US IRS guidance offers relief for financial institutions required to obtain and report taxpayer identification numbers

Transcription

1 2 October 2017 Global Tax Alert US IRS guidance offers relief for financial institutions required to obtain and report taxpayer identification numbers EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary In Notice , the United States (US) Internal Revenue Service (IRS) has issued guidance responding to concerns from financial institutions about implementing requirements to obtain and report taxpayer identification numbers (TINs). Specifically, the guidance: (1) describes procedures with which foreign financial institutions (FFIs) must comply to avoid the IRS determining that there is significant noncompliance with a Model 1 Intergovernmental Agreement (IGA) as a result of a failure to report US TINs; and (2) limits and phases in requirements for certain withholding agents to obtain and report foreign taxpayer identification numbers (FTINs) and dates of birth. The Notice states that the IRS and Treasury intend to amend the temporary regulations under chapter 3 to effectuate the modifications described in the guidance. According to the IRS, taxpayers may rely on the provisions of the Notice before the amendments to the regulations are issued. Notice is effective as of the date it was released on 25 September Most financial institutions were caught off-guard when regulations published in December essentially required re-documentation of all US accounts by the end of While IRS officials had indicated that this requirement would be modified, Notice provides very welcome, clear relief. Most importantly, withholding certificates signed before 1 January 2018, will not be deemed invalid simply because they do not contain an FTIN or a reasonable explanation for

2 2 Global Tax Alert the FTIN s absence (reasonable explanation). Furthermore, no FTIN (or reasonable explanation) will be required for accounts held by residents in jurisdictions that do not issue FTINs (identified in the Notice as Bermuda, the Cayman Islands and the British Virgin Islands 1 ) or accounts held by residents in jurisdictions with which the US does not have an in-force agreement for the exchange of tax information. Detailed discussion Background The Foreign Account Tax Compliance Act (FATCA) is found in chapter 4 of the Internal Revenue Code (Code) (Sections ). Generally, FATCA requires US and non-us withholding agents (including FFIs) to identify who their payees are and the FATCA status of those payees. For FATCA purposes, US withholding agents must withhold tax on certain payments to FFIs that do not agree to report certain information to the US regarding their US accounts and on certain payments to certain non-financial foreign entities that do not provide information regarding their substantial US owners to withholding agents. The US has entered into numerous IGAs to minimize the impact of FATCA on a foreign partner jurisdiction s financial institutions. For this purpose, the US has developed two alternative IGAs: Model 1 and Model 2. Under the Model 1 IGA, a reporting Model 1 FFI will report certain information on US reportable accounts maintained by the FFI to the partner jurisdiction tax authority, which will automatically exchange such information with the US Competent Authority. Chapter 3 of the Code (Sections ) generally requires withholding at a rate of 30% on US-source fixed or determinable, annual or periodic income paid to nonresident aliens. Chapter 61 of the Code (specifically Sections W) imposes information reporting requirements for payments made to US persons. To determine a payee s status under chapters 3, 4 and 61, and any applicable withholding required, withholding agents and payors must generally rely on documentation provided by the account holder or payee prior to payment, or, to the extent allowed, on non-tax documentation that the withholding agent already has in its customer files. In January 2017, the IRS issued final regulations under chapters 3 and 4, which incorporated guidance from earlier temporary regulations, as well as new temporary regulations under chapter 3 (temporary chapter 3 regulations). 2 US TIN reporting requirements for Model 1 FFIs In general, a Model 1 FFI is treated as complying with Section 1471, and is not subject to withholding, if both the FFI and the partner jurisdiction comply with the relevant IGA reporting requirements. Information required to be reported includes the US TIN of US-person account holders and also the US TIN of certain US persons holding controlling interests in non-us entities. Before 2017, reporting Model 1 FFIs were not required to report such TINs for preexisting accounts if they were not in the FFI s records and were required to report dates of birth only if in the FFI s records. FTIN and date-of-birth reporting requirements Prior to the temporary chapter 3 regulations, applicable IRS withholding certificates and reporting forms and instructions outlined circumstances in which persons filing the forms were required to report the FTIN or date of birth of a foreign account holder. The temporary chapter 3 regulations generally incorporated such requirements for withholding agents. Temp. Reg. Section T(e)(2)(ii)(B) sets forth conditions for withholding certificates to be considered valid. Beginning 1 January 2017, a beneficial owner withholding certificate documenting an account maintained at a US branch or office of a withholding agent that is a financial institution is required to contain the account holder s FTIN and, for individuals, the account holder s date of birth. For withholding certificates associated with payments made on or after 1 January 2018, an account holder that does not provide an FTIN must provide a reasonable explanation for its absence. In other words, under the temporary regulations, a withholding certificate that does not contain an account holder s FTIN (or a reasonable explanation) would be invalid effective 1 January 2018, resulting in the application of the presumption rules and, most likely, excess withholding. Relief guidance in Notice US TIN reporting by Model 1 FFIs Notice gives Model 1 FFIs additional time to implement procedures to obtain and report US TINs for preexisting accounts. Specifically, for calendar years 2017, 2018 and 2019, a Model 1 FFI s failure to obtain and report a required US TIN will not be treated as significant noncompliance with an applicable IGA, provided that the FFI: (1) obtains and reports the dates of birth for account holders for whom no TIN is reported, (2) requests the TIN from such

