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2014 IRPAC Public Report: International Reporting and Withholding Subgroup

Foreign Account Tax Compliance Act (FATCA)

IRPAC has worked closely with the IRS and Treasury regarding the implementation of the Foreign Account Tax Compliance provisions of Subtitle A of Title V of the HIRE Act (commonly referred to as FATCA) through an ongoing dialogue regarding the FATCA regulations, the coordinating regulations under Chapters 3, Taxes to Enforce Reporting on Certain Foreign Assets and 61, Information and Returns, and other published guidance that were issued in 2013 and 2014, together with Forms W-8, Withholding Certificate, Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding and Form 8966, Foreign Asset Tax Compliance Act (FATCA) Report. IRPAC intends to continue this dialogue and provide input with regard to the regulations, associated forms, and the foreign financial institution (FFI) registration process.

Below is a summary of the principle issues that have been discussed. Section I contains recommendations about the regulations. Section II contains recommendations about IRS forms and instructions. Sections III contains recommendations about the intergovernmental agreements and FATCA registration. The Appendix C to this report lists 57 other recommendations IRPAC has made in connection with FATCA.

SECTION I – RECOMMENDATIONS ABOUT THE REGULATIONS

A. Carve-Out To Definition of Financial Account

Recommendation

1. IRPAC recommends that an addition be made to the list of exceptions (provided in Treas. Reg. § 1.1471-5(b)(2)) to the definition of “financial account” under FATCA for debt interests in investment entities described in Treas. Reg. § 1.1471-5(e)(4)(i)(B) or (C) that result from ordinary course of business transactions rather than from true financial investments in such entities.     

Discussion  

Under the FATCA rules, participating foreign financial institutions (PFFIs) must perform FATCA processing on the “financial accounts” they maintain. In addition to depository and custodial accounts (and insurance/annuity contracts), the term financial account is defined to include certain equity or debt interests. Treas. Reg. § 1.1471-5(b)(1)(iii). For an equity or debt interest in an entity that is a depository institution, a custodial institution, an insurance company, or an investment entity described in Treas. Reg. § 1.1471-5(b)(e)(4)(i)(A), such equity or debt interest is a financial account generally only if the interest is determined primarily by reference to assets that give rise to withholdable payments. In contrast, for an equity or debt interest in an investment entity described in Treas. Reg. § 1.1471-5(b)(e)(4)(i)(B) or (C) (in general, an investment fund), such equity or debt interest is a financial account regardless of whether the interest is determined primarily by reference to assets that give rise to withholdable payments. This is a sensible rule with respect to equity interests and what are typically thought of as debt interests (i.e., traditional loans of cash and interests in a debt instrument such as a bond). The term “debt interest” could, however, be interpreted much more broadly to mean any enforceable obligation to pay a fixed sum of money (see, e.g., Halle v. Comm'r, 83 F.3d 649 (4th Cir. 1996); Treas. Reg. § 1.1666-1(c)). This would, in IRPAC’s view, unintentionally bring into the ambit of FATCA account due diligence requirements of an investment entity described in Treas. Reg. § 1.1471-5(e)(4)(i)(B) or (C) routine trade payables and certain other payments on transactions which are not themselves debt. Consider, for example, periodic payments, which would become “debt” once fixed and enforceable, on a bespoke interest rate swap, which would not itself be debt (embedded loans excepted).  

To resolve this potential overreach of the meaning of debt interest, IRPAC recommends that an exception be added to the list of exceptions to the financial account definition under the FATCA rules for debt interest in investment entities described in Treas. Reg. § 1.1471-5(e)(4)(i)(B) or (C). Specifically, IRPAC recommends the definition of financial account in Treas. Reg. § 1.1471-5(b) be modified to add the following carve-out to Treas. Reg. §1.1471-5(b)(2) (“Exceptions”). This recommendation carves out, in general, debt that has a short life and is not interest-bearing (other than late payment interest):  

            (vii) Certain Trade Debt. Debt interest in an Investment Entity described in Treas. Reg.§ 
            1.1471-5(e)(4)(i)(B) or (C) that satisfies each of the following conditions:

                (A) The debt interest either arose in the ordinary course of the Investment Entity’s 
                trade or business (such as a liability arising from an employment relationship or a 
                liability arising from a business relationship with a service provider or supplier) or 
                represents the obligation to make a payment on a transaction with a counterparty;

                (B) The principal amount of the debt interest is required to be paid or expected to be 
                paid within 90 days of the date it arose; and

                (C) The debt interest does not accrue any amounts representing interest or amounts 
                economically equivalent to interest, except to the extent such amounts clearly 
                represent penalties for default or late payment of the debt interest.

B. Retroactive Use of Faxed/Emailed Forms W-8

Recommendation

1. IRPAC recommends that the effective date for the rule permitting withholding agents to rely upon an otherwise valid withholding certificate or other documentation received by facsimile or scanned and received electronically (such as by pdf attached to an e-mail) be modified to be effective for all certificates/documentation furnished after March 6, 2014, rather than only to payments made on or after that date.  

