Feb. 20 —A crucial component for implementing the Foreign Account Tax Compliance Act has been finalized by the Internal Revenue Service in the form of two regulations providing harmonization mechanisms for the new and existing anti-tax evasion regimes.
A senior Treasury Department official said during a Feb. 20 conference call that the release of the two sets of final and temporary regulations (T.D. 9657
, T.D. 9658
) marks a milestone in implementing the law.
Practitioners told Bloomberg BNA that the pair of lengthy rules will provide stakeholders with a lot to digest just four months before the July 1 compliance deadline.
Enacted in 2010, FATCA requires foreign financial institutions to tell the Internal Revenue Service about their U.S.-owned accounts or face, in some cases, a 30 percent withholding tax on certain U.S.-source payments that are made to them.
The new rules contain more than 50 different amendments and clarifications to final rules (T.D. 9610; 13 DTR GG-1, 1/18/13
) issued in January 2013, and take into account stakeholder suggestions on ways to reduce burdens consistent with the compliance objectives of the statute, Treasury said in a fact sheet
issued with the regulations.
T.D. 9658 serves to harmonize the new FATCA rules with Chapters 3, on reporting and withholding rules related to payments of U.S. source income to non-U.S. persons, as well as Chapter 61 and Section 3406, on reporting and withholding requirements for various types of payments made to certain U.S. persons.
The new rules demonstrate the degree to which the IRS and Treasury have listened to stakeholders in developing the FATCA regime, Candace Ewell, a partner in the Washington National Tax Services group at PricewaterhouseCoopers LLP, said Feb. 20.
“Many of the comments and concerns that have been bouncing around since final regs released last January have been addressed and in many instances addressed in the way that stakeholders requested,” Ewell said.
The two regulatory packages are “related but distinct” and will require separate approaches, John L. Harrington, a partner with Dentons LLP in Washington, said Feb. 20.
T.D. 9657 provides further detail to changes that were previewed in Notice 2013-69, issued in October 2013 (210 DTR G-7, 10/30/13
“It's helpful to see the detail for some of the things just set out conceptually” in the notice, such as reporting rules for direct reporting nonfinancial foreign entities (NFFEs), Harrington said.
The rules also note potential areas of future guidance, including verification requirements of sponsoring entities and a possible revenue procedure revising the foreign financial institution (FFI) agreement to align with the new regulations.
The new rules don't contain the same amount of sweeping changes or introduction of new concepts as the original final rules, John M. Staples, a managing partner with Burt, Staples & Maner LLP in Washington, said Feb. 20.
“I think the government feels that they have 98 percent of this regime largely nailed,” he said, adding that the new rules represent the final 2 percent, as well as some “housekeeping”changes and technical clarifications.
What new elements there are in the temporary rules are likely to be of limited applicability to specific stakeholders that weren't fully addressed in T.D. 9610, Staples said. Important changes include rules for grantor trusts and investment entities that seem to respond to industry concerns, he said.
The government made a concerted effort to bring conformity between Chapters 3, 4, and 61, including the expansion of the indefinite validity period of the Form W-8 series under Chapter 4 to Chapter 3, Denise M. Hintzke, global tax leader at Deloitte Tax LLP's Foreign Account Tax Compliance Initiative in New York, said Feb. 20.
“Overall, release of these regulations is a huge relief for most US withholding agents who have been waiting for them,” including financial institutions, insurance companies, asset management companies and any other U.S. non-financial entity, Deborah Pflieger, a principal with accounting firm EY's Financial Services Organization, said in e-mailed remarks Feb. 20.
The majority of these entities do not have FFIs with extensive offshore operations within their groups, but are very much affected by these regulations, she said.
“Now that we have the ‘conforming regulations' we can determine which FATCA principles that apply to FFIs will also apply to US withholding agents,” Pflieger said.
Examples include requirements for individuals born in the U.S. but claiming foreign status to prove renunciation of U.S. citizenship, or that if the only phone number on file for a foreign individual is a U.S. phone number, a withholding agent will need to obtain “cure documentation,” Pflieger said. “These were principles that apply to foreign financial institutions under the FATCA regulations, but will now apply to US withholding agents as well because the section 1441 regulations now also reflect them,”she said.
