IRS updates FATCA FAQs to provide clarification on several issues
TAX ALERT |
The IRS has recently updated the Foreign Account Tax Compliance Act (FATCA) Frequently Asked Questions (FAQs) webpage to include guidance regarding Qualified Intermediaries (QIs), Withholding Foreign Partnerships (WPs) and Withholding Foreign Trusts (WTs). In addition, this update clarifies a few other issues, including requirements regarding foreign reverse hybrid entities that receive effectively connected personal service income, and whether qualified derivatives dealers (QDD) may apply for a waiver of the existing periodic review requirement.
In order to help answer some general and frequently addressed questions regarding FATCA, the IRS maintains a webpage with a list of FATCA FAQs along with responses. As part of a recent update to this list, the IRS has included guidance regarding several questions that had previously not been addressed on the FATCA FAQs webpage.
First, the IRS has added an FAQ (Q&A #19 under “Applications and Renewals”), which clarifies that foreign reverse hybrid entities applying for WP status must also be participating, deemed compliant, registered or model one foreign financial institutions (FFI) in order to comply with the terms of the WP agreement. A foreign reverse hybrid entity is an entity organized outside of the U.S. that is treated as a corporation for U.S. Federal income tax purposes, but is fiscally transparent under the laws of the country in which it was organized. Additionally, the FAQ notes that a foreign reverse hybrid entity that is a non-financial foreign entity (NFFE) can apply to be a WP with regard to payments of personal service income that is effectively connected with a U.S. trade or business, assuming that it would otherwise meet the requirements of a NFFE under the WP agreement.
The IRS has also added a FAQ (Q&A #1 under “Certifications and Periodic Reviews”) to clarify periodic review requirements for QDDs. The FAQ specifies that a QI that is a QDD can apply for a waiver of the current periodic review required with respect to its QI activities that do not consist of QDD activities. However, it may apply only if the QI’s applicable certification period ends in 2017 or 2018, and the QI otherwise meets the requirements of the period review waiver section of its QI agreement. This clarification is a welcomed relief for QDDs seeking to reduce costs and time required for periodic reviews.
Finally, the IRS has updated the FAQs to stipulate how the independence standard for an external reviewer of a QI, WP or WT should be applied for period review years prior to 2018. Specifically, the IRS notes in the FAQ that, based on the QI agreement along with the WP and WT agreements, a reviewer – either internal or external – must be independent, must have sufficient independence to conduct a review objectively and may not review their work or the work of others in the same ‘firm.’ Based on this, the updated FAQ states that the IRS will permit an external reviewer of a QI, WP or WT to apply other standards of independence (such as the standards for agreed-upon procedures by a CPA) for the purposes of reviews conducted for years prior to 2018. Additionally, the IRS has stated that they intend to update the FATCA FAQs to provide further guidance regarding the independence standard for 2018 and later calendar years.
QIs, WPs and WTs should make sure to take note of this additional guidance, and should continually monitor the FATCA FAQs webpage for additional guidance from the IRS in this highly complex area.