IRS ISSUES FINAL RULES ON NONRESIDENT ALIEN WITHHOLDING31 December 2019
TD 9890; Reg §1.1441-1; Reg §1.1441-2; Reg §1.1441-6; Reg §1.1441-7; Reg §1.1471-4; and Reg §1.6049-6
TD 9890: Regulations Relating to Withholding and Reporting Tax on Certain U.S. Source Income Paid to Foreign Persons
The IRS has issued final rules on the due diligence and reporting requirements that apply to persons making certain U.S. source payments to nonresident aliens, and to foreign financial institutions reporting on U.S. accounts under the Foreign Account Tax Compliance Act (FATCA). The final regs adopt, with modifications, the proposed regs published on January 6, 2017 as final and remove the corresponding temporary regs.
Background—Chapter 3. Under Chapter 3 of Subtitle A to the Code, “Withholding of Tax on Nonresident Aliens and Foreign Corporations,” a withholding agent must withhold 30% of any payment that is subject to withholding and made to a foreign payee, unless it can reliably associate the payment with valid tax documentation. (See Code Sec. 1441 to Code Sec. 1446)
Reg. § 1.1441-1T(e)(2)(ii)(B) provides that, beginning January 1, 2017, a beneficial owner withholding certificate provided to document an account maintained at a U.S. branch or office of a withholding agent that is a financial institution is required to contain the foreign account holder’s Foreign Taxpayer Identification Number (Foreign TIN) and, in the case of an individual account holder, the foreign account holder’s date of birth, in order for the withholding agent to treat the withholding certificate as valid. For withholding certificates associated with payments made on or after January 1, 2018, an account holder that does not provide a Foreign TIN must provide a reasonable explanation for its absence in order for the withholding certificate not to be considered invalid under Reg. § 1.1441-1T(e)(2)(ii)(B). The Chapter 3 temporary regs (see below) also provide that if the withholding certificate does not contain the account holder’s date of birth and the withholding agent has the date of birth in its files, the withholding certificate will not be considered invalid.
The term “withholding certificate” means Forms W-8BEN, W-8BEN-E, W-8ECI, W-8EXP and, with respect to a qualified intermediary acting as a qualified derivatives dealer (QDD) claiming treaty benefits for dividends, Form W-8IMY. The term “withholding agent” refers to a withholding agent that is a U.S. branch or office of a financial institution. (Instructions, Form W-8BEN)
For calendar year 2017, the instructions for Form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding) provide that a withholding agent that is a U.S. office or branch of a financial institution is required to report on Form 1042-S a recipient’s Foreign TIN when the recipient has furnished documentation that provides a Foreign TIN. The instructions provide that, beginning for the 2017 calendar year, the withholding agent is also required to report on Form 1042-S an individual recipient’s date of birth when the recipient has furnished documentation that provides a date of birth or the recipient’s date of birth is identified in any of the withholding agent’s files.
Background—Chapter 4, FATCA. FATCA requires certain foreign financial institutions (FFIs) to report to IRS information about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold certain ownership interests. Code Sec. 1471 requires withholding agents to withhold 30% of certain payments to an FFI unless the FFI has entered into a “FFI agreement” with IRS to meet these requirements. Code Sec. 1472 imposes withholding, documentation, and reporting requirements on withholding agents with respect to certain payments made to certain non-financial foreign entities.
In order to facilitate the exchange of information on financial accounts held by U.S. taxpayers, the Treasury Department collaborated with foreign governments to develop two alternative model intergovernmental agreements (IGAs) (Model 1 IGA and Model 2 IGA) that are intended to provide an effective and efficient means for complying with FATCA while reducing the burden FATCA compliance imposes on financial institutions. The Model 1 IGA provides that a reporting Model 1 FFI will report certain information on U.S. reportable accounts maintained by the FFI to the partner jurisdiction tax authority, which will automatically exchange such information with the U.S. Competent Authority.
The Model 1 IGA provides that a reporting Model 1 FFI will be treated as complying with, and not subject to withholding under, Code Sec. 1471 if the partner jurisdiction complies with its obligations under the IGA with respect to such financial institution and such financial institution complies with its reporting and registration obligations in accordance with the IGA. The Model 1 IGA also provides that the U.S. will not require a reporting Model 1 FFI to withhold tax under Code Sec. 1471 or Code Sec. 1472 with respect to an account held by a recalcitrant account holder (as defined in Code Sec. 1471(d)(6)) or to close such account if the U.S. Competent Authority receives certain information specified in the Model 1 IGA with respect to such account.
