreements as well as the OECD’s TRACE initiative for global automatic information exchange protocols and systems.   A free download of the first of the 34 chapters is available at http://www.lexisnexis.com/store/images/samples/9780769853734.pdf

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Filing Requirement for NRA with US Source Income?

Posted by William Byrnes on June 10, 2014


Nonresident Aliens with US Source Income?

Nonresident aliens (“NRA”) who received income from U.S. sources in 2013 also must determine whether they have a U.S. tax obligation. The filing deadline for nonresident aliens can be April 15 or June 16 depending on sources of income. See Taxation of Nonresident Aliens.

Who is a Nonresident Alien for US tax Purposes?

An alien is any individual who is not a U.S. citizen or U.S. national.

A resident alien is an alien who has passed either the green card test or the substantial presence test.  A nonresident alien is everyone other alien.

Who Must File a US tax Return?

If an alien is covered under either of the following 2 categories , then the alien must file a US tax return:

  1. A nonresident alien individual engaged or considered to be engaged in a trade or business in the United States during the year.
  2. A nonresident alien individual who is not engaged in a trade or business in the United States and has U.S. income on which the tax liability was not satisfied by the withholding of tax at the source.

Which Income to Report?

A nonresident alien’s income that is subject to U.S. income tax must generally be divided into 2 categories:

Effectively Connected Income, after allowable deductions, is taxed at graduated rates. These are the same rates that apply to U.S. citizens and residents. Effectively Connected Income should be reported on page one of Form 1040NR, U.S. Nonresident Alien Income Tax Return.

FDAP income generally consists of passive investment income; however, in theory, it could consist of almost any sort of income. FDAP income is taxed at a flat 30% (or lower treaty rate) and no deductions are allowed against such income. FDAP income should be reported on page four of Form 1040NR.

Which Form to File?

Nonresident aliens who are required to file an income tax return must use:

What is US Source Income Subject to US tax?

A nonresident alien (NRA) usually is subject to U.S. income tax only on U.S. source income. The general rules for determining U.S. source income that apply to most nonresident aliens are shown below:

Summary of Source Rules for Income of Nonresident Aliens
Item of Income Factor Determining Source

Salaries, wages, other compensation

Where services performed

Business income: Personal services Where services performed
Business income: Sale of inventory -purchased Where sold

Business income: Sale of inventory -produced

Where produced (Allocation may be necessary)

Interest

Residence of payer

Dividends

Whether a U.S. or foreign corporation*

Rents

Location of property

Royalties: Natural resources Location of property

Royalties: Patents, copyrights, etc.

Where property is used

Sale of real property

Location of property

Sale of personal property

Seller’s tax home (but see Personal Property, in Chapter 2 of Publication 519, for exceptions)

Pensions

Where services were performed that earned the pension

Scholarships – Fellowships Generally, the residence of the payer

Sale of natural resources

Allocation based on fair market value of product at export terminal. For more information, see IRC section 1.863–1(b) of the regulations.

*Exceptions include: a) Dividends paid by a U.S. corporation are foreign source if the corporation elects the Puerto Rico economic activity credit or possessions tax credit. b) Part of a dividend paid by a foreign corporation is U.S. source if at least 25% of the corporation’s gross income is effectively connected with a U.S. trade or business for the 3 tax years before the year in which the dividends are declared.

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Treasury provides temporary relief for five areas of FATCA compliance (Notice 2014-33 of May 2)

Posted by William Byrnes on May 2, 2014


For my blogs FATCA subscribers, below I summarize and (quickly) analyze the aspects of Notice 2014-33, published just before 3pm East Coast time on Friday May 2, and provide relevant links.

Treasury released Notice 2014-33 on May 2.  Notice 2014-33 provides aspects of temporary relief for five areas of FATCA compliance:

1. 6 month extension (from July 1, 2014 until December 31, 2014) for characterizing as “pre-existing” the obligations (including accounts) held by an entity

2. soft-enforcement transition period 2014 and 2015 for good-faith actors

3. modification to the “standards of knowledge” for withholding agents under §1.1441-7(b)[1] for accounts documented before July 1, 2014

4. revision to the definition of a “reasonable explanation” of foreign status in §1.1471-3(e)(4)(viii)[2]

5. additional guidance for an FFI (or a branch of an FFI, including a disregarded entity owned by an FFI) that is a member of an expanded affiliated group of FFIs to be treated as a limited FFI or limited branch, including the requirement for a limited FFI to register on the FATCA registration website.

