In accordance with Congress’ burden reduction efforts, the Internal Revenue Service has finally issued long-awaited proposed regulations eliminating Foreign Account Tax Compliance Act (FATCA) withholding as required under Internal Revenue Code sections 1471 and 1472 on gross proceeds from sales of assets that can produce U.S. sourced interest or dividends and deferring withholding on foreign passthrough payments (see Notice). FATCA withholding on gross proceeds was originally set to start January 1, 2019, so the proposed regulations, eliminating the withholding will provide much needed relief to financial institutions who were still scrambling to create systems and procedures for complying with these rules. Refer to our prior alert on the issue here.
Citing industry comments regarding the significant burden imposed on withholding agents to implement the 2017 Chapter 4 regulations and the sufficiency of current withholding requirements as incentive for FFIs to avoid nonparticipating FFI status, the IRS concluded that withholding on gross proceeds is no longer necessary. This proposed regulation is a welcome relief for those withholding agents that have been working to implement this requirement as part of their compliance systems in preparation of what was to be the Jan. 1, 2019 implementation date.
In addition to eliminating withholding on gross proceeds, the IRS has proposed the deferral of withholding on foreign passthru payments until two years after the final regulations are published defining the term, “foreign passthrough payments.” As the IRS has raised concern regarding an FFI’s ability to circumvent the FFI agreement should it fail to implement withholding on these payments, it is likely that this withholding requirement will not be eliminated as was the case with gross proceeds. However, the IRS has requested that industry stakeholders provide comments on alternative approaches that meet the objectives of this requirement while still allowing for efficiency in its implementation. We will cover other aspects of the proposed regulations in more detail later. We await the final regulations.