The information required to be reported by a reporting Model 1 FFI includes the U. S. Taxpayer identification number (U.S. TIN) of each specified U.S. person that is an account holder and, in the case of a non-U.S. entity with one or more specified U.S. persons who are controlling persons, the U.S. TIN of each controlling person (required U.S. TINs). Notwithstanding this reporting requirement, before 2017, a reporting Model 1 FFI was not required to report a required U.S. TIN for an account maintained as of the determination date specified in the applicable Model 1 IGA (preexisting account) that is a U.S. reportable account if the U.S. TIN was not in the reporting Model 1 FFI’s records. Similarly, a reporting Model 1 FFI was required to report the date of birth only if the date of birth was in the reporting Model 1 FFI’s records.
Partner jurisdictions have committed to establish rules for 2017 and subsequent years requiring reporting Model 1 FFIs to obtain and report the required U.S. TINs for such accounts.
If a reporting Model 1 FFI fails to report required U.S. TINs for U.S. reportable accounts, the U.S. Competent Authority may notify the partner jurisdiction competent authority that there is significant non-compliance with respect to the reporting Model 1 FFI, in accordance with the Model 1 IGA. If the reporting Model 1 FFI remains noncompliant for 18 months after such notification, under the relevant Model 1 IGA, the U.S. may treat the reporting Model 1 FFI as a nonparticipating financial institution that is subject to withholding under Code Sec. 1471.
Background—regs. On January 6, 2017, the IRS published final and temporary regs that coordinated the documentation, withholding and reporting provisions under Chapter 3 (information reporting and withholding on foreign persons), Chapter 61 (information reporting), Code Sec. 871 (nonresident alien individual tax), Code Sec. 3406 (backup withholding) and Code Sec. 6402 (disclosure of return information) with those required under the Foreign Account Tax Compliance Act (FATCA) (the Chapter 3 temporary regs). The text of the temporary regs also served as the text of contemporaneously issued proposed regs (the Chapter 3 proposed regs). See Final and temporary FATCA regs coordinate with existing withholding rules (01/05/2017).
Also, on January 6, 2017, the IRS published final and temporary regs (the Chapter 4 temporary regs) that modified and added to existing regs on information reporting by foreign financial institutions (FFIs) with respect to U.S. accounts and withholding on certain payments to FFIs and other foreign entities under FATCA. On the same date, IRS published proposed regs that cross-referenced the Chapter 4 temporary regulations and included other proposed regulations. See Final and temporary regs modify, add to, FATCA reporting and withholding rules (01/05/2017).
Background—Notices . On September 25, 2017, the IRS issued Notice 2017-46, 2017-41 IRB 275 (see IRS loosens Chapter 3, FATCA reporting requirements for financial institutions (09/28/2017)), and on March 5, 2018, the IRS issued Notice 2018-20, 2018-12 IRB 444 (see IRS further expands exemption from Chapter 3 TIN requirement (03/08/2018)). These notices signaled the IRS’s intent to amend certain provisions in the Chapter 3 temporary regs to narrow the scope of certain documentation requirements and provide a phase-in for implementation of those rules.
On December 18, 2018, the IRS proposed amending the regs under Chapters 3 and 4 to reduce the burden under those regulations (the 2018 proposed regs). The 2018 proposed regs proposed to modify the requirement that a withholding certificate or treaty statement provided by a entity treaty claimant identify the applicable limitation on benefits provision that the entity met in order to be eligible for treaty benefits. (Prop Reg §1.1441-1(e)(4)(ii)(A)(2) and Prop Reg §1.1441-6(c)(5)(i) of the 2018 proposed regs)
Other proposed modifications related to the documentation that a withholding agent could rely on to treat an address provided by an account holder that is 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 treaty. (Prop Reg §1.1441-1(c)(38) and Prop Reg §1.1471-1(b)(62) and Prop Reg §1.1471-1(b)(99) of the 2018 proposed regs) See Proposed regs would reduce withholding, etc. requirements under FATCA and Chapter 3 (12/14/2018).
2019 final regs. The 2019 final regs adopt, with modifications, the proposed regs published on January 6, 2017 as final and remove the corresponding temporary regs.
The final regs also incorporate the modifications included in the 2018 proposed regs, with respect to:
- The requirement that a withholding certificate or treaty statement provided by an entity treaty claimant identify the applicable limitation on benefits 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 is 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 treaty.
The 2019 final regs also include a limited number of technical corrections and conforming changes to final regs under Chapters 3, 4, and 61. The IRS intends to finalize the remaining provisions of the 2018 proposed regs in separate guidance at a future date.
