Administration’s Proposals – Tax Information Reporting and Withholding
On May 11, 2009, Treasury released its “General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals” (the Green Book). A number of the proposals in the Green Book relate to tax information reporting and withholding requirements. On June 25, 2009, IRPAC issued a letter (the “Green Book letter”) to Commissioner Shulman discussing the implications for the IRS, as well as payers, withholding agents and taxpayers, of these provisions of the Green Book. The Green Book letter makes a number of preliminary recommendations regarding the implementation of the proposals if they are enacted; a more definitive look was deferred until actual legislative language becomes available. The Discussion section below briefly summarizes some of the principal recommendations of the letter.
A. General Implementation Issues
If adopted in the form proposed, the Administration’s tax proposals will require significant guidance from the IRS and the devotion of significant IRS resources in order to permit the proposals to be implemented in a timely and effective manner. The Green Book letter details a number of areas in which such guidance will be required. Since affected parties will not be able to take steps to implement the required procedures until such guidance is issued, the IRS will need to act quickly, in particular if the effective date provisions of the Administration’s proposals are not changed.
IRPAC hopes that any legislation enacted contains either a later effective date than the proposals currently contain, or a provision that certain of the proposals will only become effective after the publication by the IRS of implementing guidance. If the proposals are adopted without a significant change in the effective date, IRPAC recommends that the IRS consider relaxing the application of penalties that may otherwise be applicable during some specified transitional period.
Some of the Green Book’s withholding proposals effectively eliminate relief at source in respect of U.S. withholding taxes in certain cases and contemplate that beneficial owners will be able to obtain refunds of amounts withheld in excess of their substantive tax liability. The IRS will need to issue clear guidance regarding the types of documentation that will be acceptable for purposes of establishing
- That tax was withheld, and
- That the tax is attributable to a particular person, so that non-U.S. persons can establish their right to refunds.
In addition, the IRS will need to develop a procedure that allows refunds to be processed quickly and efficiently and to set up one or more operations centers to process refund requests.
C. Exceptions to Withholding and Reporting Obligations
IRS will have to issue prompt guidance regarding the exceptions to the new withholding and reporting requirements that are suggested in the Green Book, and to interpret the exceptions broadly in order to facilitate their implementation in a manner that is not disruptive to withholding agents’ and intermediaries’ operations and, more generally, standard capital markets transactions.
D. Qualified Intermediary Program
Adoption of the Green Book’s proposals will require the devotion of significant resources to administering the Qualified Intermediary (QI) program and the issuance of guidance on a number of issues, including the following:
- IRS will need to devote resources to the processing of a potentially substantial number of applications for QI status, in particular from intermediaries located in jurisdictions whose “know your customer” rules have not previously been approved by the IRS.
- IRPAC is also concerned that the Green Book proposals may sweep non-financial industry intermediary transactions into the QI rules. Because the current QI system extends only to intermediaries that conduct financial services businesses, eliminating the current non-QI process prior to the development of a workable QI system for non-financial industries could pose significant hardship on many industries.
- Implementation of the proposals should take into account the terms of existing QI agreements in implementing the modifications to the QI program, including, in particular, the ability to “opt out” with respect to certain requirements imposed on QIs and making the proposals effective only upon the next renewal of a QI’s agreement with the IRS, rather than amending outstanding agreements.
- Treasury and IRS should consider implementing, on a case-by-case basis only, the proposed regulatory authority to require that a financial institution may be a QI only if all commonly controlled financial institutions also are QIs.
5. IRS should expedite guidance regarding the implementation of the gross proceeds withholding proposal, in particular with regard to identifying the jurisdictions that are not subject to the proposal because they have “satisfactory exchange of information programs.”
E. Disclosure of Beneficial Owners of Foreign Entities
IRS should issue guidance on a number of issues raised by the Green Book’s proposal to require that withholding agents obtain documentation of a foreign entity’s beneficial owners as a prerequisite to granting withholding tax relief in respect of fixed determinable, annual periodical income. In particular, guidance will be needed to clarify what a withholding agent is required to do with the beneficial owner information once it has been obtained. The proposal as written lends itself to at least two interpretations, both of which present significant practical implementation challenges.
For the reasons detailed in the Green Book letter, IRPAC believes that applying the proposal in a manner that would revise the substantive rules for claiming withholding tax relief raises substantial legal and practical issues that would prevent successful implementation. However, IRPAC believes that the proposal potentially could be implemented as a disclosure requirement that does not affect a foreign entity’s substantive entitlement to withholding tax relief, if carefully drafted and limited in application.
The Green Book letter also summarizes a number of specific issues on which guidance will be needed in order for the proposal to be implemented effectively.
F. Reporting by Government Entities
The IRS should develop guidance on the interrelationship of the Green Book’s proposal to require reporting with respect to certain payments made by federal, state, and local governments with similar rules under IRC §3402(t), 6041, and 6050W in order to minimize overlap and duplication and to provide clarity to persons required to file information returns under those provisions.
G. Reporting of Payments to Corporations
The Green Book letter suggests that rescinding the current information reporting exemption for corporate payees would be burdensome for payers and questions whether the information would provide sufficient utility to the IRS to justify this burden. The Green Book letter also provides comments regarding guidance that will be needed to implement the requirement effectively if it is enacted.
On August 18, 2009, IRPAC met with IRS and Treasury representatives to discuss the issues presented in the letter; since that date, IRPAC and Treasury have continued to discuss these issues.