3 Global Tax Alert 3 account holders annually, and (3) before reporting calendaryear 2017 information, searches electronically searchable data maintained by the FFI for the missing TINs. FTIN and date-of-birth reporting Notice announces the IRS s intention to amend the temporary chapter 3 regulations to: (1) narrow the circumstances in which an FTIN and date of birth are required, (2) provide exceptions from the FTIN requirement for certain account holders, (3) phase-in the rules for obtaining FTINs, and (4) provide relief from obtaining a date of birth for certain withholding certificates signed before 1 January For accounts and financial institutions to which Temp. Reg. Section T(e)(2)(ii)(B) applies, the IRS intends to amend the regulations to clarify the terms account holder, account and financial institution. In addition, the IRS intends to amend Temp. Reg. Section T(e)(2)(ii)(B) to limit the scope of payments to which it applies. Specifically, after amendment, the regulation will treat withholding certificates without FTINs as invalid only for payments of US-source income reportable on Form 1042-S. Therefore, if a withholding agent only pays gross proceeds or foreign-source income or amounts reportable on Forms 1099-K to a payee, no FTIN or date of birth would be required to treat their withholding certificate as valid. This is effectively a change in the current presumption rules applicable to individuals. As a result, a withholding agent would need to capture why a form is invalid and apply different withholding rules based on the cause of a failure (i.e., withhold only on US-source fixed or determinable income if the form is invalid due to a missing FTIN, or backup withhold on all payments for other failures). Alternatively, a withholding agent could presumably treat the withholding certificate as invalid for all purposes. Withholding certificates for beneficial owners or payees of an intermediary account holder who provided a Form W-8IMY to a withholding agent are not required to have an FTIN. The IRS plans to provide exceptions from the FTIN requirements for several types of accounts, specifically: (1) accounts held by residents in jurisdictions with which the US does not have an in-force agreement for the exchange of tax information, (2) accounts held by residents in jurisdictions that do not issue FTINs (currently limited to Bermuda, the Cayman Islands and the British Virgin Islands), and (3) accounts held by a government, international organization, foreign central bank of issue, or US territory resident. The IRS will also amend the regulations to provide for a phase-in of the requirement to obtain an FTIN for financial accounts maintained in the US over a period ending on 31 December Separate rules apply under the following circumstances: 1. Withholding certificates signed on or after 1 January Withholding certificates signed (emphasis added) on or after 1 January 2018, must contain an FTIN (or a reasonable explanation for its absence). A withholding agent may rely on an FTIN provided by an account holder unless the withholding agent has actual knowledge or reason to know that it is incorrect. A reasonable explanation for why an account holder does not have an FTIN is a statement that the account holder is not legally required to obtain an FTIN. A withholding agent must determine whether any other explanation provided is reasonable, and may not so determine if it has actual knowledge that the account holder has an FTIN. According to the Notice, the withholding agent has no obligation to validate the format or other specifications of the FTIN. If an account holder provides a reasonable explanation for a missing FTIN for an account opened before 1 January 2018, however, a withholding agent will need to perform an electronic search to confirm that it does not have the account holder s FTIN on file. 2. Withholding certificates for payments made before 1 January Regarding withholding certificates for payments made before 1 January 2018, an otherwise valid withholding certificate will not be treated as invalid solely because it does not include the account holder s FTIN (or a reasonable explanation). 3. Withholding certificates signed before 1 January 2018 that have a three-year validity period. A withholding certificate signed before 1 January 2018, that has a three-year validity period will not be treated as invalid for payments made after 1 January 2018, solely because it does not contain the account holder s FTIN (or a reasonable explanation). The certificate will be considered invalid, however, for payments made after the earlier of: (1) 31 December 2019, (2) the expiration date of the validity period of the withholding certificate, or (3) if applicable, the date when a change in circumstances requiring a revised withholding certificate occurs.