1. Six Month Extension To Characterize Entity Accounts As Pre-Existing Obligations

Treasury stated that industry comments indicate that the release dates of the final Forms W-8 (click on the links for analysis of the April 2014 releases of the new W-8IMY and W-8BEN-E) and accompanying instructions present practical problems for both withholding agents and FFIs to implement new account opening procedures beginning on July 1, 2014.

Thus, obligations (including accounts) held by an entity – opened, executed, or issued from July 1, 2014 until December 31, 2014 – may be treated as preexisting obligations by a withholding agent or FFI for purposes of sections 1471 and 1472 (subject to certain modifications described in section IV of Notice 2014-33).

2. Transition Period For Enforcement And Administration Of Compliance

The IRS will regard 2014 and 2015 as a transition period for purposes of its enforcement and administration of the due diligence, reporting, and withholding provisions under chapter 4, as well as the provisions under chapters 3 and 61, and section 3406, to the extent these rules were modified by the temporary coordination regulations.

During this transition period, the IRS will take into account the extent of good faith efforts to comply with the requirements of the chapter 4 regulations and the temporary coordination regulations by

  • a participating or deemed-compliant FFI,
  • direct reporting NFFE,
  • sponsoring entity,
  • sponsored FFI,
  • sponsored direct reporting NFFE, or
  • withholding agent.

The IRS will take into account whether a withholding agent has made reasonable efforts during the transition period to modify its account opening practices and procedures to document the chapter 4 status of payees, apply the standards of knowledge provided in chapter 4, and, in the absence of reliable documentation, apply the presumption rules of §1.1471-3(f).[3]

Additionally, for example, the IRS will consider the good faith efforts of a participating FFI, registered deemed-compliant FFI, or limited FFI to identify and facilitate the registration of each other member of its expanded affiliated group as required for purposes of satisfying the expanded affiliated group requirement under §1.1471-4(e)(1).

The IRS will not regard calendar years 2014 and 2015 as a transition period with respect to the requirements of chapters 3 and 61, and section 3406, that were not modified by the temporary coordination regulations. For example, the IRS will not provide transitional relief with respect to its enforcement regarding a withholding agent’s determinations of the character and source of payments for withholding and reporting purposes.

3. Modification To The Standards Of Knowledge For Withholding Agents Under §1.1441-7(b)[4] 

Treasury intends to amend the temporary coordination regulations to provide that a direct account holder will be considered documented pursuant to the requirements of §1.1441-1(e)(4)(ii)(A)[5] prior to July 1, 2014, without regard to whether the withholding agent obtains renewal documentation for the account holder on or after July 1, 2014. Therefore, a withholding agent that has documented a direct account holder prior to July 1, 2014, is not required to apply the new reason to know standards relating to a U.S. telephone number or U.S. place of birth until the withholding agent is notified of a change in circumstances with respect to the account holder’s foreign status other than renewal documentation or reviews documentation for the account holder that contains a U.S. place of birth.

The temporary coordination regulations also provide a transitional rule to allow a withholding agent that has previously documented the foreign status of a direct account holder for chapters 3 and 61 purposes prior to July 1, 2014, to continue to rely on such documentation without regard to whether the withholding agent has a U.S. telephone number or U.S. place of birth for the account holder. The withholding agent would, however, have reason to know that the documentation is unreliable or incorrect if the withholding agent is notified of a change in circumstances with respect to the account holder’s foreign status or the withholding agent reviews documentation for the account holder that contains a U.S. place of birth.

4. Revision Of The Definition Of Reasonable Statement 

Commentators have noted that the description of a reasonable explanation of foreign status in the final chapter 4 regulations differs from the description provided in the temporary coordination regulations.

Treasury and the IRS intend to amend the final chapter 4 regulations to adopt the description of a reasonable explanation of foreign status provided in the temporary coordination regulations, which permit an individual to provide a reasonable explanation that is not limited to an explanation meeting the requirements of §1.1471-3(e)(4)(viii)(A) through (D).

(viii) Reasonable explanation supporting claim of foreign status. A reasonable explanation supporting a claim of foreign status for an individual means a written statement prepared by the individual (or the individual’s completion of a checklist provided by the withholding agent), stating that the individual meets one of the requirements of paragraphs (e)(4)(viii)(A) through (D).

