United States

IRS issues formal relief for FTIN collection requirement

TAX ALERT  | 

In a recent release, although not yet published (Notice 2017-46, 2017-41 IRB 1), the U.S. Department of Treasury (Treasury) and the Internal Revenue Service (IRS) have formally announced their intent to amend the temporary regulations under chapter 3, Treas. Reg. §1.1441-1T(e)(2)(ii)(B), related regulations and certain form instructions which require the collection of foreign taxpayer identification numbers (FTINs) and dates of birth on tax withholding certificates from certain investors and accountholders.

Notice 2017-46 (“the notice”) provides relief from the mandate for banks and other withholding agents (including U.S. branches of foreign banks) to begin collecting FTINs this year. See RSM’s previous alert here for more details on the issue. While Treasury and the IRS have not amended the temporary regulations yet, they’ve clarified in Notice 2017-46 that they intend to amend them and that taxpayers can rely on provisions of the notice regarding the content of the amendments before they are officially published.

Key Points from the Notice

·         Foreign financial institutions (FFIs) get relief – the Notice provides relief for FFIs that fail to report FTINs. It specifically states that FFIs required to report FTINs will not be deemed to be in significant non-compliance of their relevant Intergovernmental Agreements (IGAs) solely because of a failure to report an FTIN for a pre-existing account, provided they have complied with the procedures set forth in the Notice. Specifically, the FFI must (1) report the account holder’s date of birth, (2) make an annual request for the FTIN, and (3) conduct a search of their electronic records for missing FTINs prior to reporting information for 2017. This provision should provide relief to institutions concerned with defaulting on agreements and potentially being subject to FATCA withholding for significant noncompliance with the rules.

·         No requirement to validate FTINs - the notice provides welcomed relief for withholding agents who were unsure of their responsibilities with respect to collection and validation of FTINs.  It indicates that the Service intends to amend the regulations to state that withholding agents are not required to validate the format or other specifications of FTINs against the jurisdictions’ TIN system and can rely on the account holder’s FTIN unless the withholding agent has actual knowledge or reason to know (as defined in §1.1441-7(b)(2)) that the FTIN is incorrect or there’s been a change in circumstances. This is welcomed relief For purposes of §1.1441-1(e)(4)(ii)(D) (prescribing the requirements for a change in circumstances), a withholding agent’s reason to know that a Foreign TIN is incorrect will include a notification from the account holder of a new residence address outside the jurisdiction provided on the withholding certificate.

·         Reliance on prior W-8s without FTINs – in response to comments from industry regarding the burden imposed by the regulations, the Service has clarified that withholding agents can continue to rely on otherwise valid W-8’s obtained before Jan. 1, 2018 that do not have FTIN’s. The notice also sets forth an alternative procedure for obtaining and associating foreign TINs with withholding certificates signed before Jan. 1, 2018. Specifically, an otherwise valid withholding certificate that does not include the accountholder’s Foreign TIN (or a reasonable explanation for why the account holder was not issued a Foreign TIN) and was signed before Jan. 1, 2018, will continue to remain valid for payments made after Dec. 31, 2019, if the withholding agent (1) obtains from the account holder its Foreign TIN (or a reasonable explanation for why the account holder was not issued a Foreign TIN) on a written statement (including a written statement transmitted by email) that the withholding agent associates with the account holder’s withholding certificate; or (2) otherwise has the account holder’s Foreign TIN in the withholding agent’s files and the withholding agent associates the account holder’s Foreign TIN with the account holder’s withholding certificate.

Notwithstanding the above, above previously valid forms without FTINs expire, withholding agents must collect new ones with FTINs. According to the notice, an otherwise valid withholding certificate signed before Jan. 1, 2018, that does not include the account holder’s Foreign TIN (or reasonable explanation) will not be valid for payments made after the earlier of the expiration date of the validity period of such withholding certificate or the date when a withholding agent determines that a revised withholding certificate is otherwise required, and the withholding agent must obtain on a new withholding certificate with the account holder’s Foreign TIN (or a reasonable explanation of why an FTIN is not provided).

·         Reasonable explanations for missing FTINs – one of the biggest challenges for withholding agents is determining what a “reasonable” explanation of a missing FTIN should be under the regulations. The temporary chapter 3 regulations provide that if an account holder does not have a Foreign TIN, the account holder is required to provide a reasonable explanation for its absence. The Notice states that the “reasonableness” requirement will clarified in the forthcoming amended regulations to state that a reasonable explanation must address why the account holder was not issued an FTIN to the extent provided for in the instructions to certain withholding forms, such as Forms W-8, BEN, W-8BEN-E, W-8ECI, W-8EXP, and Form W-8IMY, as applicable. The instructions to these forms have all been revised (as of June or July 2017) to provide that a reasonable explanation is a statement that the account holder is not legally required to obtain an FTIN.

·         IRS published list of jurisdictions that do not issue FTINs – Besides better defining what it considers to be a reasonable explanation for a missing FTIN, the notice also indicates that Treasury and the IRS intend to amend the applicable regulations to provide that a withholding agent will not be required to obtain an FTIN (or a reasonable explanation) for an account held by a resident of a jurisdiction that has been identified by the IRS as a jurisdiction that does not issue FTINs to their residents. The IRS listing of such jurisdictions can be found here, upon release. According to the notice, the following jurisdictions have been identified as not issuing FTINs to their residents: Bermuda, the British Virgin Islands, and the Cayman Islands.

