United States

IRS opens 2017 with new FATCA agreements and regulations


The Department of Treasury and the IRS were extremely busy during the end of 2016 and have started 2017 off with a bang by: (1) announcing Jan. 17 the launch of a new Qualified Intermediary (QI), Withholding Foreign Partnership (WP), and Withholding Trust (WT) Application and Account Management System (Announcement),  (2) publishing a new Foreign Financial Institution (FFI) agreement (see Rev. Proc. 2017-16) and a final QI Agreement (see Rev. Proc. 2017-15) on Dec. 30, 2016, and (3) publishing four sets of temporary (TD 9808, TD 9809) and proposed (REG 103477-14, REG 134247-16) regulations on Jan. 6, 2017, that govern reporting and withholding under chapters 3, 4 and 61 of the Internal Revenue Code. The agreements and regulations followed release of a new Foreign Account Tax Compliance Act (FATCA) Online Registration User Guide published in December 2016. 

This alert provides an overview of the two revenue procedures and four sets of temporary and proposed regulations.


New FATCA Online Registration User Guide and New QI Account Management System

In December 2016, the IRS published an updated version of the FATCA Online Registration User Guide to assist entities registering with the IRS that replaces the previous version issued in November 2015. Key changes per the new guide include:

  • Discontinuance of limited conditional status
    The new user guide clarifies that the IRS will no longer recognize ‘Limited Branch’ or ‘Limited Conditional FI’ status as for FIs registering after Dec. 31, 2016, since this status is no longer valid. Additionally, starting Jan. 1, 2017, new or existing entities registered as limited branches or as limited conditional FIs will be placed in ‘registration incomplete’ status.  

RSM observation: This change, in effect, means that funds, banks and others with branches or entities in their structures who previously registered for FATCA purposes as limited branches or as limited/conditional FIs must update their registrations on the IRS portal or risk being treated as noncompliant and subject to FATCA withholding on payments received on or after Jan. 1, 2017. Additionally, participating FFIs and registered deemed-compliant FFIs (other than FFIs covered by an intergovernmental agreement (IGA)) in expanded affiliated groups with limited branches and limited FI’s risk tainting the status of the entire group and any entity in the group as a participating or registered deemed compliant FFI unless the limited/conditional FI’s registration is updated. 

  • Automated QI, WP and WT application, renewal and termination process
    A new QI, WP and WT Application and Account Management System was launched that allows users to manage and maintain their QI, WP or WT status online. The system is designed to allow QIs, WPs and WTs to complete such tasks as applying for, renewing or terminating their QI, WP or WT status. Front and back office operations personnel should be trained on how to use the system and companies may need to modify their procedures with respect to QIs in order to truly take advantage of the features offered by this system. 

New FFI agreement

Chief compliance officers and tax matters partners at FIs around the world breathed a sigh of relief after the IRS published the long-awaited revised FFI agreement on Dec. 30, 2016, in Rev. Proc. 2017-16. The revised agreement applies to reporting FIs resident in countries with model 2 IGAs in effect (such as Hong Kong and Switzerland) and clarifies several previously unanswered questions such as requirements for branches and guidance on how to renew and terminate the agreement.

The new agreement will be effective for FFI’s registering on or after Jan. 1, 2017, and replaces the old FFI agreement from Rev. Proc. 2014-38, which expired on Dec. 31, 2016. Reporting model 2 FIs with agreements currently in place must renew their existing FFI agreements by July 31, 2017, or the agreement will be considered terminated. Agreements can be renewed starting in May 2017 through the IRS’ FATCA registration website

Reporting model 2 FIs may need to modify their existing systems, policies and procedures to timely comply with revised or updated provisions of the new FFI agreement. Key changes with notable impact include:

  • Withholding on passive NFFEs – One point of much needed clarification was provided with respect to the treatment of passive nonfinancial foreign entities (NFFEs). The new agreement specifies that participating FFIs must deduct FATCA withholding from withholdable payments made to passive nonfinancial foreign entities (NFFEs) that either fail to disclose their substantial US owners or that fail to certify that they have no substantial US owners as required under section 1.1471-3(d)(12)(iii) with respect to an offshore obligation that is not an account. The prior FFI agreement was unclear as to whether or not withholding was required on payments to passive NFFEs who failed to disclose their substantial US owners or who failed to certify that they had none. 