Discussion  

The Temporary Regulations provide that withholding agents may rely upon an otherwise valid Form W-8 or other documentation received by facsimile or scanned and received electronically (such as by pdf attached to an e-mail) as long as the withholding agent does not know that the form or document was transmitted by a person not authorized to do so. Treas. Reg. § 1.1441-1T(e)(4)(iv)(C). This rule, however, is effective for payments made on or after March 6, 2014.  

Treas. Reg. § 1.1441-1T(b)(7)(ii) permits a withholding agent who failed to collect an appropriate withholding certificate prior to payment to avoid withholding liability on that payment if it collects an appropriate withholding certificate after the date of payment containing a signed affidavit that states that the information and representations contained in the certificate were accurate as of the time of the payment.  

By referencing the date payments were made, rather than the date the documentation is collected, the effective date on the facsimile/e-mail rule prevents withholding agents from using the new rule set forth in Treas. Reg. § 1.1441-1T(e)(4)(iv)(C) to cure documentation failures in connection with payments made before March 6, 2014. That is, any withholding agent who discovers incomplete documentation in its account must obtain mailed ink-signature forms (instead of facsimile or scanned forms) with the retroactive jurat.  

We understand the policy reason for this effective date was to avoid "rewarding" withholding agents who failed to collect the documentation properly (i.e., mailed documentation) at the time payments were made. We believe this policy is short sighted. Most of the withholding agents are seeking to cure past documentation failures that arose inadvertently. The Chapter 3 withholding regime imposes a tremendous burden with significant costs on withholding agents. Most withholding agents attempt to put in place procedures, policies and systems that allow them to fully comply with these laws. But the regime is complicated and the number of payees can often be in the thousands. In this context, inadvertent mistakes can and do occur. We believe it is unlikely that any withholding agent purposely delayed documentation collection under Chapter 3 in hopes of making use of the anticipated, less costly new rule. Moreover, we believe applying the new rule to forms collected after March 6 would reward those withholding agents who undertake the efforts to self-cure past mistakes by allowing them to use any and all reasonable collection techniques to obtain the necessary documentation.  

C. Material Modification to a Grandfathered Obligation

Recommendation

1. IRPAC recommends that the events constituting a withholding agent’s actual knowledge of a material modification to a grandfathered obligation be limited to specific, identifiable actions, such as (1) the receipt of a disclosure from either the issuer or the issuer’s agent, or (2) the assignment of a new security identifier (such as a CUSIP number), as these are the only two reliable, and practical, indicators that may be used by withholding agents in a consistent manner.  

Discussion

The final regulations issued in January 2013, provided that a withholding agent is required to treat a modification of an obligation as material if the withholding agent knows, or has reason to know, that a material modification has occurred. As a result of comments submitted by IRPAC and other stakeholders explaining that it is often difficult for a withholding agent to reliably make such a determination, the March 2014 temporary regulations (§ 1.1471-2T(b)(4)(ii)) modified the final regulations to provide that a withholding agent, other than the issuer of the obligation (or an agent of the issuer), is required to treat a modification of an obligation as material only if the withholding agent has actual knowledge that a material modification has occurred.

These temporary regulations included an example of an event that will cause a withholding agent to have actual knowledge of a material modification – namely, when the withholding agent receives a disclosure from the issuer. This was an extremely helpful and welcomed change, but IRPAC remains concerned that further clarification and precision in this area may be needed.  

To that end, IRPAC recommends that the incidents triggering a withholding agent’s actual knowledge of a material modification be limited to specific, identifiable events, and further recommends that such triggering events only be those that may be applied in the most reliable and consistent manner by all withholding agents. In our estimation, these are (1) the receipt of a disclosure from either the issuer or the issuer’s agent, or (2) the assignment of a new security identifier (such as a CUSIP number). IRPAC believes that by limiting the circumstances under which a withholding agent’s actual knowledge is triggered in this manner, the end result will be a far more consistent and reliable application of the intended rule.  

D. “It maintains for retail customers” in Treas. Reg. § 1.1473-1T(a)(4)(vi)

Recommendation

1. IRPAC recommends the elimination of the words “it maintains for retail customers” in Treas. Reg. § 1.1473-1T(a)(4)(vi), as we believe this phrase represents an unintended limitation to the transitional relief from withholding provided for certain offshore payments of U.S. sourced fixed or determinable annual or periodic (FDAP) income paid prior to 2017.  

Resolution

Treasury and IRS adopted this recommendation in T.D. 9657 (July 1, 2014).

Discussion

In order to bring about a more orderly and effective implementation of FATCA, and to coordinate the final regulations’ withholding requirements with those of the Model 1 intergovernmental agreements (IGAs), the final regulations issued in January 2013 delayed withholding on certain offshore payments of U.S. source FDAP made before 2017. This was accomplished by modifying the definition of withholdable payment to exclude certain types of payments that, due to their nature, either represented a minimal risk for tax avoidance or have historically been excluded from the Chapter 3 reporting and withholding regime. These payments included, for example, those made with regard to short-term obligations, payments that are effectively connected with the conduct of a U.S trade or business and certain non-financial payments commonly made through an accounts payable function.   

