Who is Impacted by these Final Regulations?
Any U.S. payors or withholding agents making U.S. sourced payments to non-U.S. persons and any non-U.S. financial institutions (foreign financial institutions or FFIs) reporting certain U.S. persons will be interested in the final regulations published by the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) in January 2020.
On January 2, 2020, the Treasury and IRS published final regulations and removal of temporary regulations under chapters 3, 4, and 61 of the Internal Revenue Code. This article summarizes some of the key changes and updates to the regulations.
Use of Electronic Signatures for Purposes of Chapters 3 and 4
Withholding agents may accept withholding certificates that were signed electronically! They may do so if the withholding certificate demonstrates that it was signed electronically by the recipient identified on the form or a person authorized by the recipient to sign the form. Examples were included for illustrative purposes to demonstrate the difference between an acceptable electronic signature contrasted with one that the signature is merely printed. The regulations state that an acceptable withholding certificate may include a signature block that contains the name of the person authorized to sign, a time and date stamp, and a statement that the certificate has been electronically signed. To contrast, an unacceptable withholding certificate has a signature line that includes a typed name and no other information. The regulations further provide that to support an electronic signature on a withholding statement, withholding agents may consider, in addition to the withholding certificate itself, any other information it has on file provided that the withholding agent does not have actual knowledge that the documentation or information is incorrect.
It is important to note that these final regulations do not add a specific allowance for Form W-9; however, the final regulations remove the specific exclusion for Form W-9 from the temporary regulations, as unnecessary.
Withholding agents may establish an electronic system for a beneficial owner or payee to provide Form 8233 electronically, if the system meets the requirements of the section 1441 regulations.
Withholding Certificates and Statements from a Third-Party Repository
Withholding agents may accept withholding certificates and statements from a third-party repository rather than directly from a payee or its agent! The withholding agent still must review the withholding certificate in the same manner as any other documentation to determine reliability for purposes of chapter 4.
How does this work? Consider a non-U.S. corporation that completes a Form W-8BEN-E and uploads it to a third-party repository that is an electronic data aggregation site. Non-U.S. corporation has a relationship with a withholding agent. Prior to receiving payment of an amount subject to withholding, the non-U.S. corporation sends the withholding agent an e-mail with a link that authorizes the withholding agent to access its Form W-8BEN-E on the data aggregation site and the withholding agent may treat the form as furnished by the non-U.S. corporation.
Good news! The same is true for partnerships. A non-U.S. partnership may upload its own Form W8IMY, a withholding/allocation statement, and a withholding certificate for each underlying partner, to a third-party repository using the same process. The non-U.S. partnership ought to have a process in place to provide a new withholding/allocation statement to the repository and to alert the withholding agent when that happens.
The final regulations do not specifically include Forms W-9; however, the regulations remove the specific exclusion of Forms W-9 under these rules.
Effectively Connected Income (ECI) Affidavits
Affidavits of Unchanged Status, or Affidavits, for payments of income effectively connected with the conduct of a U.S. trade or business differ slightly from Affidavits for other types of income. The usual Affidavits are at the bottom of a Form W-8 or an attached page and state that the information and representations contained on the certificate were accurate as of the time of the payment. The special addition is that an ECI Affidavit must state that the beneficial owner has included the income on its U.S. income tax return for the taxable year in which it is required to report the income or, alternatively, that the beneficial owner intends to include the income on a U.S. income tax return for the taxable year in which it is required to report the income and the due date for filing such return (including any applicable extensions) is after the date on which the affidavit is signed.
The final regulations confirm that a certificate received within 30 days after the date of the payment will not be considered to be unreliable solely because it does not contain this ECI affidavit.
Alternative Nonqualified Intermediary (NQI) Withholding Statements
Generally, a withholding or allocation statement from an NQI must include all information necessary for a withholding agent to report the payment on Form 1042-S (e.g., name, address, TIN (if any), recipient type, recipient codes, etc.) to the underlying owners of an NQI. The final regulations allow NQIs to provide an alternative withholding or allocation statement that does not repeat all of the information included on the withholding certificates provided by the NQI for its underlying owners. The NQI may use this alternative withholding statement if it represents to the withholding agent that the information on the provided withholding certificates is consistent with all other information the NQI has for purposes of determining the withholding rate applicable for each payee.
Further, in response to a comment that withholding agents are in a better position to determine chapter 4 recipient and category codes (instead of NQIs), the final regulations provide that an NQI may provide a withholding statement that does not include a chapter 4 recipient code for one or more payees 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 records of the withholding agent with respect to the payee.