RSM observation:  Recognizably, many passive NFFE’s have struggled with the idea of providing information on their substantial U.S. owners to withholding agents or to the IRS. Going forward, however, those who don’t disclose the information will be subject to withholding.  Likewise, withholding agents who fail to withhold when required may be subject to penalties. Participating FFIs should therefore review withholding certificates (i.e., IRS Forms W-8) provided by passive NFFEs with respect to offshore accounts more closely to confirm that they have either listed their substantial US owners or certified that they have none.

  • Clarification for branches – The new FFI agreement removes the provisions on U.S. branches that were in the 2014 FFI agreement.  The new guidance clarifies that US branches of FFIs that are treated as U.S. persons (as defined in section 1.1441-1(b)(2)) are not required to register with the IRS or to agree to the terms of an FFI agreement. Branches will still, however, be required to report their US accounts and accounts held by owner-documented FFIs, and to apply the withholding and due diligence rules to all of their accounts. The new guidance also clarifies that foreign branches of U.S. financial institutions are considered U.S. persons and U.S. withholding agents. As such, they will have primary withholding responsibility for certain types of FATCA withholdable payments.
  • Limited application to branches of Reporting Model 2 FFIs – The new agreement clarifies that agreements entered by Reporting Model 2 FFIs do not apply to all branches of the FFI. US branches and branches located in jurisdictions with model 1 IGAs in effect are not covered by the FFI agreement. Additionally, the guidance further clarifies that reporting Model 2 FFIs can rely on publicly available information to document an account, to the extent permitted in Annex I of an applicable Model 2 IGA, until there is a change in circumstances that affects the account holder’s claim of chapter 4 status.
  • Updated presumption rules – One of the more significant developments is that the new agreement incorporates new presumption rules that reporting model 2 FIs must now apply for undocumented entity accounts. Specifically, section 3 of the new FFI agreement provides that in cases where a reporting Model 2 FFI acts as an intermediary for a withholdable payment that is allocated to an entity account and is unable to document the account by obtaining a self-certification or other documentation described in Annex I of the applicable IGA, the reporting model 2 FI must apply the presumption rules set forth in Treas. Reg. section 1.1471-3(f) to treat such entity account as a nonparticipating FFI and must provide sufficient information to the upstream withholding agent to withhold on the payment.  This is a significant change as the IRS has rejected the suggestion from commenters that that an undocumented entity account should be treated as a non-consenting U.S. account and should not be subject to withholding.  
  • New final certification procedures and clarification of post termination obligations – The new FFI agreement clarifies an FFI’s obligations once its FFI agreement has been terminated. Specifically, upon termination of the agreement, FFIs must now certify their compliance with the agreement for the period covered within 6 months of the date of termination. Further, the FFI’s obligations under the agreement for the period that it covers will survive termination of the agreement. New provisions clarify that termination of an FFI agreement will not affect the entity’s withholding, reporting, depositing or other responsibilities for any year that the agreement was in effect.
  • Effect of new Model 1 IGAs – FFIs in jurisdictions that did not have IGAs in effect when they originally registered with the IRS, but that were later treated as having a Model 1 IGA in effect, will be treated as having terminated its FFI agreement in the jurisdiction of its home office, but the agreement will continue to apply to any branches of the FFI covered by the agreement that are treated as participating FFIs. The guidance specifies that these FFIs should modify their  registration on the IRS website to reflect an updated chapter 4 status that is consistent with the Model 1 IGA that applies and must provide a new withholding certificate (or oral or written confirmation) reflecting this new chapter 4 status to withholding agents within 30 days of the change. 

RSM Observation:  Funds and other financial institutions resident in jurisdictions treated as having model 1 IGAs in effect now should update their registrations and revise W-8s that they’ve provided to others to reflect their updated chapter 4 status. They may also need to develop processes for monitoring jurisdictions treated as having IGAs in effect going forward.

While the new FFI agreement provides answers to many of the questions that have haunted taxpayers and practitioners alike since FATCA’s inception, it is expected that further amendments may be made once the public has had an opportunity to submit comments on the new agreement to the IRS.