The temporary regulations issued March 07, 2014, made significant changes to these transitional rules, including a limitation on the types of debt obligations eligible for the offshore withholding relief. Specifically, Treas. Reg. § 1.1473-1T(a)(4)(vi) (March 07, 2014) essentially limits the relief to “interest payments made by a foreign branch of a U.S. financial institution (USFI) with respect to depository accounts it maintains for retail customers.” While some concerns remain as to the specific policy considerations that led to this change, IRPAC believes, more importantly, that this temporary relief for offshore payments was intended to apply to payments made on all offshore deposit accounts, not just those of retail customers. In fact, recent IRPAC discussions with IRS have shown that there is no clear cut definition or agreement as to what types of accounts constitute those maintained for retail customers.  

Furthermore, this term may have disparate meanings for different USFIs, depending on their product offerings and client base – thus leading to conflicting interpretations and treatment by U.S. banks competing in the same market place. Finally, to exclude only specified types of offshore deposit accounts from the temporary withholding relief would require an investment in additional systems and operational development at a time when such resources are scarce.  

To strictly interpret this “retail” terminology would potentially result the transitional relief not applying to payments made with respect to significant numbers of deposit accounts maintained by foreign branches of USFIs for commercial or institutional clients, which IRPAC believes was not the intended goal. IRPAC has suggested, therefore, the most expedient way to clarify and resolve this ambiguity would be to eliminate the words “it maintains for retail customers” from the penultimate paragraph of Treas. Reg. § 1.1473-1T(a)(4)(vi), which Treasury and IRS have adopted.

E. Application of Coordinating Regulations on Offshore Obligations to Non-financial Entities

Recommendation

1. IRPAC recommends that the coordinating regulations clarify the extent to which certain provisions in the coordinating regulations that apply to payments made "with respect to an offshore obligation" are limited in their application only to payors that are financial entities.

2. If the IRS and Treasury intend for the coordinating regulations applicable to payments made "with respect to an offshore obligation" to apply only to financial entities, IRPAC recommends that the regulatory language be revised to clearly provide for such a limitation and its effective date.

Discussion 

Prior to the issuance of the March 2014 temporary coordinating regulations relating to payments made "with respect to an offshore obligation," there were several provisions relating to the Chapter 61 reporting rules that applied to payments made "to an offshore account."  For example, under the prior rules of Treas. Reg. §§ 31.3406(g)-1(e) and 1.6049-5(c)(1), backup withholding did not apply and alternative documentation (in lieu of withholding certificates) was permitted for payments paid and received outside the U.S. "to an offshore account."  An offshore account was defined to mean "an account maintained at an office or branch of a U.S. or foreign bank or other financial institution at any location outside the U.S. (i.e., other than in any of the fifty States or the District of Columbia) and outside of possessions of the United States."  As written, the requirement that the payment be made "to an offshore account" could be made by either a financial institution (e.g., to its account holder) or by a non-financial institution who wires funds directly into a payee's offshore bank account. Nothing in the language of these rules specifically limited their application to only certain payors that were financial entities.  However, we understand that some tax practitioners believe the rule was intended to apply only to financial institutions, despite the lack of any clear language so indicating.  

The temporary regulations changed the regulatory language to require that payments must be made "with respect to an offshore obligation" rather than made "to an offshore account."  The term "offshore obligation" is defined, in relevant part, to mean:  "(A) [a]n account maintained at an office or branch of a bank or other financial institution located outside the United States; or (B) [a]n obligation as defined in § 1.6049-4(f)(3) (other than an account described in paragraph (c)(1)(i)(A) of this section), contract, or other instrument with respect to which the payor is either engaged in business as a broker or dealer in securities or a financial institution (as defined in § 1.1471-5(e)) that engages in significant activities at an office or branch located outside the United States."  Treas. Reg § 1.6049-5T(c)(1)(i). Although the language of (B) is clearly limited to payments by financial institutions, brokers and dealers, the language of (A) by its terms is not so limited since it does not explicitly state that the payor needs to be a financial institution, broker or dealer.  Moreover, the language of (A) is nearly identical to the prior definition of "offshore account" in Treas. Reg. § 1.6049-5(c)(1), which (as noted above) stated, "an offshore account means an account maintained at an office or branch of a U.S. or foreign bank or other financial institution at any location outside the U.S. (i.e., other than in any of the fifty States or the District of Columbia) and outside of possessions of the United States."  

One could read (A) as applying only to bank/financial institution payors because only bank/financial institution payors can make payments (presumably of interest) "with respect to an offshore obligation [i.e., an account maintained at a bank outside the U.S.]."   However, that reading makes (A) redundant, because any payment by a bank with respect to its depositor's account is also covered by (B).  In addition, the preamble to the temporary regulations states that, "these temporary regulations expand the circumstances in which documentary evidence may be relied upon by . . . allowing the use of documentary evidence beyond payments made to accounts of banks and other financial institutions."  T.D. 9658, Preamble (Mar. 6, 2014).  As such, the preamble suggests an intent to broaden the rules generally and does not illuminate whether (A) was meant to narrow or broaden the prior rules nor indeed, what the breadth of those prior rules was (i.e., whether they applied only to payors that were financial entities).  

