JAN. 16, 2017

Emily L. Foster

taxnotes image.png

Much-anticipated final, temporary, and proposed withholding and information reporting regulations released by Treasury and the IRS December 30 provide some relief for withholding agents and foreign financial institutions but don't fully address industry concerns.

 * * * * * * * 

The much-anticipated final, temporary, and proposed withholding and information reporting regulations released by Treasury and the IRS December 30 provide some relief for withholding agents and foreign financial institutions but don't fully address industry concerns.

The regulations incorporate the relief announced in prior guidance and address other concerns of the withholding agent and FFI communities, Laurie Hatten-Boyd of KPMG LLP said. "With a few exceptions, most of the changes will be viewed as positive ones," she added.

Chip Collins of UBS AG said, "It's commendable for the IRS to address many of the issues that have been raised by industry over the years. That said, we need to keep in mind that some relief provisions come with strings attached."

One set of final and temporary regulations (T.D. 9808 ) address the withholding of tax on some U.S.-source income paid to foreign persons, information reporting and backup withholding regarding payments made to U.S. persons, and portfolio interest paid to nonresident alien individuals and foreign corporations. The final regs make minor changes to 2014 temporary regs (T.D. 9658 ) coordinating the Foreign Account Tax Compliance Act rules under chapter 4 with preexisting due diligence, reporting, and withholding requirements under chapters 3 and 61, along with sections 871, 3406, and 6402.

The new temporary regs provide additional rules under chapter 3 and also serve as the text of concurrently issued proposed regulations (REG-134247-16 ).

The IRS also released final and temporary FATCA regulations (T.D. 9809 ) following up on 2014 temporary regs (T.D. 9657 ), requiring information reporting by FFIs regarding U.S. accounts and withholding on some payments to FFIs and other foreign entities.

Additional proposed FATCA regulations (REG-103477-14 ) address other aspects of withholding and reporting for sponsoring entities, such as certification and compliance requirements, IRS inquiries, and events of default.

Some Simplified Requirements

The general rule under chapter 3 is that a withholding agent must withhold 30 percent of some U.S.-source payments to a foreign person unless it can rely on documentation substantiating that the payment was made to a U.S. person or a beneficial owner that is a foreign person entitled to a reduced rate of withholding. Withholding on payments to a foreign person is not required when the foreign person assumes withholding as a qualified intermediary, a U.S. branch of a foreign person, or as a withholding foreign partnership or trust.


Tara Ferris of EY said the chapter 3 regs, as well as the chapter 4 regs, "provide simplified requirements for a nonqualified intermediary and nonwithholding foreign partnership withholding statement" by allowing the intermediary or flow-through entity to "simply represent that nothing in its files conflicts with the withholding certificates provided for the beneficial owners."

But Collins said that although the simplified nonqualified intermediary (NQI) withholding statement is a helpful change, it comes with conditions -- it's only permitted "if the NQI has provided an additional certification with the withholding statement."

The withholding statement had become unwieldy with the addition of chapter 4 information, which was mostly duplicative of the information on withholding certificates of beneficial owners, Ferris explained. According to Ferris, the government had said it used that information to confirm that it was consistent with its files, but in response to industry comments allowed for the withholding agent or flow-through entities to make a statement on the withholding statement.

Concerning other chapter 3 rules, the preamble explains that the final regs don't adopt presumption rules for foreign status of an entity based on documentary evidence or if an entity has a global intermediary identification number (GIIN). But in response to comments, the final rules have been modified to allow foreign status presumption for entities on the per se list of foreign corporations if the withholding agent has evidence of the entities' incorporation in a relevant foreign jurisdiction, even if the entity names include "company" or "corporation."

Common Chapter 3 and 4 Rules

The chapter 3 and 4 regs provide that an address subject to a hold mail instruction can be relied on as a permanent residence address if the person provides documentary evidence of her residence in that country.


"Many financial institutions struggled with the provision that was added to the final chapter 4 regulations and chapter 3 temporary regulations, which negated a permanent residence address that was a hold mail address and provided no means to cure," Ferris said.

Hatten-Boyd explained that hold mail instructions are common in private banking and that under the prior regs, in that situation, "a withholding agent was required to impose the maximum amount of withholding notwithstanding the fact that it had tax documentation on file for the account holder." The ability to cure was necessary and will be well received, she said.

