FATCA: 2016 Year-End Regulations and Updates
If you have a foreign bank account, take note. The IRS issued a flurry of regulations and updates around year-end covering FATCA (Foreign Account Tax Compliance Act) issues. Some of the releases were removal of temporary regulations, while others involved final and temporary regulations. Here are some of these regulations and updates.
Use of Foreign TIN
Temporary regulations were set to expire on February 28, 2017 that allowed the use of a foreign TIN (rather than a US ITIN) on the completion of the Form W-8BEN series. TD 9808 (December 30, 2016) made this permanent for residents of a treaty country with the US and where there is a TIEA in effect.
New Form W-8BEN
A new form for foreign (non-US) individuals was released as of January 2017. Little changed, but it does now require the inclusion of the paragraph cite as well as the Article of a treaty when claiming US treaty benefit under a Limitation on Benefits (LOB) provisions.
The new regulations now also require both a foreign TIN and date of birth (Line 6 & 8) to be completed for payments after January 1, 2017 to individuals for accounts maintained at a US office or branch of a withholding agent that is a financial institution. Previously, it was an either/or requirement. This may be a nod to the CRS provisions that require a date of birth from an individual account holder.
FFI Agreement-Rev. Proc. 2017-16
Old FFI Agreements (Model 2 FFIs and Non-IGA Country FFIs) expired as of December 31, 2016. Those impacted FFIs will need to renew the new agreement on the IRS website. These participating FFIs report directly to the IRS on all US account holders, as well as on non-participating FFIs and recalcitrant account holders for each year.
Sponsored FFIs and the GIIN Requirements
Withholding agents must verify the GIIN of a Sponsored Entity against the IRS FFI list by March 31, 2017 for payments after January 1, 2017 (and providing the agent has a withholding certificate properly completed prior to that date). The Sponsoring Entity is supposed to have registered all of its Sponsored Entities by the first of this year. The withholding agent does not have to obtain a new withholding certificate provided it has obtained the GIIN for the Sponsored Entity in some manner and retains the documentation as to how it was received.
US Persons-Dual Residents and Electing Nonresidents
The 2014 temporary regulations defined the term U.S. person to include a person described in section 7701(a)(30), but do not specify whether a U.S. person includes a dual resident (that is, an individual who is considered a resident of the United States and also a resident of a country with which the United States has an income tax treaty). For purposes of chapter 3 and knowing whether to complete a Form W-9 or W-8BEN, a person that is a resident of a foreign country under the residence article of an income tax treaty will be considered a nonresident alien individual and should complete the Form W-8BEN.
The Treasury Department and the IRS have determined that the treatment of dual residents should be consistent in chapters 3 and 4 and that dual residents should be treated as non-U.S. persons for purposes of chapters 3 and 4. Accordingly, TD 9808 revised the 2014 temporary regulations to provide that an individual will not be treated as a U.S. person for a taxable year or any portion of a taxable year that the individual is a dual resident taxpayer who is treated as a nonresident alien pursuant to §301.7701(b)-7 for purposes of computing the individual’s U.S. tax liability.
The regulations under chapter 3 also provide that an alien individual who has made an election under section 6013(g) or (h) to be treated as a resident of the United States is treated as a nonresident alien individual for purposes of chapter 3. In order to have a consistent rule, these final regulations [under Chapter 4] provide that a U.S. person does not include an alien individual who has made an election under section 6013(g) or (h) to be treated as a resident of the United States.
Investment Advisors and Investment Managers
This type of Certified deemed-compliant FFI did not have to register or obtain a GIIN. The final regulation recognized that some types of investment entities with similar characteristics were not investment advisors or managers. Therefore, the heading of Reg. Sec. 1.1471-5(f)(2)(v) has been changed to “Certain investment Entities that do not maintain financial accounts.”
US Person-Foreign Insurance Company
These final regulations also revised the definition of U.S. person to remove an unnecessary restriction on certain foreign insurance companies. The 2014 temporary regulations provide that a U.S. person includes a foreign insurance company that has made an election under section 953(d) to be treated as a U.S. person if the foreign insurance company is not a specified insurance company and is not licensed to do business in any state.
The preamble to the 2014 temporary regulations explains that the definition of U.S. person in the 2013 final regulations is modified in the 2014 temporary regulations to include certain foreign insurance companies that have made an election under section 953(d) in light of the existing requirements applicable to these types of entities to report U.S. owners on the entity’s U.S. income tax return. The requirement included in the 2014 temporary regulations that a U.S. person that is not a specified insurance company not be licensed to do business in any state is unnecessary because insurance companies that are not specified insurance companies are required under section 953(d) to report information regarding their U.S. owners regardless of whether they are licensed to do business in a state.
These final regulations revise the 2014 temporary regulations to provide that a U.S. person includes a foreign insurance company that has made an election under section 953(d) and that is not a specified insurance company (regardless of whether such entity is licensed to do business in a state).
Just a reminder that the IRS intends to update the jurisdictions treated as if they had an IGA in effect for those jurisdictions where the IGA has not yet entered into force by December 31, 2016. There are presently 20 countries where an IGA is signed but not yet in force and 22 countries where the US has reached an agreement in substance. Any jurisdiction where the IGA is not in force by the end of the year must submit a detailed explanation as to why this has not occurred and a plan with timeline as to when it will be in force, or else it will be eliminated from the list.
Any country that is deleted from the list will result in its FFIs having to register directly with the IRS and enter into an FFI Agreement with the IRS to report directly under the US regulations. The country FFIs will still be considered to qualify up until 60 days after their country has been eliminated from the published IRS listing.
Click here for a schedule of countries that are presently on the IGA list and their status. This will impact a number of countries where the IGA is not yet in force. Included are such countries as China, Greece, Malaysia, Philippines, Portugal, Saudi Arabia and the UAE. This would mean that withholding would have to take place on certain US sourced payment to FFIs in these countries under FATCA withholding for those FFIs that had not yet entered into an FFI Agreement with the IRS, even if the payment may have been exempt from withholding under a treaty.
Victor (Sandy) Jose, CPA
For more than 35 years, Victor (Sandy) Jose has assisted clients with their inbound and outbound investments, Foreign Account Tax Compliance Act (FATCA) compliance, Offshore Voluntary Disclosure Program projects, as well as other withholding and reporting projects. Sandy has extensive and broad based global experience in the automotive and manufacturingindustries. Contact Sandy at email@example.com or (248) 244-3082.