F. Definition of “banking or similar business” as Applicable to Non-banking Entities

Recommendation

1. IRPAC recommends that the definition of "banking or similar business" under Treas. Reg. § 1.1471-5(e)(2) be modified to avoid the inadvertent treatment of ordinary non-banking business taxpayers as financial institutions by providing limited exceptions for entities that sell goods and services.    

2. IRPAC recommends that an exception be made to the definition of "extensions of credit" to exclude local country customary trade receivables associated with the sale of goods or services.

Discussion

Although the final regulations issued in January 2013 clarify that an entity is not treated as a depository institution unless it both (i) accepts deposits, and (ii) regularly engages in certain specified "banking activities," these rules as currently drafted may pick up certain non-banking business taxpayers.

        (1) Treas. Reg. § 1.1471-5(e)(2)(ii), which provides an exception from the "accepts 
        deposits" rule for deposits "solely" accepted as collateral or security pursuant to a sale or 
        lease of property or pursuant to a similar financing arrangement, is too narrow in cases in 
        which a company takes deposits from its business (non-banking) customers for the 
        customers' convenience ("convenience deposits"), and where those deposits make up a 
        very small percentage of loans extended (to customers making purchases).  An exception 
        for convenience deposits that make up less than 5% of the outstanding loans would make 
        this exception less likely to impact non-banking businesses.  Customers who intend to 
        purchase goods/services from sellers who provide cash discounted pricing might wish to 
        deposit funds for their own convenience with that seller as a means to enhance cash 
        savings.  Without this exception, a non-banking business taxpayer that accepts such 
        convenience deposits and also sells goods on standard delayed payment terms, as 
        described below, may inadvertently be picked up by the current definition of a depository 
        institution.  

        (2) The list of lending transactions treated as banking activities at Treas. Reg. §§ 1.1471-
        5(e)(2)(i)(A)-(F) includes the "extension of credit."  Treating the extension of credit as a 
        banking activity, without any qualification, would appear to impact entities that sell goods 
        on delayed payment terms that are generally consistent with what we understand to be 
        normal terms for trade receivables, i.e., payment required within 60-90 days of the 
        purchase (and, in some countries that have customary longer terms for such receivables, 
        terms of up to 180 days).  Generally, no interest is charged under these typical delayed 
        payment terms (i.e., no additional amount is due for payment received pursuant to these 
        terms vs. upfront cash paid).  

Delayed payment terms should not be treated as a banking activity because there is no profit potential associated with the delayed payment terms.  This treatment would be consistent with IRC § 483 which does not treat as unstated interest any portion of a delayed payment that is due within six months of the date of sale. To avoid inadvertently impacting non-banking businesses entities that sell goods/services on typical delayed payment terms, IRPAC recommends that an exception be made to the definition of extensions of credit to exclude local country customary trade receivables associated with the sale of goods or services.

G. Hold Mail Address at Treas. Reg. § 1.1441-1T(c)(38)

Recommendation

1. IRPAC recommends that the definitions of “permanent residence address” contained in Treas. Reg. §§ 1.1441-1T(c)(38) and 1.1471-1(b)(99) be modified to make it clear that a hold mail instruction should not invalidate documentation used to establish a payee's status provided that the hold mail address is not the sole address on file for the payee. That is, as long as a second, non-U.S. address (which can be treated as the person's permanent residence address) is provided, either on the documentation itself or elsewhere, that second address may be considered a valid, permanent residence address.

2. IRPAC suggests adding a sentence to read: “In the case of documentation including such a hold mail address, a second address provided in either the tax documentation or in the accountholder file may be treated as the person's permanent residence address.”  

Discussion

The definitions of permanent residence address set forth under Treas. Reg. §§1.1441-1T(c)(38) and 1.1471-1(b)(99) both contain the language that, “[f]urther, an address that is provided subject to instructions to hold all mail to that address is not a permanent residence address.”  Some withholding agents have interpreted this language to mean that any hold mail instruction in documentation or the accountholder file invalidates documentation used to establish a payee's status and that the documentation is, thus, not "curable." Based on IRPAC's conversations with the IRS, we understand that this was not the IRS’s intent.  That is, the IRS intended a hold mail instruction to invalidate tax documentation only in instances in which another, non-U.S. address (which can be treated as the person's permanent residence address) is not provided.  IRPAC suggests the IRS clarify this interpretation.  For example, IRPAC suggests adding a sentence after the above quoted language to read:

        “In the case of documentation including such a hold mail address, a second address 
        provided in either the tax documentation or in the accountholder file may be treated as the 
        person's permanent residence address.”  

H. Special Rules for PFICs (Passive Foreign Investment Company)

Recommendation

1. IRPAC recommends that the IRS modify the exemption that eliminates a transfer agent’s Form 1099 reporting obligations with respect to a FATCA compliant PFIC fund by permitting the transfer agent to rely on a statement provided by the fund until such time there is a change in circumstances or unless the transfer agent knows or has reason to know the statement is incorrect.

