Very late in 2019, the IRS issued final regulations on the due diligence and reporting requirements that apply to persons making certain U.S. source payments to nonresident aliens. These regulations also pertain to foreign financial institutions (FFIs) reporting on U.S. accounts under the Foreign Account Tax Compliance Act (FATCA).
They incorporate the modifications included in the 2018 proposed regulations regarding:
- The requirement that a withholding certificate or treaty statement provided by an entity (e.g., corporate) treaty claimant identify the applicable limitation on benefits (LOB) provision that the entity meets in order to be eligible for treaty benefits, and
- The documentation that a withholding agent may rely on to treat an address provided by an account holder that’s subject to a hold mail instruction as a permanent residence address for purposes of an account holder’s claim of foreign status or benefits under an income tax
Some of the specific issues addressed by the final regulations including the following:
Obtaining a Foreign TIN
Sometime, an account holder completes a Form W-8BEN or W-8BEN-E but fails to provide the account holder’s Foreign Taxpayer Identification Number (FTIN). Does this mean a completely new form must be completed and signed, or may the withholding agent just receive this information in separate correspondence? The regulations allow for a separate written statement; however, the account holder must represent its FTIN in a signed written statement that acknowledges that such statement is a part of the withholding certificate.
In addition, the withholding agent must associate the statement with the account holder’s withholding certificate. The requirement that the signed written statement include an acknowledgment that such statement is part of the withholding certificate ensures that the statement is subject to penalties of perjury to the same extent as any other information provided on the withholding certificate.
The final regulations also clarify the application of the exception to the requirement that a withholding certificate include an FTIN for an account holder that is a government, international organization, foreign central bank or resident of a U.S. territory by adding an example. The example specifies that an account holder may claim foreign government status either under Internal Revenue Code Section 892 or otherwise when the withholding agent may rely on a claim of exemption under either of two applicable regulations as typically documented on:
- IRS Form W-8-EXP, “Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting,” or
- IRS Form W-8BEN-E, “Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities).”
The final regs also clarify the standard of knowledge applicable to a date of birth by providing that a withholding agent may rely on a date of birth provided on a withholding certificate unless it knows (or has reason to know) that the date of birth is incorrect. This is the same standard of knowledge applicable to FTINs.
Nonqualified Intermediary Withholding Statements
Qualified Intermediaries have strict standards related to documentation and reporting. Nonqualified Intermediaries, such as many foreign partnerships and foreign trusts, do not report directly to the IRS nor are they required to withholding on payments. But the final regulations still clarify that the general standards of knowledge that are applicable to withholding agents also apply to a nonqualified intermediary for reliance on payee documentation. This applies for purposes of representing that the information on the payees’ withholding certificates is consistent with any other account information that the Nonqualified Intermediary has for determining the withholding rate applicable to each payee.
The final regs also provide that a Nonqualified Intermediary may submit a withholding statement that excludes a Chapter 4 recipient code for one or more payees. However, the intermediary may do so only if the withholding agent is able to determine the appropriate recipient code based on other information included on, or associated with, the withholding statement or that is otherwise contained in the withholding agent’s records for the payee in question.
E-signatures and Third-Party Repositories
The final regs permit a withholding agent to consider, in addition to the withholding certificate itself, other available documentation or information that supports that a withholding certificate was electronically signed. This is provided that the withholding agent does not know that the documentation or information is incorrect.
Treaty Claims and Statements
The final regulations adopt the standard of knowledge in the temporary regulations for reliance on a Limitation on Benefits (LOB) provision associated with a treaty claim made on a withholding certificate. The LOB provisions must now be included on all claims for treaty benefits. An extension of time was allowed to obtain the LOB information on pre-existing accounts until January 1, 2020.
The final regulations became effective on January 2, 2020, though applicable dates vary depending on when payments were made. You may need to determine which of the due dates applies to your specific situation. Moore Doeren Mayhew can provide assistance in this analysis.