IRS Issues Proposed Regulations on FATCA
On December 13, 2018, the Internal Revenue Service issued a proposal intended to reduce the regulatory burden with respect to FATCA, the Foreign Account Tax Compliance Act. The proposal would eliminate withholding requirements on gross proceeds paid to certain foreign entities from the sales or other dispositions of property that could produce interest or dividends from sources within the U.S. It also includes a delay on pass-through payment withholding requirements; relief from treaty statement documentation; and rules related to refunds and credits of amounts withheld.
The Proposed Regulations also provide guidance on the definition of an “investment entity,” modify certain due diligence requirements of withholding agents, and revise certain provisions relating to refunds and credits of amounts over-withheld.
Effective Date of New Regulations
The Treasury Department and the IRS provide that taxpayers can generally rely on the modifications in the Proposed Regulations until final regulations are issued. However, taxpayers may not rely on the provisions of the Proposed Regulations that relate to credits and refunds of withheld tax until Form 1042 and Form 1042-S are updated for the 2019 calendar year.
Most Notable Changes Proposed for FATCA
- Eliminate FATCA withholding on gross proceeds from the sale or other disposition of assets that could produce U.S.-source dividends or interest, which under the current regulations is scheduled to apply to payments made on or after January 1, 2019.
- Defer the effective date for withholding on foreign passthru payments, a “passthru payment” having been statutorily defined in the Hire Act as any withholdable payment or other payment “attributable to” a withholdable payment, until the date that is two years after the date the term “foreign passthru payment” is defined in final regulation.
- Eliminate FATCA withholding on non-cash value insurance premiums.
- Amend existing FATCA regulations to clarify that an entity is not viewed as “managed by” another entity for purposes of the FATCA regulations solely because the entity invests all or a portion of its assets in the other entity if such other entity is a mutual fund, exchange traded fund, or a collective investment entity that is widely-held and is subject to investor protection regulations; however, an investor in a discretionary mandate would be viewed as being “managed by” the advising financial institution for purposes of the FATCA rules.
- Modify certain FATCA and chapter 3 due diligence and documentation requirements, including those relating to (i) claims for benefits under an applicable U.S. income tax treaty and (ii) a permanent residence address subject to a hold mail instruction.
- Revise the procedural rules for claiming credits and refunds for taxes overwitheld under FATCA and chapter 3 with respect to nonresident partners of partnerships so as to eliminate the potential mismatch (which arises under the so-called “lag method” provided in current instructions to IRS Form 1042) between income allocated to nonresident partners and the withholding on that income.
- Extend the applicable periods during which a withholding agent may apply the reimbursement and set-off procedures, which are procedures that allow withholding agents to rectify previous overwithholding of taxes under FATCA or chapter 3.
- Allow nonqualifying intermediaries that are participating FFIs or registered deemed-compliant FFIs to report taxes withheld under FATCA as those withheld under chapter 3, to assist the accountholders in claiming foreign tax credits in their respective home jurisdictions.
The elimination of FATCA withholding on gross proceeds and non-cash insurance premiums that are described above also apply to payments made to non-financial foreign entities (“NFFEs”).