2. IRPAC recommends that the required statement may be provided by any party authorized to sign documents on behalf of the fund rather than by an “officer” of the fund.  

Discussion

Treas. Reg. §§ 1.6042-2T(a)(1)(i)(B) and 1.6045-1T(c)(3)(xiv) require a transfer agent to obtain an annual statement from a fund that the fund is a PFIC and will satisfy its reporting obligations under Chapter 4. In lieu of this requirement to obtain an annual statement, IRPAC recommends that such a statement remain valid until such time when there is a change in circumstances. Under this proposal, the fund would need to represent on its initial statement that it will notify the transfer agent if there is a change of circumstances that causes the entity to no longer be a PFIC or that it will not satisfy its reporting obligations under Chapter 4. Additionally, IRPAC recommends that the IRS adopt a requirement that would prevent a transfer agent from relying on a statement received from a fund if it knew or had reason to know that the fund is no longer a PFIC or will not satisfy its reporting obligations under Chapter 4. IRPAC understands that funds infrequently change status from PFIC to non-PFIC (or vice versa) and that transfer agents who typically are contractually obligated to prepare the fund’s FATCA reports will have insight regarding the underlying status of the fund.  

The above regulations require “an officer of the corporation” to sign the statement. IRPAC recommends that this requirement be modified for reasons on administrative practicality. IRPAC understands that most PFICs do not have officers, therefore, it would be appropriate to permit the statement to be signed by any person who represents that they have the requisite authority to sign on behalf of the fund.  

I. Per Se Foreign Corporation

Recommendation

1. IRPAC recommends that the phrase “(other than a name which contains the designation “corporation” or “company”)” be removed from Treas. Reg. § 1.1441-1T(b)(3)(iii)(A)(1)(iii).

Discussion

Treas. Reg. § 1.1441-1T(b)(3)(iii)(A)(1)(iii) provides, in general, that if a withholding agent cannot reliably associate a payment with documentation from the payee and the payee is an exempt recipient, the payee is presumed to be a foreign person and not a U.S. person if the name of the payee indicates that the entity is the type of entity that is on the per se list of foreign corporations contained in Treas. Reg. § 301.7701-2(b)(8)(i), other than a name which contains the designation corporation or company. This is a longstanding presumption rule, except that the exception for entities the name of which contains the designation corporation or company was added by FATCA coordinating regulations, presumably to preclude a domestic (U.S.) corporation from being treated as a foreign person. We find this exception unnecessary because a withholding agent would need an indicator that an entity is formed in a jurisdiction other than the U.S. in order to presume the entity is foreign based on the per se list. For example, a withholding agent would need an indicator that an entity, the name of which contains the designation “Public Limited Company,”  was formed in the United Kingdom or one of the other applicable jurisdictions listed in Treas. Reg. § 301.7701-2(b)(8)(i) in order to treat the entity as a per se foreign corporation. Accordingly, the likelihood that a withholding agent would treat what is a domestic corporation as a foreign person based on the application of the per se list in Treas. Reg. § 301.7701-2(b)(8)(i) is remote. For this reason, IRPAC recommends that the phrase “(other than a name which contains the designation “corporation” or “company”)” be removed from Treas. Reg. § 1.1441-1T(b)(3)(iii)(A)(1)(iii).

J. Source of Brokerage Fees

Recommendation

1. IRPAC recommends that IRS and Treasury add a sourcing rule that presumes commissions for trades of securities issued by non-U.S. issuers to be foreign source income if paid to a broker that is a non-U.S. person or can be presumed to be a non-U.S. person, unless the withholding agent knows or has reason to know that the broker executed the trade inside the U.S., such as when the trade is of American depository receipts traded on a U.S. securities market.

Discussion

Treas. Reg. § 1.1441-3T(d)(1) provides that when the source of a payment is not known at the time of payment, the payment must be presumed to be U.S. source and, in turn, is subject to Chapters 3 and 4 withholding. Certain withholding agents have taken the position that, absent an affirmative statement by a broker that the broker did not perform its services (i.e., the execution of a trade) inside the U.S., the commission paid to the broker for the trade must be presumed U.S. source income, even if the trade is executed by a non-U.S. broker on a non-U.S. security. This is a conservative position taken because of (i) the risk that the IRS would take the position that the withholding agent may not assume that none of commission on the trade was for services performed inside the U.S. and (ii) the liability that arises for underwithholding.

