IRS may ease mandate to collect foreign taxpayer identification number
TAX ALERT |
The IRS recently stated that it is giving serious consideration to potentially easing the burden for banks and other withholding agents (including U.S. branches of foreign banks) that are required to start collecting foreign taxpayer identification numbers (FTIN) next year. Several means of relief are under consideration, including reducing the number of taxpayers for whom a bank or withholding agent would be required to collect an FTIN, allowing for the staggered collection of FTINs and permitting FTINs to be collected orally or in writing.
The FTIN requirement was first introduced in final and temporary regulations issued last year, but was delayed until Jan. 1, 2018, in response to comments from industry that it was overly burdensome. See TD 9808, REG 103477-14, REG 134247-16. The rule requires non-U.S. persons who are beneficial owners of financial accounts or investments at U.S. financial institutions and U.S. branches of foreign financial institutions to provide a tax withholding certificate (i.e., Form W-8) with the FTIN issued to it by its jurisdiction of tax residence or an explanation of why an FTIN was not provided or the non-U.S. person will be subject to withholding at a rate of 30 percent of payments and distributions of certain U.S.-sourced income received on or after Jan. 1, 2018. Understandably, many companies collected new W-8 forms without FTINs from investors and accountholders late last year after the forms were revised in April 2016, but before the FTIN requirement became effective and are cringing at the thought of having to approach investors and accountholders again for more information.
In a June 2, 2017, letter to the IRS, the Securities Industry and Financial Markets Association (SIFMA) expressed concern over the ability of financial institutions to collect Forms W-8 from investors and accountholders by the Jan. 1, 2018, deadline. Of particular concern was the potential for an excessive, and unexpected, amount of withholding that could result if these institutions were not able to collect the required information in time. Based on recent comments by an IRS spokesperson, it appears that the agency is listening to these concerns.
In a recent statement, the IRS has said they are considering potential relief in the following ways:
- Allowing more time and flexibility for withholding agents to cure or remediate IRS Forms W-8, withholding forms that, if not for the FTIN requirement, would otherwise be valid. The IRS mentioned this could be accomplished via a staggered approach to the collection of FTIN numbers, such as requiring the information to be collected when Forms W-8 are renewed.
- Allowing withholding agents to collect the required FTINs orally or in writing.
- Reducing the types of taxpayers for whom FTINs would be required. One example provided by the IRS was the possibility of limiting the FTIN collection requirement to taxpayer from jurisdictions with which the United States has information-exchange agreements.
While these comments do not alter the current requirement for withholding agents to begin collecting FTINs before Jan. 1, 2018, they foreshadow potential relief. The IRS comments also demonstrate the IRS’ willingness to listen, and potentially consider, public comments and concerns regarding the administrative burden of these new rules.
Banks and other withholding agents should continue preparing to begin collecting the required FTINs under the current rules by Jan. 1, 2018, but should watch carefully for any potential relief the IRS may provide in this area. Foreign taxpayers with accounts or investments at U.S. financial institutions or U.S. branches of foreign banks should also take note, as failure to provide an FTIN to the applicable institutions could result in unexpected and excessive withholding.