New qualified intermediary agreement

Besides the new FFI agreement that was published in Rev. Proc. 2017-16, the IRS also published the long awaited final QI agreement in Rev. Proc. 2017-15. The final QI agreement substantially mirrors the proposed agreement set forth in Notice 2016-42, which was issued last year to replace the old QI agreement set forth in Rev. 2014-39. The old QI agreement expired on December 31, 2016 which means that entities with old QI agreements in effect as of December 31, 2016 need to renew their agreements by March 31, 2017 and that entities wishing to become new QI’s as of January 1, 2017 will have new requirements to meet.

In general, the QI agreement allows non-U.S. persons to elect to enter into an agreement with the IRS to simplify their obligations as withholding agents under chapters 3 and 4 and as payors under chapter 61 and section 3406 of the code for amounts paid to their account holders. The final QI agreement applies to any QI agreement in effect on or after January 1, 2017. A QI that seeks to renew its QI agreement must renew prior to March 31, 2017. The renewed agreement will have a January 1, 2017 effective date.

Of most interest is the substantive guidance and operational procedures provided in the final QI agreement for implementing the new Qualified Derivative Dealer (“QDD”) regime applicable to dividend equivalent payments under section 871(m) of the code. According to the revenue procedure, the QDD regime will apply to all dividend equivalent payments received by an electing QI on its principal transactions only and replaces the Qualified Securities Lender regime provided in Notice 2010-46 that applied only to substitute dividend payments received on stock loans, stock repos and substantially similar transactions. Going forward, the QDD regime will operate solely within the QI Agreement.

Note that a new agreement for Withholding Foreign Partnerships (WP) and Withholding Trusts has also been issued and will be covered in a separate alert to be published shortly.

New final, temporary, and proposed regulations

As a follow-up to the new FFI and the final QI agreements that were published, Treasury also published new temporary and proposed regulations on Jan. 6, 2017 which reflect the IRS’s adoption and rejection of many concepts set forth in comments by taxpayers and practitioners on previously issued FATCA regulations. Specifically, Treasury issued:

  • Final and temporary coordination regulations - TD 9808 provides final and temporary regulations under chapters 3 and 61 of the U.S. Internal Revenue Code governing portfolio interest paid to nonresident alien individuals and foreign corporations, withholding of tax on certain U.S. source income paid to foreign persons, and information reporting and backup withholding on payments made to certain U.S. persons.
  • Final and temporary Chapter 4 regulations - TD 9809 provides final and temporary regulations under chapter 4 sections 1471 through 1474 of the code governing information reporting by foreign financial institutions (FFIs) with respect to U.S. accounts and withholding on certain payments to FFIs and other foreign entities.
  • Proposed chapter 3 regulations - REG 103427-16 cross references temporary regulations set forth in TD 9808 with respect to withholding tax on certain US source income paid to non-U.S. persons as well as the requirements for certain claims for refund or credit.
  • Proposed chapter 4 certification and verification regulations - REG 103477-14 sets forth Proposed regulations  under chapter 4 of the code relating to verification and certification requirements for certain entities and reporting by FFIs, including, but not limited to, events of default for entities that agree to perform FATCA compliance requirements on behalf of certain FFIs and nonfinancial foreign entities, certification procedures for the IRS’s review of certain entities, requirements for members of consolidated compliance groups, and procedures for future modifications to the certification requirements.

Highlights of key changes noted in the regulations include:

  • LOB provision must be specified on W-8BEN-E forms – Consistent with the revised Form W-8BEN-E, the temporary regulations modify the chapter 3 regulations to require that a limitation on benefits statement on Form W– 8BEN-E identify the specific limitation on benefits provision on which the taxpayer is relying to claim treaty benefits.  This in effect means that in order for a treaty claim made on Form W-8BEN-E to be valid, an LOB box must be checked to identify which specific LOB provision the taxpayer is relying on in order to claim treaty benefits or the taxpayer will not be entitled to a reduced treaty rate of withholding.  Previously, instructions to form W-8BEN-E were unclear about whether an LOB box must be checked.  The revised regulation clarifies the new requirement.
  • Withholding on portfolio interest -  The new regulations were modified to clarify that interest on a registered obligation qualifies as portfolio interest if the withholding certificate or documentary evidence that must be provided is furnished before expiration of the beneficial owner’s period of limitation for claiming a refund of tax with respect to such interest.  If a withholding agent withholds an amount under chapter 3 of the Code because it cannot reliably associate the payment with the documentation for the beneficial owner on the date of payment, the beneficial owner may nevertheless claim the benefit of an exemption from tax by claiming a refund or credit for the amount withheld based upon the procedures described in Treas. Reg. sections 1.1464–1 and 301.6402–3(e).
  • Presumptions of foreign status clarified - The final regulations kept in place the presumption rules for payments made to exempt recipients as set forth in section 1.1441–1T(b)(3)(iii)(A)  of the 2014 temporary coordination regulations.  Of most significance here is that the Service rejected the notion that having a GIIN on file or other documentary evidence (such as a certificate of incorporation) for an undocumented person is enough to support a presumption of foreign status.
  • Facsimiles, scanned and emailed W-8s – the final regulations clarify that withholding agents can rely on faxed, scanned, or emailed W-8s for any open tax year and not just for payments made after March 6, 2014.  Previously issued regulations only allowed withholding agents to rely on valid Form W–8s or documentary evidence received by facsimile or scanned and furnished by email for payments made after March 6, 2014.
  • Foreign TINs required starting Jan. 1, 2017 – starting Jan. 1, 2017, withholding agents are now required to collect an account holder’s foreign taxpayer identification number, and, in the case of an individual account holder, the account holder’s date of birth, on withholding certificates for accounts maintained at a U.S. office or branch of a withholding agent that is a financial institution. The rules clarify that a withholding certificate that does not contain a date of birth, but is otherwise valid will not be invalid if the withholding agent has such information in its files.
  • U.S. branch treated as U.S. person - The final regulations remove the requirement that non-US persons with U.S. branches have a specified chapter 4 status. Additionally, the requirement that US branches treated as US persons must provide a withholding certificate certifying to the chapter 4 status of the foreign person of which the U.S. branch is a part of has been removed.
  • New language for curing late W-8 ECIs -  Under the final regulations, late W–8ECI’s submitted with claims that income is effectively connected with a US trade or business must now have a signed affidavit that states that the information and representations contained on the certificate were accurate as of the time of the payment and either (i) the beneficial owner has included the income on its U.S. income tax return for the taxable year in which the income must be reported, or (ii) the beneficial owner will include the income on its U.S. income tax return for the taxable year in which the income must be reported and the due date for filing the return (including any applicable extensions) is after the date on which the affidavit is signed.  The rule was added to ensure compliance with the requirement that the beneficial owner actually include the income on its income tax return for the taxable year in which the income is paid.
  • Electronically signed W-8s – The regulations have been amended to allow withholding agents to accept a Form W–8 with an electronic signature when the withholding agent has not developed and maintained an electronic collection system described in § 1.1441–1(e)(4)(iv)(B).  According to the new rules, valid electronically signed withholding certificates can now be accepted by a withholding agent if the withholding certificates reasonably demonstrate to the withholding agent that they have been electronically signed by the recipient identified on the form or a person authorized by the recipient to sign the form (by, for example, a signature block that includes a time and date stamp and a statement that the certificate has been electronically signed and the name of the person authorized to sign the form). The rules specify that if the withholding certificate contains only a typed name in the signature line and no other information regarding the method of signature, a withholding agent cannot treat the withholding certificate as validly signed.


With two revenue procedures and four sets of regulations issued, financial institutions will need to take steps now to determine specifically how the new FFI agreement, the final QI agreement, and the new temporary and proposed regulations will impact their operations. Notwithstanding any potential changes in the guidance that might be issued in upcoming months, even those organizations that ultimately decide to “wait and see” what things will look like when the dust settles should be prepared to:

  • Renew FFI agreements before July 30, 2017
  • Renew QI agreements by March 31, 2017
  • Start withholding on payments to passive NFFEs that fail to either disclose their substantial US owners or to certify that they have none
  • Identify entities registered as limited branches and update their registrations, policies, and tax withholding certificates as needed to reflect the new guidance
  • Submit new withholding certificates for FIs in jurisdictions now treated as having model 1 IGAs in effect to reflect their new statuses under the IGA
  • Update policies and procedures for presumptions of foreign status, collection of foreign TINs, acceptance of W-8s with treaty claims, and treatment of portfolio interest. 


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