A withholding agent can generally eliminate its requirement to withhold if it obtains a statement from the non-U.S. broker that the broker did not perform services inside the U.S. Unfortunately, this statement is cumbersome to obtain in practice. Consider, for example, a U.S. pension plan which hires an investment advisor which, in turn, hires, in its capacity as an agent for the pension plan, a non-U.S. broker to sell a non-U.S. security, the trade of which is settled at the pension plan’s U.S. custodian. The pension plan, which is the obligor of the broker commission, would typically have no direct interaction with the broker and, therefore, typically could not readily ask the broker for a statement on where the broker performed its services. In addition, unlike for a typical vendor payment, the pension plan would not receive an invoice from the broker, which, if one existed, the pension plan could pay less any applicable withholding. Instead, the broker takes its commission directly from the sale amount, and remits the net proceeds to the custodian who, in turn, would have no way to withhold on the commission on the plan’s account since the broker already paid itself the commission. The investment advisor does have a working relationship with the broker and, therefore, could ask the broker for the above statement, but the typical investment advisor does not have experience or a process in place on U.S. tax withholding and reporting matters. IRPAC believes that putting a process in place to collect location of services statements from putative non-U.S. brokers, which could number in the hundreds for each investor and/or investment advisor, is a wasteful undertaking with respect to non-U.S. securities, as the probability of non-U.S. brokers performing services inside the U.S. on non-U.S. securities is remote.

SECTION II – RECOMMENDATIONS ABOUT THE FORMS AND INSTRUCTIONS

K. Time Period for Acceptance of Pre-FATCA Forms W-8

Recommendation

1. IRPAC recommends that IRS issue guidance providing that withholding agents may continue to accept pre-FATCA Forms W-8 through December 31, 2014.

Resolution

IRS has adopted this recommendation for Forms W-8 for entities by adding a cover page to the above effect to the 2014 Form W-8BEN-E, Certificate of Entities Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities), Form W-8ECI, Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States, Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting, and Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting.

Discussion

Most FATCA Form W-8 types were posted to the IRS website on different dates, some after the revision date shown on the form.  The instructions for these forms were typically posted on different dates and after the forms themselves.  As a result, the forms will sunset on different dates if, in accordance with Treas. Reg. § 1.1471-3(c)(6)(vii), the revision date shown on the form is the only consideration.  Further, because each form and/or set of instructions were generally not made available until after the revision date shown on the form (sometimes, months after), withholding agents will have less than the six months allotted in Treas. Reg. § 1.1471-3(c)(6)(vii) to transition to the new form.

To allow for an orderly transition from the pre-FATCA Forms W-8 to the new Forms W-8, including to allow additional time for withholding agents to update validation procedures and for customers to become familiar with the new Form W-8 requirements, IRPAC has recommended that withholding agents be permitted to continue to accept pre-FATCA Forms W-8 through December 31, 2014. IRS has adopted this recommendation, except for the February 2014 Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, for individuals, the acceptance of which will be required beginning September 1, 2014 (six months after the revision date shown on the updated form).

L. “Other income” Example in Line 15 Instructions for Form W-8BEN-E

Recommendation

1. IRPAC recommends that the Instructions for Form W-8BEN-E, Part III, Line 15, fourth bulleted item (see page 10), be eliminated.  

Resolution

IRS adopted this recommendation in the Cover Sheet to Update 2014 Instructions for Form W-8BEN-E published October 7, 2014.

Discussion

Part III of Form W-8BEN-E is used by beneficial owners to claim a reduced rate of withholding under an income tax treaty on certain types of payments that are subject to Chapter 3 withholding.  In most instances, a beneficial owner that is an entity is only required to complete Part III by checking boxes 14a, 14b and 14c (if applicable), and by entering the name of the country in which the entity is a resident on line 14a.  

If, under the provisions of the applicable income tax treaty, a treaty claim requires the beneficial owner to meet special conditions that are not already covered in the representations included on boxes 14a, 14b and 14c, Line 15 of Part III must also be completed. For example, if the beneficial owner is claiming a preferential rate of withholding on dividends that is based on their ownership of a specific percentage of the stock of the entity paying the dividend, Line 15 must be completed to include the specific article of the treaty under which the claim is made, the particular rate of withholding that applies, the specific type of income (in this example, dividends), and an explanation of why the beneficial owner meets those terms (e.g., an ownership threshold of 15% is met).  Another example of when a Line 15 entry may be required is for a claim of reduced withholding under the terms of a “Business Profits” treaty article, which is generally permitted only when the beneficial owner does not maintain a permanent establishment in the U.S.

Unlike the examples described above, the “other income” article of U.S. income tax treaties prescribes only one rate of withholding, and requires no special conditions (e.g., special tax status, classification or ownership percentages) that must be satisfied in order to apply this article other than those already covered on boxes 14a – 14c of the form.  In fact, previous versions of the Instructions to Form W-8BEN (including the version (February 2006) used immediately before the new FATCA version) make no reference to this requirement.  IRPAC members are unable to understand the rational for this new requirement, or what type of compelling (or useful) explanation is expected to be entered on Line 15 in the case of an other income claim.  Nor do we understand what possible enforcement value this information will have for the IRS.

Finally, for withholding agents, this additional condition for other income treaty claims will result in unnecessary re-documentation efforts and adverse customer services issues, or the possible denial of reduced rates of withholding in cases where it should be appropriate.  For these reasons, it is recommended that the fourth bullet (“Persons claiming treaty benefits under an “other income” treaty article”) be deleted in its entirety.