Foreign Tax IDs in Lieu of TINs
One of the more significant and favorable provisions in the new rules is for individuals completing a Form W-8 BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, who are residents of a country with a tax treaty with the U.S., Laurie Hatten-Boyd, a principal in the International Tax group of the Washington National Tax practice of KPMG LLP, said Feb. 20.
Such individuals may use a foreign tax identification number on the W-8 BEN form, without obtaining a U.S. tax identification number. The change will be significant for U.S. withholding agents in the non-financial sector, said Hatten-Boyd, who is based in Seattle. Previous requirements that foreign persons obtain a U.S. TIN had been a serious challenge, she said.
“To further reduce burdens and mitigate instances of duplicative reporting under FATCA and chapter 61,” temporary rules under T.D. 9658 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 intergovernmental agreement (IGA).
Current rules allow FFIs to elect to satisfy their FATCA reporting obligations by reporting U.S. account holders on the Form 1099 series, for reporting types of taxable income, instead of reporting the account holder on the Form 8966, FATCA Report, as required under FATCA.
U.S. payors, however, won't receive an exception to reporting under Chapter 61 in addition to FATCA reporting, according to the rules.
“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,” the rules said. One of those differences is the requirement under Chapter 61 to furnish a copy of Form 1099 to the payee to encourage voluntary compliance; “there is no equivalent requirement for payee statements under FATCA,” the rules said. U.S. payors also generally have established reporting systems and are subject to a broader range of payment reporting under Chapter 61 than non-U.S. payors, the rules said.
“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,” the rules said.
The rules confirmed that there won't be a recipient copy of Form 8966, FATCA Report, Hatten-Boyd said. Some taxpayers with offshore accounts may find themselves in a “gotcha” situation because they won't know what was reported on their foreign accounts on the Form 8966, because non-U.S. payors have only limited requirements to issue a Form 1099, she said.
The disparity between the policy view that a recipient copy of a Form 1099 is critical to encouraging voluntary tax compliance in certain situations, without providing rules for recipients to receive a copy of the FATCA report, seems “baffling,” Hatten-Boyd said.
Changes made by the new regulations to the final rules issued in January 2013 are primarily aimed at relieving compliance burdens, not adding new requirements,”Danielle Rolfes, international tax counsel for the Treasury Department, said during a Tax Executives Institute seminar in Atlanta on Feb. 20.
Rolfes said Treasury opted to pre-release the regulations, rather than wait for them to publish in the Federal Register as is the department's normal protocol, in order to give stakeholders more time to prepare.
“Since FATCA takes effect on July 1, we wanted to get this in the public domain as soon as possible,”she said.
“There's still a ton to do,” Ewell said, noting in particular that coordination between FATCA and provisions related to qualified intermediaries and withholding foreign partnerships and withholding foreign trust agreements remain critical items.
Practitioners particularly noted that the lack of final forms, particularly the Form W-8 series, including the Form W-8 BEN, will continue to be a hurdle for stakeholders to make it to the finish line of full FATCA compliance by July 1.
“The forms are really kind of the guts of due diligence,” Staples said. “That's going to give people a lot of heartburn if the forms don't come out very very shortly.”
The outstanding forms “may be slightly longer than the draft forms because they've now added a few more categories in this new set of regulations,” Hintzke said. Industry members anticipate having to make additional changes to their systems and coding, she said.
In an e-mail message announcing release of the final rules, the IRS said the guidance has been submitted to the Federal Register for publication but hasn't been released publicly. The version of the final rules released Feb. 20 may vary slightly from the documents that will be published in the Federal Register, the Service said.
T.D. 9657 includes text on temporary regulations that will serve as the text of proposed rules (REG-130967-13) while temporary regulations under T.D. 9678 will serve as the text for proposed rules (REG-134361-12), both to be published in the Federal Register.