The final and temporary regs also alleviate an issue withholding agents had when obtaining "retroactive tax documentation to cover periods for which prior documentation had not been on file," Hatten-Boyd said.

The new rules adopted under chapters 3 and 4 allow withholding agents for any open tax year to rely on a valid Form W-8 or documentary evidence if received by fax or scanned and sent by email after March 6, 2014, regardless of when the payment was made. The prior temporary regs had required hard copies for payments made on or before March 6, 2014.

"There had also been significant controversy over electronic signature, where the tax documentation that had been electronically signed was being passed up from another withholding agent who maintained the electronic system," Hatten-Boyd said. The new chapter 3 and 4 regs "clarify that the electronic signature is acceptable where it contains the name of the beneficial owner, a date stamp, and a statement that the document had been signed electronically," she said, adding that some withholding agents may need to update their systems to ensure they capture this information.

Hatten-Boyd said the new regulations clarify that "an unambiguous country abbreviation on a Form W-8 will not be the type of inconsequential error that requires the withholding agent to obtain curative documentation." She explained that under the prior regs, a withholding agent was required to cure a form that used HK as the abbreviation for Hong Kong and that although that seems like a minor issue, the cost of obtaining additional documentation could be substantial. "The concession demonstrates Treasury and the IRS's attempt to strike the right balance," she said.

The regs provide "a more generous rule for reliance on prior versions of forms," Ferris said, explaining that they allow withholding agents to use the prior version until six months after a new version is issued or the end of the calendar year during which the revised version was issued, whichever is later. That change was previewed with the new Form W-8BEN-E , "Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)," released in April 2016.

Standards of Knowledge and LOB

According to Ferris, the chapter 3 regs don't provide meaningful guidance on the standards of knowledge for verifying treaty claims.

Reg. section 1.1441-6 provides rules for claiming a reduced rate of withholding under an income tax treaty. The new Form W-8BEN-E requires an entity claiming treaty benefits to check a box to indicate the applicable limitation on benefits provision. For the LOB claim, the withholding agent is subject to an actual knowledge standard, which has been a point of contention among practitioners. (Prior coverage .)

While the regs "seem to say that a withholding agent can rely on an LOB statement unless it has actual knowledge that the entity doesn't meet the LOB provision . . . many stakeholders do not know how to apply the actual knowledge standard, and the regulations don't seem to provide any answer," Ferris said.

Ferris said the regs apply a new "reason to know" standard regarding whether a treaty is not in force but that that "doesn't answer the LOB verification question, and the examples are not helpful."

Ferris noted that the regs include rules on LOB statements providing that a treaty statement associated with documentary evidence expires after three years, like a withholding certificate with an LOB statement. The regs do not grandfather old treaty statements but provide that previously collected treaty statements will expire on January 1, 2019, she said, adding that previous comments on this change that had been previewed in the draft qualified intermediary agreement were not adopted.

Taxpayer Identification Numbers

Although the chapter 3 regs provide some relief regarding Form 8233, "Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual" -- used by non-U.S. individuals to claim treaty benefits -- concerns persist about the taxpayer identification number requirement, according to Hatten-Boyd.

The good news is that the final regs clarify that a withholding agent can obtain Form 8233 electronically, Hatten-Boyd said. "Unfortunately, however, Treasury and the IRS continue to maintain that a U.S. TIN should be provided on that form, notwithstanding the 2014 changes that make clear that a Form 8233 is one of the types of withholding certificates for which a foreign TIN is now permissible for a treaty claim," she said.

According to Hatten-Boyd, the reasoning in the preamble for requiring a U.S. TIN fails to recognize that reg. section 1.1441-4(a) provides that income on personal services is not income for which a tax return would be required, as long as other conditions are met. "This oversight is particularly troublesome given the difficulty that non-U.S. individuals have been experiencing in obtaining [TINs]," she said.

Collins noted that another new rule requiring a withholding agent to collect a foreign TIN also causes concerns. He explained that under previous rules, if a withholding agent did not provide a foreign TIN on a Form W-8BEN (for individuals) or W-8BEN-E, the withholding agent could still treat the form as valid. But under the new regs, "the absence of a foreign TIN may result in a W-8BEN or BEN-E being invalidated beginning January 1, 2018, unless the account holder provides an explanation for not having a foreign TIN," Collins said. He added that the instructions for the requester of forms W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, and W-8IMY should clarify that point.