M. Instructions for the Requestor of Forms W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, and W-8IMY Regarding Print Name

Recommendation

1. IRPAC recommends that the Instructions for the Requester of Forms W-8 be modified to provide that a validation of the new field appearing on Form W-8BEN-E, Form W-8ECI and Form W-8EXP, in which the person signing the form is also required to print their name on the signature line, be optional.

Discussion

Form W-8BEN-E, Form W-8ECI and Form W-8EXP all include a new data field adjacent to the signature line on which the signer is asked to print their name. In addition, the Instructions for the Requestor of Forms W-8 state, on page 13 -

        “…for a Form W-8 for which the person signing the form does not also print a name 
        before the signature when required on the form, the withholding agent need not treat the 
        form as incomplete if the withholding agent has documentation or information supporting the 
        identity of the person signing the form.”   

In an apparent effort to mitigate potential form validation issues, the above-quoted text provides that a withholding agent may treat a form that does not include a printed name as an inconsequential omission (and thus need not invalidate a form on this basis) if documentation or information supporting the identity of the person signing the form is already on file.  Unfortunately, withholding agents typically do not maintain documentation or information supporting the identity of the person signing tax forms for entities.  Therefore, treating this as an inconsequential omission in this fashion will offer little relief for withholding agents.  Withholding agents typically do not need to know the identity of or interact with the person who has signed a Form W-8 for an entity, and should not be burdened with tracking down the signer’s identity (or rejecting a form) if the signer’s name is not printed.  Nor should withholding agents be required to make subjective calls as to whether the printed name corresponds to the signature.  For these reasons, IRPAC recommends that a validation of the print name field not be mandatory.  

N. Translation of Forms W-8 and Instructions

Recommendation

1. IRPAC recommends that the IRS issue official foreign language translations of the W-8 series of Forms and Instructions, as it does for certain other forms and publications directed to a non-English speaking audience.

Discussion

FATCA generally requires that individual non-U.S. persons provide withholding agents with withholding certificates, such as an IRS Form W-8BEN, to certify that such individual is not a U.S. person. Similarly, non-U.S. entities are generally obligated to provide withholding agents with an IRS Form W-8BEN-E to certify their Chapter 4 status. In as much as these forms must be completed and signed by non-U.S. persons who may not be conversant in English and may not previously had any reason to interact with the IRS or U.S. tax counsel, in order to facilitate the provision of the requested information it would be appropriate to create official translations of these IRS forms. While the regulations currently contemplate financial institutions may create substitute forms in foreign languages, it is our understanding that financial institutions may be reluctant to do so due to the risks associated with creating a substitute form. Moreover, the risk that substitute forms from various financial institutions may use different language increases the confusion associated with non-U.S. persons completing complex U.S. tax forms. Therefore, the IRS, just as it currently does for certain IRS forms and publications directed to non-English speaking stakeholders (e.g., Pub. 4261 (SP) “Do You Have a Foreign Bank Account (Spanish Version)”), should create a single official translation of each Form in the W-8 series (prioritizing the IRS Form W-8BEN, Form W-8BEN-E, and Form W-8IMY and their respective instructions) in several foreign languages (such as Spanish, French, German, Chinese, Japanese, Russian, Korean, and such other languages as are needed). It is expected that creating official translations of these forms will greatly enhance compliance with FATCA and reduce most errors associated with a non-English speaker preparing the forms. IRPAC recommends that the IRS and Treasury seek the assistance of its IGA partners in identifying the languages into which the W-8 series of forms should be translated, and perhaps, in obtaining assistance in preparing such local translations.  

O. Form W-9, Request for Taxpayer Identification Number and Certification:
     FATCA Jurat, Exempt Payee Code, Exemption from FATCA Reporting Code

Recommendation

1. IRPAC recommends that the fourth certification of Form W-9, Part II (regarding the FATCA code) be removed. If this recommendation is not adopted, IRPAC recommends that IRS issue guidance specifying that, for accounts maintained in the United States, a substitute version of Form W-9 is not required to include the fourth certification in Part II of Form W-9.

2. IRPAC recommends that the Instructions for the Requester of Form W-9 be modified to clarify that the exempt payee code and the exemption from FATCA reporting code are not required fields, and do not affect the validity of the form for purposes of withholding.

Discussion

The fourth certification of Part II of Form W-9 was added pursuant to FATCA. IRPAC recommends that this certification be eliminated, as we see neither regulatory authority for it (see Treas. Reg. §§ 31.3406(h)-3(a)(1)-(2) regarding the statements that must be made under penalties of perjury on Form W-9), nor a need for a penalties of perjury statement with respect to a field that, according to our understanding, merely affects information reporting. If the recommendation in the preceding sentence is not adopted, IRPAC recommends that IRS issue guidance that the fourth certification in Part II of Form W-9 need not be included on a substitute version of Form W-9 for an account that is maintained in the United States. Since this certification is not relevant for such an account, we believe this certification would serve as a possible source of confusion for requesters in the United States and their payees.