Foreign Taxpayer Identification Numbers (foreign TINs) and Dates of Birth
The final regulations incorporate the chapter 3 temporary regulations and the provisions in Notice 2017-46 and Notice 2018-20 with some small changes. Here is a quick refresher:
Section 1.1441-1T(e)(2)(ii)(B) required that a beneficial owner withholding certificate used to document an account maintained at a U.S. branch of office of a financial institution must include the foreign TIN of an account holder and a date of birth if that account holder is in individual (human), otherwise, the withholding agent may not treat the withholding certificate as valid. Account holders that do not have a foreign TIN must provide a reasonable explanation for its absence. Withholding certificates of individuals that do not include the date of birth may be valid if the withholding agent has the date of birth of the account holder in its files.
Notice 2017-46 provided transitional rules that allowed additional time for a withholding agent to collect a foreign TIN and date of birth from an account holder. For payments made on or after January 1, 2020, a withholding agent may treat a withholding certificate obtained before January 1, 2018, as valid if the withholding agent obtains the foreign TIN of the account holder on a written statement or if the withholding agent otherwise has the foreign TIN of the account holder TIN in its files – so long as there are no changes in circumstances and the withholding certificate does not expire.
Notice 2017-46 also includes exceptions for an account holder that is:
• Resident in a jurisdiction that does not issue foreign TINs and is on an IRS published list,
• A government, international organization, foreign central bank, or resident of a U.S. territory,
• Resident in a jurisdiction with which the United States does not have an agreement relating to the exchange of tax information in force.
Further, the notice limits the requirement to obtain a foreign TIN and date of birth to payments of U.S. source income reportable on Form 1042-S.
Notice 2018-20 was published as a result of requests by certain jurisdictions with laws that restrict the collection or disclosure of foreign TINs of their residents. These jurisdictions requested that their residents not be required to provide foreign TINs to withholding agents under the new rules. In the notice, the IRS outlined its intent to expand its list of jurisdictions that do not issue foreign TINs to their residents. The new list would include these new jurisdictions that with foreign TIN disclosure laws. This list is available at:
The Final Regulations incorporate all of the above and provide that that a separate written
statement is an acceptable way for a withholding agent to collect the foreign TIN of an account holder, as long as the account holder represents its foreign TIN in a signed written statement that acknowledges that such statement is a part of the withholding certificate and the withholding agent associates the statement with the withholding certificate of the account holder. This acknowledgement and association signed by the account holder confirms 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 incorporate the allowance in the instructions for Form W-8 that a reasonable explanation may be provided on a separate attached statement associated with the withholding certificate.
The final regulations also clarify the standard of knowledge applicable to a date of birth on a withholding certificate. Similar to the standard of knowledge applicable to foreign TINs, withholding agents may rely on a date of birth on a withholding certificate unless it knows or has reason to know that the date of birth is incorrect.
Limitation on Benefits (LOB) for Treaty Claims
For entities claiming a treaty benefit, a treaty claim on a withholding statement or a treaty statement is required. The chapter 3 temporary regulations required a treaty statement to identify the specific LOB provision of the applicable treaty on which the beneficial owner relies to claim the treaty benefit. This provision is still included, however the general standard of knowledge under the temporary regulations changed in two situations:
• A withholding agent has reason to know that a request for treaty relief by a beneficial owner is unreliable or incorrect if the beneficial owner claims benefits under an income tax treaty that does not exist or is not in force. A withholding agent determines this by referencing the Treaty Tables maintained on the IRS website.
• A withholding agent may rely on the claim of a beneficial owner regarding its reliance on a specific LOB provision absent actual knowledge that such claim is unreliable or incorrect. A withholding agent may determine whether a tax treaty is in existence and is in force by checking the list maintained on the IRS website (or any replacement page on the IRS website) or in the State Department’s annual Treaties in Force publication.
Here’s a link to the List maintained by the IRS https://www.irs.gov/businesses/internationalbusinesses/united-states-income-tax-treaties-a-to-z
The chapter 3 temporary regulations also add a three-year validity period for a treaty statement provided with documentary evidence. This coincides with the validity period for a withholding certificate containing a treaty claim. In addition to increasing the accuracy of treaty claims, it helps to ensure the update of information when ownership thresholds or activity requirements in a particular treaty change.
The 2018 proposed regulations also add an exception to the three-year validity period for treaty statements associated with documentary evidence provided by tax-exempt organizations (other than tax-exempt pension trusts or pension funds), governments, and publicly traded corporations. The validity period for treaty statements is now more closely aligned with the validity period for treaty claims on withholding certificates. It has been determined by Treasury and the IRS that three years is an appropriate validity period for treaty statements and treaty claims because it requires the entity to periodically redetermine whether it continues to meet the LOB provision.
The final regulations do not include the record retention requirement included in the 2018 proposed regulations for treaty statements from publicly traded corporations, as it was determined to be unnecessary for information that is publicly available.