(A) The individual certifies that he or she—

(1) Is a student at a U.S. educational institution and holds the appropriate visa;

(2) Is a teacher, trainee, or intern at a U.S. educational institution or a participant in an educational or cultural exchange visitor program, and holds the appropriate visa;

(3) Is a foreign individual assigned to a diplomatic post or a position in a consulate, embassy, or international organization in the United States; or

(4) Is a spouse or unmarried child under the age of 21 years of one of the persons described in paragraphs (e)(4)(viii)(A) through (C) of this section;

(B) The individual provides information demonstrating that he or she has not met the substantial presence test set forth in § 301.7701(b)-1(c) of this chapter (for example, a written statement indicating the number of days present in the United States during the 3-year period that includes the current year);

(C) The individual certifies that he or she meets the closer connection exception described in § 301.7701(b)-2, states the country to which the individual has a closer connection, and demonstrates how that closer connection has been established; or

(D) With respect a payment entitled to a reduced rate of tax under a U.S. income tax treaty, the individual certifies that he or she is treated as a resident of a country other than the United States and is not treated as a U.S. resident or U.S. citizen for purposes of that income tax treaty.

5.1 Limited FFIs And Limited Branches

While Treasury stands ready and willing to negotiate IGAs based on the published models, commentators have expressed practical concerns about the status of FFIs and branches of FFIs in jurisdictions that are slow to engage in IGA negotiations and that have legal restrictions impeding their ability to comply with FATCA, including the conditions for limited FFI or limited branch status under the chapter 4 regulations. Specifically, comments have noted that the restrictions imposed by the final chapter 4 regulations on a limited branch or limited FFI on opening any account that it is required to treat as a U.S. account or as held by a nonparticipating FFI hinders the ability of an FFI to agree to the conditions of limited status due, for example, to requirements under local law to provide individual residents with access to banking services or to the business needs of the FFI to secure funding from another FFI in the same jurisdiction with similar impediments to complying with the requirements of FATCA.

Treasury and the IRS intend to amend the final chapter 4 regulations to permit a limited FFI or limited branch to open U.S. accounts for persons resident in the jurisdiction where the limited branch or limited FFI is located, and accounts for nonparticipating FFIs that are resident in that jurisdiction, provided that the limited FFI or limited branch does not solicit U.S. accounts from persons not resident in, or accounts held by nonparticipating FFIs that are not established in, the jurisdiction where the FFI (or branch) is located and the FFI (or branch) is not used by another FFI in its expanded affiliated group to circumvent the obligations of such other FFI under section 1471. This modification is consistent with the treatment of related entities and branches provided in the model IGAs.

5.2 Registration of Limited FFIs

Commentators have also stated that certain jurisdictions are explicitly prohibiting an FFI resident in, or organized under the laws of, the jurisdiction from registering with the IRS and agreeing to any status, including status as a limited FFI, regardless of whether the FFI would otherwise be able to comply with the requirements of limited FFI status.

Treasury and the IRS intend to amend the final chapter 4 regulations to provide that, if an FFI is prohibited under local law from registering as a limited FFI, the prohibition will not prevent the members of its expanded affiliated group from obtaining statuses as participating FFIs or registered deemed-compliant FFIs if the first-mentioned FFI is identified as a limited FFI on the FATCA registration website by a member of the expanded affiliated group that is a U.S. financial institution or an FFI seeking status as a participating FFI (including a reporting Model 2 FFI) or reporting Model 1 FFI.

In order to identify the limited FFI, the member of the expanded affiliated group will be required to register as a Lead FI with respect to the limited FFI and provide the limited FFI’s information in Part II of the FATCA registration website. If the Lead FI is prohibited from identifying the limited FFI by its legal name, it will be sufficient if the Lead FI uses the term “Limited FFI” in place of its name and indicates the FFI’s jurisdiction of residence or organization.

By identifying a limited FFI in the FATCA registration website, the Lead FI is confirming that:

(1) the FFI made a representation to the Lead FI that it will meet the conditions for limited FFI status,

(2) the FFI will notify the Lead FI within 30 days of the date that such FFI ceases to be a limited FFI because it either can no longer comply with the requirements for limited status or failed to comply with these requirements, or that the limited FFI can comply with the requirements of a participating FFI or deemed-compliant FFI and will separately register, to the extent required, to obtain its applicable chapter 4 status, and

(3) the Lead FI, if it receives such notification or knows that the limited FFI has not complied with the conditions for limited FFI status or that the limited FFI can comply with the requirements of a participating FFI or deemed-compliant FFI, will, within 90 days of such notification or acquiring such knowledge, update the information on the FATCA registration website accordingly and will no longer be required to act as a Lead FI for the FFI.

