This news alert discusses some recent changes to the procedures regarding compliance with the Foreign Account Tax Compliance Act (FATCA). The new developments are relevant for both account holders and withholding agents.
FATCA imposes an information reporting regime designed to prevent underreporting of gross income by taxpayers. Non-compliance with certain documentation rules can result in the imposition of withholding at a 30% rate.
New Form W-8BEN-E
In July 2017, the IRS released a revised version of Form W-8BEN-E (Certificate of Status for Entities). This replaces the form that was previously revised in April 2016. The April 2016 version of the form can continue to be used until January 2018 (six months after the release of the new version).
The new form only reflects minor changes (all of which relate to recent changes in the regulations). The more significant changes are in the revised instructions to the form. The most important change in the instructions relates to the need for certain account holders to provide a foreign taxpayer identification number (FTIN). This requirement is described in more detail below.
Many withholding agents have previously received Forms W-8BEN-E on forms that use the April 2016 revision (or the prior June 2014 revision). These can generally be relied upon (subject to the FTIN Cliff issue described in the next section) until December 31 of the third calendar year following the year in which the form is signed. For example, forms that are signed in 2015 are generally valid until December 31, 2018.
The new Form W-8BEN-E generally requires that foreign account holders provide an FTIN for accounts maintained at a US office or branch of a financial institution. An FTIN is a taxpayer identification number that is used to identify a taxpayer for foreign income tax reporting purposes in the jurisdiction for which the filer is a tax resident. This requirement also applies to Forms W-8BEN-E that are on the April 2016 revision of the form.
An FTIN is not required to be provided if the filer does not have an FTIN (either because an identifying number has not been issued or the jurisdiction does not use identifying numbers.) Where an FTIN is not required, the filer must attach an explanation on the form (or in the margins of the form or in a separate attached statement). However, the filer is not permitted to use “not applicable” as an explanation. The instructions specifically state that “not legally required” is considered to be an appropriate explanation.
The requirement to supply an FTIN is pursuant to a recent modification of the regulations. The requirement to supply an FTIN is effective as of January 1, 2017. However, no withholding is required under FATCA with respect to payments made before January 1, 2018.
The regulations left open the question of whether a Form W-8BEN-E that was previously received could be relied upon after effective date of the change if the form did not have an FTIN (or a reasonable explanation). The IRS announced on their web site in April 2017, that for calendar year 2017, a withholding agent is generally not required to reject a form merely because it does not include an FTIN. In such instance, the withholding agent may assume that the foreign person does not have an FTIN (unless it has actual knowledge to the contrary). https://www.irs.gov/businesses/corporations/frequently-asked-questions-faqs-fatca-compliance-legal#GeneralQ21
Where a previously-filed Form W-8BEN-E does not have an FTIN (or a reasonable explanation), the IRS guidance states that the withholding agent is permitted to obtain the FTIN (or a reasonable explanation) on a written statement provided by the beneficial owner (including a statement transmitted by email). https://www.irs.gov/businesses/corporations/frequently-asked-questions-faqs-fatca-compliance-legal#GeneralQ22
Many practitioners have interpreted the above guidance as meaning that Forms W-8BEN-E that were accepted in 2017 and earlier years that do not have an FTIN (or a satisfactory explanation), cannot be relied upon after December 31, 2017. This has been referred to as the FTIN Cliff.
The possibility of an FTIN Cliff has caused a great amount of concern for financial institutions with a US branch or office. To comply with this rule for all previously submitted forms would be a massive undertaking. One possible compliance mechanism would be to review all previously submitted forms for missing FTINs and then request the written statements suggested by the IRS. Another possible mechanism would be request all new forms from all account holders. Both solutions are expensive and disruptive.
The Treasury Department and the IRS received a great number of comments regarding the potential difficulties related to compliance with the new FTIN requirements. As a result, the IRS issued Notice 2017-46, which provides some additional exceptions to the FTIN requirements. Notice 2017-46 announces various future amendments to the FATCA regulations. Notice 2017-46 specifically states that taxpayers can rely on the notice before the issuance of the amendments to the regulations.
Notice 2017-46 provides that a withholding agent is not required to obtain an FTIN (or a reasonable explanation) for accounts held by a resident of certain countries. These countries include (i) Bermuda, (ii) British Virgin Islands, (iii) Cayman Islands, or (iv) any country that does not have an agreement with the US relating to the exchange of tax information. In the future, the IRS may add additional countries to the list.
Withholding certificates that are signed before January 1, 2018 will generally not be treated as invalid under Notice 2017-46 solely because they are missing an FTIN (or a reasonable explanation). However, a Form W-8BEN-E that does not contain an FTIN (or reasonable explanation) will cease to be valid on the earlier of (i) December 31, 2019, or (ii) the date the certificate ceases to be valid. This provision effectively moves the FTIN Cliff two years from December 31, 2017 to 2019.
Withholding certificates that are signed on or after January 1, 2018 must have an FTIN (or reasonable explanation), if otherwise required, to be valid. Under Notice 2017-46, withholding agents may rely on an FTIN unless the agent has actual knowledge that the FTIN is incorrect (or has reason to know the number is not correct). Withholding agents will not be required to validate the format or other specifications of the FTIN.
Compliance with the new FTIN requirements will be challenge for all withholding agents. Notice 2017-46 will definitely make this transition easier.
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