·         Relief from date of birth requirement – with respect to the date of birth requirement, the Notice clarifies that Treasury intends to amend the regulations to provide that an otherwise valid withholding certificate signed before Jan. 1, 2018, will not be treated as invalid for payments made before Jan. 1, 2019, to an account holder that is an individual, solely because the withholding certificate does not include the account holder’s date of birth and the date of birth is not in the withholding agent’s files. As a result, withholding agents now have additional time to comply with the date of birth requirement for withholding certificates signed before Jan. 1, 2018. Additionally, Treasury says that it intends to amend the temporary chapter 3 regulations to clarify that a withholding agent will be considered to have the account holder’s date of birth in its files if it obtains the date of birth on a written statement (including a written statement transmitted by email) from the account holder.

·         Revised form 1042-S instructions and reporting requirements – according to the Notice, instructions for Form 1042-S will be revised to provide that, starting with reporting for calendar year 2018, a withholding agent must report on each Form 1042-S filed for a financial account maintained by a U.S. branch or office of the withholding agent the account holder’s Foreign TIN if: (1) the account holder has provided a withholding certificate that includes its Foreign TIN; (2) the withholding agent has obtained the Foreign TIN under the alternative procedure described above; or (3) if the withholding agent has identified the account holder’s Foreign TIN in any of the withholding agent’s electronically searchable records (as defined in §1.1471-1(b)(38)). This modification will, in effect, mean that withholding agents should be prepared to modify systems and processes for capturing information required on Form 1042-S this year. Additionally, companies that issue substitute IRS Forms 1042-S may need to redesign forms or modify their programs capture fields for FTINs going forward.

The instructions for Form 1042-S for calendar year 2017 will be also be revised, with respect to withholding certificates furnished on or after Jan. 1, 2017, to require the reporting of an individual account holder’s date of birth if the date of birth is on the withholding certificate or is available in the withholding agent’s electronically searchable information (as defined in §1.1471-1(b)(38)). Furthermore, beginning with reporting for calendar year 2018, the instructions for Form 1042-S will require the reporting of an individual account holder’s date of birth if the date of birth is on the withholding certificate or is identified in any of the withholding agent’s files. Companies with multiple decentralized systems with data such as accountholder or investor dates of birth are housed may need to implement modifications quickly to ensure that up- and downstream systems are properly linked and that the information is accessible for purposes of generating Forms 1042-S.

·         Penalties for missing FTINs and birth dates – for those who are concerned about potential penalties that may apply for not reporting FTINs, Notice 2017-46 clarifies that penalties for failure to comply with reporting obligations may be imposed for failure to report an account holder’s Foreign TIN or an individual account holder’s date of birth on Form 1042-S to the extent that the instructions for Form 1042-S require such information to be reported. We therefore advise that you consider these penalties in any quantification or assessment of your potential risk or exposure for noncompliance with these rules.

·         Impact on Indefinite Withholding Certificates – Interestingly, the Notice clarifies that Treasury intends to amend the temporary chapter 3 regulations to provide that an otherwise valid withholding certificate signed before Jan. 1, 2018, that is indefinitely valid under §§1.1441-1(e)(4)(ii)(B) and 1.1471-3(c)(6)(ii)(B) will not be treated as invalid for payments made on or after Jan. 1, 2018, solely because the withholding certificate does not include the account holder’s Foreign TIN (or a reasonable explanation for why the account holder was not issued a Foreign TIN). Such a withholding certificate will be treated as invalid for payments made after the earlier of Dec. 31, 2019, or the date when a change in circumstances requiring a revised withholding certificate occurs. However, for payments made after Dec. 31, 2019, a withholding agent may rely on the alternative procedure described above to obtain a Foreign TIN (or a reasonable explanation for why one is not provided).

·         Form 1099 reporting and backup withholding – Treasury and the IRS have indicated that they intend to amend the applicable regulations to limit their scope, so that a withholding certificate is only required to be treated as invalid under the applicable regulations for payments of U.S. source income reportable on Form 1042-S. The IRS states in the notice that it is unnecessary for a withholding agent to obtain an FTIN (or a reasonable explanation) or an individual’s date of birth on a withholding certificate obtained solely to avoid Form 1099 reporting and backup withholding, or in other cases in which payments associated with a withholding certificate would not otherwise be subject to reporting on Form 1042-S. Withholding agents relying on this provision, however, will need to have procedures in place for documenting the source of income and for overriding any presumption that income is U.S. sourced. 

Closing

In summary, Notice 2017-46 should be helpful to operations, compliance and tax functions at global financial institutions around the world who have waited anxiously for official guidance and for confirmation of relief with respect to the requirement to collect and report FTINs and dates of birth for certain accountholders and investors. Treasury and the IRS have indicated that the final regulations will narrow the circumstances for when an FTIN is required, provide exceptions from the FTIN requirement for certain account holders and provide a phased timeline for obtaining FTINs. By doing so, financial institutions should be less burdened with complying with the requirements, but will still have a relatively short window of time to modify their systems, policies and procedures, including, but not limited to, training front and back office personnel charged with collecting and reviewing tax withholding certificates. Let the games begin! 

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