4 4 Global Tax Alert 4. Withholding certificates signed before 1 January 2018 that have an indefinite validity period. A withholding certificate signed before 1 January 2018, that has an indefinite validity period will not be treated as invalid for payments made after 1 January 2018, solely because it does not contain the account holder s FTIN (or a reasonable explanation). The certificate will be considered invalid for payments made after the earlier of: (1) 31 December 2019, or (2) if applicable, the date when a change in circumstances requiring a revised withholding certificate occurs. The amended regulations will also provide an alternative procedure for obtaining and associating FTINs with withholding certificates signed before 1 January An otherwise valid, unexpired withholding certificate signed before 1 January 2018, that does not include the account holder s FTIN (or a reasonable explanation), will remain valid for payments made after 31 December 2019, if the withholding agent: (1) obtains the account holder s FTIN (or a reasonable explanation) from the account holder on a written statement that the withholding agent associates with the account holder s withholding certificate; or (2) otherwise has the account holder s FTIN in the withholding agent s files associated with the account holder s withholding certificate. According to the Notice, a withholding agent can associate an account holder s written statement with a withholding certificate. Previously, the account holder was expected to associate these two documents. Regarding the requirement to obtain the date of birth of an individual account holder, the Notice provides that amended regulations will specify that an otherwise valid withholding certificate signed before 1 January 2018, will not be treated as invalid for payments made before 1 January 2019, solely because the withholding certificate does not include the account holder s date of birth and the date of birth is not in the withholding agent s files. EY Observes: After 31 December 2018, a withholding agent may continue to rely on a withholding certificate signed either before or after 31 January 2018, if the withholding agent has the account holder s date of birth in its files. Notice also states that the IRS intends to revise the Form 1042-S instructions. The amended instructions will stipulate circumstances in which a withholding agent must report on Form 1042-S an account holder s FTIN or date of birth. Implications It is important to note that an FTIN (or a reasonable explanation), and a date of birth for individuals, will generally be required on any Form W-8 signed after 31 December 2017, and furnished for an account maintained at a US branch or office of a financial institution. At least for an FTIN, this is the case even though the financial institution has the account holder s FTIN in its records. A withholding certificate without a date of birth will be valid, however, if the financial institution has the account holder s date of birth in its books and records. A withholding certificate signed in 2017, which would otherwise expire on 31 December 2020, that does not contain an FTIN (or a reasonable explanation) will be treated as invalid for payments made after 31 December 2019 unless the withholding agent has obtained an FTIN (or a reasonable explanation) under the so-called alternative procedure described earlier. If a financial institution does not have an account holder s date of birth in either its records, or on a withholding certificate signed before 31 December 2017, that withholding certificate will be invalid after 31 December Therefore, withholding agents should review their files during 2018 to identify any nonresident alien individuals for whom they do not have a date of birth and must re-document those account holders before 1 January Endnotes 1. The IRS intends to update this list. The IRS will add jurisdictions that do not issue FTINs. 2. See EY Global Tax Alert, US IRS and Treasury issue final, temporary and proposed regulations under FATCA as well as chapters 3 and 61, dated 12 January 2017 for discussion of the final and temporary regulations and EY Global Tax Alert, US IRS and Treasury issue corrections to reporting and withholding regulations under FATCA and Chapters 3 and 61, dated 14 July 2017 on associated corrections issued in June 2017.

5 Global Tax Alert 5 For additional information with respect to this Alert, please contact the following: Ernst & Young LLP, International Tax Services Financial Services Office, Washington, DC Deborah Pflieger deborah.pflieger@ey.com Maria Murphy maria.murphy@ey.com George Fox george.fox@ey.com Phil Garlett philip.garlett@ey.com Ernst & Young LLP, International Tax Services Financial Services Office, New York Justin O Brien justin.obrien@ey.com Tara Ferris tara.ferris@ey.com Ernst & Young LLP, International Tax Services, Washington, DC Lilo Hester lilo.hester@ey.com Heather Gorman heather.gorman@ey.com International Tax Services Global ITS, Alex Postma, Tokyo ITS Director, Americas, Jeffrey Michalak, Detroit ITS Markets Leader, Americas, Stephen O Neil, New York Ernst & Young LLP, National Director of ITS Technical Services, Jose Murillo, Washington ITS Regional Contacts, Ernst & Young LLP (US) Northeast Johnny Lindroos, McLean, VA Financial Services Chris J Housman, New York Central Mark Mukhtar, Detroit Southeast Scott Shell, Charlotte, NC Southwest Amy Ritchie, Houston West Beth Carr, San Jose, CA Canada Ernst & Young LLP (Canada) Albert Anelli, Montreal

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