On Dec. 27, 2019, the Treasury Department and the IRS issued final regulations (T.D. 9890; the Final Regulations) providing guidance on due diligence and reporting rules regarding certain U.S. source payments made to foreign persons and reporting by foreign financial institutions on U.S. accounts.
The Final Regulations, which are effective on Jan. 2, 2020, finalize the proposed regulations (REG–132881–17; the 2018 Proposed Regulations) that were introduced in December 2018 with the intention of reducing taxpayer burden. The Final Regulations generally follow the 2018 Proposed Regulations, with certain modifications.
The 2018 Proposed Regulations include changes relating to the requirement that a withholding certificate or treaty statement provided with documentary evidence by a treaty claimant that is an entity must identify the applicable limitation on benefits provision that the entity meets in order to be eligible for treaty benefits. Additional changes included in the 2018 Proposed Regulations relate to the documentation that a withholding agent may rely upon 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 Final Regulations incorporate the 2018 proposed changes regarding those requirements.
To allow additional flexibility to withholding agents regarding the requirement that the agent obtain a foreign taxpayer identification number and date of birth, the Final Regulations indicate that a separate written statement is an acceptable way for a withholding agent to collect an account holder’s foreign TIN if certain other requirements are met. For withholding statement purposes, the Final Regulations also include a change regarding the requirement for chapter 4 recipient codes and clarify that the general standards of knowledge that apply to withholding agents also apply to a nonqualified intermediary in terms of relying 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.
The Final Regulations also amend the rules regarding electronic signatures for purposes of chapters 3 and 4 to generally allow a withholding agent to consider other documentation or information showing that a withholding certificate was electronically signed. The regulations clarify that a separate request and authorization to obtain a withholding certificate or statement from a third-party repository is not required for each payment made by a withholding agent in some cases.
The standard of knowledge addressed in the chapter 3 temporary regulations for reliance on a limitation on benefits provision associated with a treaty claim made on a withholding certificate was adopted without change in the Final Regulations. The Final Regulations also incorporate the Jan. 1, 2020, extension under the 2018 Proposed Regulations for withholding agents to obtain treaty statements with the specific limitation on benefits provisions identified for preexisting accounts. The Final Regulations incorporate the same exception to the three-year validity period for treaty statements that was provided in the 2018 Proposed Regulations to better align the validity period for treaty claims on withholding certificates.
The Treasury Department and the IRS indicated that they intend to finalize the remaining provisions of the 2018 Proposed Regulations in future guidance.
Withholding agents making U.S. source payments to foreign persons should review the Final Regulations so that they have an understanding of the due diligence and reporting obligations related to making such payments.