Final FATCA Regs

FATCA generally requires U.S. withholding agents to withhold tax on some payments to FFIs that do not agree to report required information to the IRS regarding their U.S. accounts and on some payments to specific nonfinancial foreign entities (NFFEs) that do not provide information to withholding agents on their substantial U.S. owners. If an FFI that is prohibited under foreign law from reporting information directly to the IRS enters into and complies with one of two alternative model intergovernmental agreements (Model 1 IGA and Model 2 IGA), the FFI will not be subject to withholding under section 1471.


The final regs modify and clarify several definitions, the documentation rules, the requirement to deduct and withhold tax on payments to some FFIs, the rules regarding payee identification and FFI agreements, and other withholding and reporting requirements.

Ferris said the final regs clarify the requirements of a foreign branch of a U.S. financial institution (U.S. FI). "The IGAs were drafted incorrectly and did not consider that a foreign branch of a U.S. FI must withhold because there was no entity for it to pass up withholding responsibility," she said, adding that the regulation "supplements the IGA and provides that a foreign branch of a U.S. FI is a withholding agent that must withhold" and that "a foreign branch may use the procedures under Annex I of an applicable Model 1 or Model 2 IGA to document the chapter 4 status of a payee of a withholdable payment that is a holder of an account maintained by the branch."

The regs do not address the FATCA status of NFFEs organized in IGA jurisdictions, Hatten-Boyd noted, saying that issue "has created uncertainty within the nonfinancial industry for the past several years."

According to Hatten-Boyd, "an NFFE could have a different FATCA status when it receives a withholdable payment, as well as different statuses if it maintains a financial account in different IGA jurisdictions," so commentators had requested that an NFFE be permitted to use the IGA in its country of organization for determination of its FATCA status for all purposes.

The IRS rejected that request. "Consequently, it is anticipated that the confusion related to NFFE FATCA certifications will continue," Hatten-Boyd said.


The regs address the concerns of some withholding agents regarding the verification of GIINs, extending to March 31, 2017, the deadline for agents to verify GIINs on forms that were provided before December 31, 2016.


Following the issuance of Notice 2015-66, 2015-41 IRN 541 , and the requirement that sponsored entities be registered on the FATCA registration website, many withholding agents "were concerned about their requirements to verify a GIIN of the sponsored entity and when withholding would start," Ferris said.

Ferris explained that "many entities in Model 1 IGA jurisdictions checked 'sponsored entity' instead of 'nonreporting IGA FFI,' which would invalidate the form if a GIIN is not received." To address that issue, the regs don't require the withholding agent to collect a GIIN, or a new form, if the agent can determine that the entity is organized or located in a jurisdiction that is treated as having a Model 1 IGA in effect, she said.

Proposed Rules for Sponsoring Entities

As announced in November by John Sweeney, branch 8 chief, IRS Office of Associate Chief Counsel (International), the regulation package includes proposed chapter 4 rules for sponsoring entities of sponsored FFIs and of direct reporting NFFEs regarding certification and compliance requirements, IRS inquiries, and default events. (Prior coverage .)


The preamble to REG-103477-14 states that the proposed verification requirements for a sponsoring entity of sponsored FFIs "are generally similar to the verification requirements for a compliance FI."

Under the proposed regs, a sponsoring entity must establish a compliance program and appoint a responsible officer to oversee its compliance for each sponsored FFI for purposes of satisfying reg. section 1.1471-5(f) requirements or an applicable Model 2 IGA.

The proposed regs permit the IRS to make general inquiries to a sponsoring entity regarding its compliance with applicable requirements and to request additional information necessary to determine its compliance with the due diligence, withholding, and reporting requirements under reg. section 1.1471-4 or an applicable Model 2 IGA.

The proposed regs describe events of default for the sponsoring entity and the termination procedures that may follow. The regs also provide the IRS the discretion to determine whether a default event should result in "termination of a sponsoring entity's status as a sponsoring entity, the deemed-compliant status of one or more sponsored FFIs, or both the status of the sponsoring entity and the statuses of one or more sponsored FFIs."

The proposed regs discuss the certification requirements and procedures for the IRS's review of some trustees of trustee-documented trusts and its review of periodic certifications provided by registered deemed-compliant FFIs. The regs describe the procedures for future changes to the requirements for certifications of compliance for participating FFIs and for participating FFIs that are members of consolidated compliance groups.