Correcting Regulations Relating to FATCA Withholding and Reporting
The IRS released T.D. 9610, providing corrections and amendments to the FATCA final regulations, which were published on 28 January 2013. Highlights are provided below.
The final regulations state that a withholding agent is required to withhold on a withholdable payment when paid to a Qualified Intermediary that has elected to be withheld upon. The election to be withheld upon is only available if the withholding agent is a:
- Participating FFI (PFFI)
- Reporting Model 1 FFI
- Qualified Intermediary (QI)
- U.S. withholding agent
Further, the final regulations state that the person who receives the payment must be a PFFI or a Registered Deemed-Compliant FFI (RDCFFI) that acts as a QI with respect to the payment and is not a QI branch of a USFI.
The Amendment clarifies that the election to be withheld upon applies to QI branches of USFIs as well.
W-8, written statements, or documentary evidence shall remain valid until the withholding agent has knowledge of a change in circumstances that makes the information on the documentation incorrect, in the following cases:
The final regulations state that Forms
- Form W-8 is provided by an individual claiming foreign status if the Form is furnished with documentary evidence supporting the individual’s claim of foreign status and the withholding agent does not have a current U.S. residence or U.S. mailing address for the payee and does not have one or more current U.S. telephone numbers that are the only telephone numbers the withholding agent has for the payee.
- A Form W-8 is provided by an excepted entity (as defined) if the Form is furnished with documentary evidence establishing the entity’s foreign status.
The Amendment clarifies that when Form W-8 and documentary evidence is on file as described above, the validity period is indefinite for both Form W-8 and the documentary evidence.
The final regulations are amended to clarify that owners of flow-through entities, such as partners, grantors and beneficiaries, can be considered properly documented when they provide proper documentary evidence (similar to the Chapter 3 rules). To maintain consistency with the treatment of flow-through entities, the regulations are clarified to provide that documentary evidence can be used to document owners of Owner-Documented FFIs (ODFFIs) as well.
The Amendments clarify the requirements for an FFI withholding statement as follows:
- The withholding statement must include either pooled information that indicates the portion of the payment attributable to a class of U.S. persons, each class of recalcitrant account holders, or a class of Nonparticipating FFIs (NPFFI), or payee-specific information, if payee-specific information is provided for purposes of chapter 3 or 61, which indicates both the portion of the payment attributable to each payee and each payee’s chapter 4 status.
- Regardless of whether the FFI withholding statement provides information on a pooled or payee-specific basis, a withholding statement provided by an FFI other than an FFI acting as a QI with respect to the account must identify each intermediary or flow-through entity that receives the payment on behalf of a payee with such entity’s chapter 4 status and GIIN, when applicable.
The Amendments remove from the definition of the term branch the requirement that an FFI maintain separate books and records for the branch. This simplification was made to ensure that no branches are omitted by the final regulations or IGAs. A branch is now defined as a unit, business, or office of an FFI that is treated as a branch under the regulatory regime of a country or is otherwise regulated under the laws of such country as separate from other offices, units, or branches of the FFI.
For limited branches and limited FFIs, the Amendments extend the time period for retaining a record of account holder and payee documentation to the longer of the entire life of the account/obligation or six years from the effective date of the FFI agreement.
The Amendments harmonize the definitions and requirements for changes of circumstances. Now, throughout the regulations, an account holder or payee that has not been substantiated with new documentation following a change in circumstances will be treated as either a recalcitrant account holder or a nonparticipating FFI beginning on the date that is 90 days after the change in circumstances. Prior to this correction, an FFI was required to treat an account holder as a recalcitrant account holder or a nonparticipating FFI on the earlier of the date that is 90 days after the change in circumstances or the date a withholdable payment or foreign pass thru payment is made. Thus, the amendment assures that, like U.S. withholding agents, FFIs will get to take advantage of the full 90-day grace period following a change in circumstances.
According to the final regulations, a nonfinancial group must meet the following requirements:
- For the three-year period preceding the year for which the determination is made:
- No more than 25% of the gross income of the EAG (excluding income derived by members that are excepted nonfinancial start-up companies and excepted nonfinancial entities in liquidation or bankruptcy) consists of passive income
- No more than 5% of the gross income of the EAG is derived by members of the EAG that are FFIs (excluding income derived from transactions between members of the EAG or by any member of the EAG that is a CDCFFI)
- No more than 25% of the fair market value of assets held by the EAG (excluding assets held by members that are excepted nonfinancial start-up companies and excepted nonfinancial entities in liquidation or bankruptcy) are assets that produce or are held for the production of passive income
- Any member of the EAG that is an FFI is either a PFFI or DCFFI
The nonfinancial group definition has been modified to clarify that transactions between members of the EAG will not be taken into account in the determination of the 25% passive income test.
The corrections clarify that relevant provisions of Section 1471 (such as the grandfathering exception and the limitation on a withholding agent’s obligations when a withholding agent lacks control, custody, or knowledge) that were omitted from Section 1472 will apply to Section 1472.
In an attempt to alleviate confusion regarding which payments meet the exception for excluded nonfinancial payments, the amendments provide revised wording to clarify that the following payments will be classified as in scope for FATCA only if such payments would be withholdable payments without consideration of the nonfinancial payments exception:
- Payments in connection with a lending transaction (including loans of securities), a forward, futures, option, or notional principal contract, or a similar financial instrument
- Premiums for insurance contracts or annuity contracts
- Amounts paid under cash value insurance or annuity contracts
- Interest (including substitute interest described in §1.861-2(a)(7) but not including interest on outstanding accounts payables from the acquisition of goods or services)
- Gross proceeds (other than gross proceeds from the sale of excluded property)
- Investment advisory fees, custodial fees, and bank or brokerage fees.
The Amendments remove the requirement for PFFIs and RDCFFIs to report payments of U.S. source FDAP income made to an NPFFI when that PFFI or RDCFFI makes a payment of a foreign reportable amount to the NPFFI. PFFIs and RDCFFIs must continue to report all foreign source reportable amounts (meaning, a payment of FDAP income that would be a withholdable payment if paid by a U.S. person) paid to an NPFFI.
T.D. 9610 can be obtained by clicking here: http://www.ofr.gov/OFRUpload/OFRData/2013-22004_PI.pdf (60KB)
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