In the case in which the FFI can no longer comply or failed to comply with the requirements of limited FFI status, the Lead FI must delete the FFI from Part II of the FATCA registration website and must maintain a record of the date on which the FFI ceased to be a limited FFI and the circumstances of the limited FFI’s non-compliance that will be available to the IRS upon request.

For 600 pages of substantive expert analysis by 50 leading FATCA professionals and in-house compliance officers, see Guide to FATCA Compliance

—-Footnotes—–

[1] §1.1441-7 (b) Standards of knowledge

(1) In general. A withholding agent must withhold at the full 30-percent rate under section 1441, 1442, or 1443(a) or at the full 4-percent rate under section 1443(b) if it has actual knowledge or reason to know that a claim of U.S. status or of a reduced rate of withholding under section 1441, 1442, or 1443 is unreliable or incorrect. A withholding agent shall be liable for tax, interest, and penalties to the extent provided under sections 1461 and 1463 and the regulations under those sections if it fails to withhold the correct amount despite its actual knowledge or reason to know the amount required to be withheld.

[2] § 1.1471–3(e) Identification of payee

(4) Reason to know. A withholding agent shall be considered to have reason to know that a claim of chapter 4 status is unreliable or incorrect if its knowledge of relevant facts or statements contained in the withholding certificates or other documentation is such that a reasonably prudent person in the position of the withholding agent would question the claims made. For accounts opened on or after January 1, 2014, a withholding agent will also be considered to have reason to know that a claim of chapter 4 status is unreliable or incorrect if any information contained in its account opening files or other customer account files, including documentation collected for AML due diligence purposes, conflicts with the payee’s claim of chapter 4 status.

(viii) Reasonable explanation supporting claim of foreign status. A reasonable explanation supporting a claim of foreign status for an individual means a written statement prepared by the individual (or the individual’s completion of a checklist provided by the withholding agent), stating that the individual meets one of the requirements of paragraphs (e)(4)(viii)(A) through (D).

[3] (f) Presumptions regarding chapter 4 status of the person receiving the payment in the absence of documentation—(2) Presumptions of classification as an individual or entity—

(i) In general. A withholding agent that cannot reliably associate a payment with a valid withholding certificate, or that has received valid documentary evidence, as described in paragraph (c)(5) of this section, but cannot determine a person’s status as an individual or an entity from the documentary evidence, must presume that the person is an individual if the person appears to be an individual (for example, based on the person’s name or information in the customer file). If the person does not appear to be an individual, then the person shall be presumed to be an entity. In the absence of reliable documentation, a withholding agent must treat a person that is presumed to be an entity as a trust or estate if the person appears to be a trust or estate (for example, based on the person’s name or information in the customer file). In addition, a withholding agent must treat a person that is presumed to be a trust, or a person that is known to be a trust but for which the withholding agent cannot determine the type of trust, as a grantor trust if the withholding agent knows that the settlor of the trust is a U.S. person, and otherwise as a simple trust. In the absence of reliable indications that the entity is a trust or estate, the withholding agent must presume the person is a corporation if it can be treated …. If the withholding agent cannot treat the person as a corporation … then the person must be presumed to be a partnership.

[4] §1.1441-7 (b) Standards of knowledge

(1) In general. A withholding agent must withhold at the full 30-percent rate … if it has actual knowledge or reason to know that a claim of U.S. status or of a reduced rate of withholding … is unreliable or incorrect. A withholding agent shall be liable for tax, interest, and penalties to the extent provided … if it fails to withhold the correct amount despite its actual knowledge or reason to know the amount required to be withheld.

[5] §1.1441-1(e)(4)(ii) Period of validity—

(A) Three-year period. A withholding certificate … shall remain valid until the earlier of the last day of the third calendar year following the year in which the withholding certificate is signed or the day that a change in circumstances occurs that makes any information on the certificate incorrect.

book cover

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 Intergovernmental Agreements (IGAs) and local law compliance requirements (Chapters 17–34), including  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, and insights as to the application of FATCA and the IGAs for BRIC and European country chapters.

If you are interested in discussing the Master or Doctorate degree in the areas of financial services or international taxation, please contact me https://profwilliambyrnes.com/online-tax-degree/

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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.

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