Compliance is an ever-shifting challenge, given the changing needs of regulators, new technological capabilities, and frequent legal updates. To help you stay on top of everything, our team has compiled the most important insights from the field of operational taxes. We were inspired by discussions at a recent industry-leading conference we attended, where tax practitioners, industry experts, and the IRS gathered to explore the future of the industry.
Read on for five key takeaways:
1. Documentation and due diligence
Obtaining valid documentation is the key starting point for QI, FATCA, or CRS compliance. Some notes on the recently proposed "burden reduction" regulations under FATCA and Chapter 3:
- Treaty statements provided with documentary evidence now need to be renewed every three years. This is a significant change for Qualified Intermediaries (QIs), who normally receive documentary evidence plus a treaty statement (as opposed to using IRS forms). Luckily, the deadline to obtain treaty statements with specific limitation on benefits (LOB) clauses for entity accounts has been extended to 1 January 2020.
- The above regulations now provide that, where the payee does not claim treaty benefits, hold-mail instructions may be "cured" by providing documentary evidence of non-US status (in other words: passports are now acceptable). Previously, another address that qualified as a permanent residence address had to be provided.
- Regarding FATCA, the regulations confirm that an entity with discretionary mandate generally qualifies as FFI.
In the area of documentation, issues and common misconceptions do remain, but guidance exists to address questions about QI, FATCA, and CRS self-certifications, particularly on date and address requirements, FATCA and CRS status mismatches, the use of affidavits, missing GIIN, and content of withholding statements. Contact us for more information.
2. 1042-S reporting
Although the QI regime has been around since 2001, reporting requirements for US-source payments made to non-US persons on form 1042-S continue to change every year. Some of the changes to QI, FATCA, and CRS reporting are, inter alia, that (1) the reimbursement procedure now allows a withholding agent to use the extended due date for filing Forms 1042 and 1042-S to make a repayment and claim a credit; and (2) an NQI that is a PFFI or RDCFFI can now report the withholding on Form 1042-S as Chapter 3 withholding, to the extent that the underlying payee has a "good" FATCA status.
Changes have also come to Form 1042-S for 2019, including:
- A new box has been added for partnerships to indicate if withholding with respect to a partnership interest occurred in the subsequent year.
- A new income code (income code 55) has been added for taxable death benefits paid on a life insurance contract.
- It has been clarified that income code 01 (interest) should be used to report interest-related dividends.
- For US banks, the transition period for date of birth (DOB) requirement on Form W-8BEN ended on 31 December 2018. Thus, such banks must report DOB on 2019 Form 1042-S.
3. 871(m) and QDD rules
As a reminder, Section 871(m) treats "dividend equivalent" payments made under derivative contracts as US-source dividends. As a result, dividend equivalent payments are amounts subject to QI and FATCA withholding. Accordingly, a withholding agent generally is required to withhold a 30% tax on any dividend equivalent payment unless an exception from, or lower rate of, withholding applies. After 1 January 2021, the scope of Section 871 (m) should exponentially expand due to sophisticated tracking of derivatives/products whose price sensitivity to their US underlying stock(s) exceeds 80% ("delta"). Section 871 (m), along with the related Qualified Derivative Dealer (QDD) regime, continues to present a distinct challenge to those charged with implementing these difficult rules.
How should you apply the "good faith efforts" during the current transition period (which should end as of 1 January 2021, if not extended), under which only delta 1 derivative products are in scope? Watch this blog for more guidance (or get in touch).
4. Recent FATCA and QI certification processes
Responsible officers (ROs) worldwide were required to certify compliance with FATCA (by 15 December 2018) and QI requirements (by 1 March 2019) through the IRS portal. Two reminders:
- The IRS requests that FATCA certifications be submitted that are based on the entity classification selected in the FATCA portal. In this respect, the FATCA Registration System has been updated to include new FATCA classifications. For entities that received the request to perform certifications but are not required to do so (e.g. Model 1 IGA FFIs), the only action required is to log in and select the most accurate FATCA status.
- Regarding QI certifications, ROs can make a "Certification of Effective Internal Controls" only if, as of the certification due date, there are (1) no events of default and (2) no material failures. Otherwise, the RO may provide a "Qualified Certification." QIs are now being contacted regarding the submitted certifications. In reviewing such certifications, areas of interest for the IRS include (1) invalid documentation, (2) underwithholding (which might be subject to extrapolation of underwithholding on a post-"cure" basis), and (3) reconciliation differences relating to Form 1042-S reporting.
The IRS further encourages full transparency and, for instance, advises attaching the periodic review report when doing the certification.
5. CRS update and MDR
In the area of Common Reporting Standards (CRS), a few notably challenging areas are:
- finalization of CRS reporting cycles
- reasonability of reported data
- compliance for FIs, in the absence of a clearly defined governance framework (compared to QI or FATCA)
The EU's DAC6 imposes the obligation to disclose reportable cross-border arrangements on EU intermediaries. It seeks to provide the tax authorities of EU Member States with enough information to enable them to promptly react to harmful tax practices and to close loopholes by enacting legislation, undertaking risk assessments, and carrying out tax audits. This new regime will likely show great variations on local implementations and will potentially affect US transactions (i.e. movement of assets from EU to US) in terms of reporting obligations.
Two topics to be additionally aware of:
- A new section, 1446(f) Proposed Regulations, regards withholding on transfers of partnership interests.
- The repeal of Section 958(b)(4) could mean that non-US subsidiaries of foreign banks should be treated as controlled foreign corporations (CFCs) which are "US Payors" for the purposes of Form 1099 reporting (Chapter 61) and backup withholding (Section 3406) purposes.
It is still too early to conclude what exact impact the new Section 1446 (f) and the repeal of Section 958(b)(4) will have on foreign entities and QIs, but we are watching the space for new developments.
Check this blog regularly for more updates.
1 The 31st International Tax Withholding & Information Reporting Conference
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.