- Requirement for a withholding agent to obtain a foreign TIN and date of birth. The IRS has determined that a separate written statement is an acceptable way for a withholding agent to collect a foreign account holder’s Foreign TIN, provided that 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 account holder’s withholding certificate. According to the IRS, this allowance permits withholding agents to cure incomplete withholding certificates by obtaining the foreign TIN on a separate statement rather than having to obtain a new withholding certificate and 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. (Reg §1.1441-1(e)(2)(ii)(B)))
The final regs clarify the application of the exception to the requirement that a withholding certificate include a Foreign TIN for an account holder that is a government, international organization, foreign central bank, or resident of a U.S. territory by adding an example specifying that an account holder may claim foreign government status either under Code Sec. 892 or otherwise when the withholding agent may rely upon a claim of exemption either under Reg §1.1441-8 (generally on an IRS Form W-8-EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting) or under Reg §1.1441-7 (generally on an IRS Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)). (Reg §1.1441-1(e)(2)(ii)(B)(4)(iii))
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 Foreign TINs. Finally, the final regs 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. (Reg §1.1441-1(e)(2)(ii)(B)(5))
- Nonqualified intermediary withholding statements. The final regs clarify that the general standards of knowledge that are applicable to withholding agents apply to a nonqualified intermediary for reliance on payee documentation for purposes of making the representation that the information on the payees’ withholding certificates is not inconsistent with any other account information the nonqualified intermediary has for purposes of determining the withholding rate applicable to each payee. (Reg §1.1441-1(e)(3)(iv)(C)(3)(i))
The final regs also provide that a nonqualified intermediary 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 withholding agent’s records with respect to the payee. (Reg §1.1441-1(e)(3)(iv)(C)(3)(ii))
- Electronic Signatures for purposes of Chapters 3 and 4. The final regs permit a withholding agent to consider, in addition to the withholding certificate itself, other documentation or information the withholding agent has that supports that a withholding certificate was electronically signed, provided that the withholding agent does not have actual knowledge that the documentation or information is incorrect. (Reg §1.1441-1(e)(4)(i)(B))
- Withholding certificates and withholding statements furnished through a third-party repository for purposes of Chapters 3 and 4. The final regs clarify that a separate request and separate authorization to obtain a withholding certificate from a third-party repository is not required for each payment made by a withholding agent when the withholding agent is otherwise permitted to rely on the withholding certificate on an obligation-by-obligation basis or as otherwise permitted under Reg §1.1441-1(e)(4)(ix). (Reg §1.1441-1(e)(4))
- Limitation on benefits for treaty claims on withholding certificates and treaty statements provided with documentary evidence for purposes of Chapter 3. The final regs adopt, without modification, the standard of knowledge in the chapter 3 temporary regs for reliance on a limitation on benefits (LOB) provision associated with a treaty claim made on a withholding certificate. (Reg §1.1441-6(b)(1))
The final regs incorporate the extension of time in the 2018 proposed regs for withholding agents to obtain treaty statements with the specific LOB provisions identified for preexisting accounts to January 1, 2020, rather than the January 1, 2019 date included in the chapter 3 temporary regulations. (Preamble, TD 9890)
The final regs also include the same modification contained in the 2018 proposed regs to correct an inadvertent omission of the applicable standard for a withholding agent’s reliance on the beneficial owner’s identification of a LOB provision on a treaty statement, incorporating the same actual knowledge standard that applies to a withholding certificate used for a treaty claim. (Preamble, TD 9890)
- Permanent residence address subject to hold mail instruction for purposes of Chapters 3 and 4. The modified requirements in the 2018 proposed regs for reliance on an address subject to a hold mail instruction are adopted by these final regs. (Reg §1.1441-1(c)(38))
- Technical corrections, conforming change, and applicability dates. These final regulations make a conforming change to Reg §1.6049-6(e)(4) to allow a payor to furnish a recipient copy of Form 1042-S electronically to a nonresident alien individual that is paid deposit interest reportable under Reg §1.6049-4(b)(5). (Preamble, TD 9890)
To clarify that the 90-day grace period applies to a change in circumstance that results from a jurisdiction ceasing to be treated as having an intergovernmental agreement (IGA) in effect, the text in Reg §1.1471-3T(c)(6)(ii)(E)(4) is moved to Reg §1.1471-3(c)(6)(ii)(E)(3) (which provides the 90-day period for changes in circumstance). (Preamble, TD 9890)
Finally, the 2019 final regs make ministerial changes to the applicability date provision in Reg §1.1441-1(f) to combine the applicability dates of these final regs with regulations issued under Code Sec. 871(m) that previously were contained in Reg §1.1441-1(f)(3) and Reg §1.1441-1(f)(5) in Reg §1.1441-1(f)(3), and clarify the applicability dates of Reg §1.1441-2 (with respect to certain payments) and Reg §1.1441-6 (with respect to identification of LOB provisions). (Preamble, TD 9890)
Effect on other documents. Sections 4 and 5 of Notice 2017-46 are obsolete as of January 2, 2020.
Effective date. These final regs are effective on January 2, 2020.
Applicability dates. Generally, Reg §1.1441-1 applies to payments made on or after January 6, 2017. (Reg §1.1441-1(f)(1))
Generally, Reg §1.1441-2 applies to payments made after December 31, 2000. (Reg §1.1441-2(f))
Generally, Reg §1.1441-6 applies to payments made, and withholding certificates and treaty statements provided, on or after January 6, 2017. (Reg §1.1441-6(i)(1))