Permanent Residence Address Subject Toto Hold Mail Instruction for Purposes of Chapters 3 and 4
To address some of the comments received on the hold mail definitions the 2018 proposed regulations provide that documentary evidence required in order to treat an address as subject to a hold mail instruction as a permanent residence address is documentary evidence that supports the person’s claim of foreign status or, for a person claiming treaty benefits, documentary evidence that supports the person’s residence in the country where the person claims treaty benefits. Regardless of whether the person claims treaty benefits, the 2018 proposed regulations allow a withholding agent to rely on documentary evidence described in § 1.1471-3(c)(5)(i), without regard to whether the documentation contains a permanent residence address.
In response to a comment, the 2018 proposed regulations added a definition of a hold mail instruction to clarify that a hold mail instruction does not include a request to receive all correspondence electronically.
Change in Circumstances with Respect to the Chapter 4 Status of a Foreign Financial Institution (FFI)
A withholding agent will have reason to know of a change in circumstances with respect to an FFI’s chapter 4 status that results solely because the jurisdiction in which the FFI is resident, organized, or located ceases to be treated as having an IGA in effect on the date that the jurisdiction ceases to be treated as having an IGA in effect.
Combined Reporting Following Merger or Bulk Acquisition Under Chapter 4
If a participating FFI (successor) acquires accounts of another participating FFI (predecessor) in a merger or bulk acquisition of accounts, the successor may assume the predecessor’s obligations to report on Form 8966 the acquired accounts with respect to the calendar year in which the merger or acquisition occurs (acquisition year), provided that it meets the following requirements:
• The successor must acquire substantially all of the accounts maintained by the predecessor, or substantially all of the accounts maintained at a branch of the predecessor, in a merger or bulk acquisition of accounts for value.
• The successor must agree to report the acquired accounts for the acquisition year on Form 8966 to the extent required.
• The successor may not elect to report on Forms 1099 as if the entity is a U.S. person, with respect to any acquired account that is a U.S. account for the acquisition year.
• The successor must notify the IRS on the form and in the manner prescribed by the IRS that Form 8966 is being filed on a combined basis.
If these requirements are not met, then both the predecessor and the successor are required to report the acquired accounts for the portion of the acquisition year that it maintains the account.
With respect to Form 1042-S reporting, a withholding agent (other than a nonparticipating FFI) required to report on Form 1042-S may rely on the procedures used for chapter 3 purposes for reporting on Form 1042-S, even if the withholding agent is not required to report under chapter 3, for combined reporting following a merger or acquisition, provided that all of the requirements for such reporting provided in the Instructions for Form 1042-S are satisfied.
Chapter 4 Reporting Payment Information for Other Accounts
The final regulations clarify the payments to be reported under chapter 4 for certain types of other accounts. First, for accounts that are a debt or equity interest other than interest as a partner in a partnership, cash value insurance contracts, and annuity contracts, chapter 4 requires reporting of the gross amounts paid or credited to the account holder during the calendar year including payments in redemption of the account – whether those redemptions are in whole or in part. Second, for accounts that are interest of a partner in a partnership, chapter 4 requires reporting of the amount of the partner’s distributive share of the partnership’s income or loss for the calendar year, without regard to whether any such amount is distributed to the partner during the year, and any guaranteed payments for the use of capital. Determination of these payments may be based on the tax returns of the partnership. If the tax returns are unavailable by the due date for chapter 4 reporting, then the financial statements of the partnership or any other reasonable method used by the partnership for calculating the partner’s share of partnership income by such date.
How to Implement?
Organizations required to file any of the information returns mentioned in this article should consider the following:
- Discuss all of the new potential processes with impacted businesses and departments.
- Review and identify any changes in process related to the collection of foreign TINs, specifically, how to apply the exceptions, maintaining an updated list of countries that do not issue TINs, countries with which the United States does not have an agreement, payments that will not require a foreign TIN, and maintaining statements along with withholding certificates that explain the reason for not having a foreign TIN.
- Discuss electronic withholding certificate changes with vendors and providers including the possibility of using third-party repositories and the process for collecting required certifications and affirmations, and the availability of Form 8233 electronically.
- Determine whether using the alternative withholding or allocation statement makes sense for your organization and if so, identify and establish a process for updating old form, using the new approach and communicating with payees.
- Determine any new procedures needed for ECI Affidavits, including training and communication with payees.
- Review and update procedure for LOB for treaty claims to incorporate checks for valid treaties.
- Identify and review methodology for calculating payment information for purposes of chapter 4 reporting, such that it is consistent with the rules. Document the methodology for usage each year.
- Maintain and update IRS lists, guidance, and materials in order to remain compliant!
- Update policy and procedure manuals, training materials and presentations to staff.
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