On a related matter, IRPAC believes that the exempt payee code and the exemption from FATCA reporting code are not relevant for withholding purposes, and solely affect whether a payee or account holder may be subject to information reporting. Consider, for example, a U.S. bank (an exempt recipient) that submits a Form W-9 to a payor but fails to provide its exempt payee code. It is our understanding that the absence of an exempt payee code would not be a reason to invalidate the form for backup withholding purposes, as this code is not a requirement for a valid Form W-9 (see Treas. Reg. § 31.3406(h)-3(a)(2)). Yet, it is our understanding that certain payors do reject Forms W-9 and backup withhold when an exempt payee code is not provided. The absence of an exempt payee code could, however, require a payor to treat such a payee as a U.S. nonexempt recipient and, accordingly, subject to information reporting. Similarly, the new exemption from FATCA reporting code may, in some cases, lead to unnecessary rejections of Forms W-9 and potential overwithholding. It is our understanding that this code, like the exempt payee code, is relevant only for reporting purposes. Accordingly, to limit the opportunities for payors to misinterpret the exempt payee code and the exemption from FATCA reporting code, IRPAC recommends that the Instructions for the Requester of Form W-9 be modified to clarify that these codes do not affect withholding.

SECTION III – RECOMMENDATIONS ABOUT INTERGOVERNMENTAL AGREEMENTS AND FATCA REGISTRATION

P. Self-Certifications For New Accounts Under Intergovernmental Agreements (IGAs)

Recommendation

1. IRPAC recommends that IRS and Treasury clarify with FATCA partner countries the consequences of a reporting Model 1 or 2 FI not obtaining a self-certification or, when permitted under Annex I of the applicable IGA, alternative documentation, to establish the FATCA status of a new account.

Discussion

A reasonable position could be taken that Annex I of the Model 1 or 2 IGAs provides that if a self-certification (or, for an entity account, alternative documentation, when permitted in the Annex) is not obtained for a new account, the account cannot be opened or must be closed. See, Sections III(B) and V(B)(3) of Annex I of the Model 1 Agreement (Updated 6-6-2014), which state, in relevant parts (emphasis added):

        “With respect to New Individual Accounts…upon account opening (or within 90 days after 
        the end of the calendar year in which the account ceases to be described [as a low-value 
        account], the Reporting [FATCA Partner Financial Institution] must obtain as a 
        self-certification....”   

        “In all other cases, a Reporting [FATCA Partner] Financial Institution must obtain a 
        self-certification from the [entity] Account Holder to establish the Account Holder’s status.”

Certain FATCA partner countries have taken the position and issued official guidance that if a self-certification (or, for an entity account, alternative documentation, when permitted in the Annex), is not obtained for a new account, the account may be opened or need not be closed but must be treated as a reportable account. The Canada Revenue Agency has issued guidance that such an account of an individual may be opened (or remain open) and is reportable only if there are U.S. indicia for the account. See Sections 9.18-9.21 of the “Guidance on enhanced financial accounts information reporting, Part XVIII of the Income Tax Act” (June 20, 2014). FATCA partner countries have taken varying positions presumably because Annex I is not entirely clear on the consequences of not obtaining a self-certification.

IRPAC believes that the consequences of a reporting Model 1 or 2 FI not obtaining a self-certification for a new account should be consistent across all IGA jurisdictions, or else reasons could exist to shift accounts to FIs in partner countries which have less stringent requirements for new accounts and, thus, frustrate the purpose of FATCA. IRPAC recommends, therefore, that IRS and Treasury clarify with partner country jurisdictions the consequence of reporting Model 1 or 2 FIs not obtaining a self-certification for a new account.

Q. Effect of Signing FATCA Registration Form

Recommendation

1. IRPAC recommends that the IRS adopt certain proposed Q&As IRPAC submitted to the IRS for inclusion in its list of Q&As posted on the IRS website, which are intended to clarify the certifications and liability of the person who acts as responsible officer for purposes of registering an FFI.  

Resolution

The IRS adopted a portion of the proposed Q&A and has included it on its website at FATCA – FAQs General, Responsible Officers and Points of Contact, Q&A 6. IRPAC recommends that the IRS fully adopt its proposed Q&A.

Discussion

During the course of the past year, IRPAC had several discussions with the IRS regarding stakeholder concerns relating to FFI registration and the potential for individuals who sign the registration statement as responsible officer to misinterpret the certifications they have made and to be held personally liable for the underlying compliance of the FFI with its respective obligations under an FFI Agreement, a Model 1 or Model 2 IGA or as a registered-deemed compliant FFI pursuant to the regulations or an applicable IGA.

IRPAC urged the IRS to both explain the certifications and clarify that the person executing the jurat contained on the registration website would not be personally liable for any potential future non-compliance by the FFI. In this regard, IRPAC submitted a proposed Q&A to the IRS that clarified the certifications and that the responsible officer would only be held accountable for errors or omissions relating to the registration and not to any potential future non-compliance by the FFI. The IRS adopted the portion of the proposed Q&A which explained the certifications. IRPAC recommends that the IRS fully adopt its proposed Q&A.