Very late in 2019, the IRS issued final regulations (“regs”) on the due diligence and reporting requirements that apply to persons making certain U.S. source payments to nonresident aliens. The regs also pertain to foreign financial institutions reporting on U.S. accounts under the Foreign Account Tax Compliance Act.
The final regs adopt, with modifications, the proposed regs published on January 6, 2017, and remove the corresponding temporary regs. They also incorporate the modifications included in the 2018 proposed regs regarding:
- The requirement that a withholding certificate or treaty statement provided by an entity treaty claimant identify the applicable limitation on benefits provision that the entity meets in order to be eligible for treaty benefits, and
- The documentation that a withholding agent may rely on to treat an address provided by an account holder that’s subject to a hold mail instruction as a permanent residence address for purposes of an account holder’s claim of foreign status or benefits under an income tax treaty.
The 2019 final regs also include a limited number of technical corrections and conforming changes to final regs under Chapters 3, 4 and 61. The IRS intends to finalize the remaining provisions of the 2018 proposed regs in separate guidance at a future date.
Let’s look at some of the specific issues addressed by the final regs.
Obtaining a foreign TIN
The IRS has determined that a separate written statement is an acceptable way for a withholding agent to collect a foreign account holder’s Foreign Taxpayer Identification Number (FTIN). However, the account holder must represent its FTIN in a signed written statement that acknowledges that such statement is a part of the withholding certificate. In addition, the withholding agent must associate the statement with the account holder’s withholding certificate.
According to the IRS, this allowance permits withholding agents to cure incomplete withholding certificates by obtaining the FTIN on a separate statement rather than having to obtain a new withholding certificate. The requirement that the signed written statement include an acknowledgment that such statement is part of the withholding certificate ensures that the statement is subject to penalties of perjury to the same extent as any other information provided on the withholding certificate.
The final regs clarify the application of the exception to the requirement that a withholding certificate include an FTIN for an account holder that’s a government, international organization, foreign central bank or resident of a U.S. territory by adding an example. The example specifies that an account holder may claim foreign government status either under Internal Revenue Code Section 892 or otherwise when the withholding agent may rely on a claim of exemption under either of two applicable regulations as typically documented on:
- IRS Form W-8-EXP, “Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting,” or
- IRS Form W-8BEN-E, “Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities).”
The final regs also clarify the standard of knowledge applicable to a date of birth by providing that a withholding agent may rely on a date of birth provided on a withholding certificate unless it knows (or has reason to know) that the date of birth is incorrect. This is the same standard of knowledge applicable to FTINs.
In addition, the final regs incorporate the allowance in the instructions for Form W-8 that a reasonable explanation may be provided on a separate attached statement associated with the withholding certificate.
Nonqualified intermediary withholding statements
The final regs clarify that the general standards of knowledge that are applicable to withholding agents also apply to a nonqualified intermediary for reliance on payee documentation. This applies for purposes of representing that the information on the payees’ withholding certificates is consistent with any other account information that the nonqualified intermediary has for determining the withholding rate applicable to each payee.
The final regs also provide that a nonqualified intermediary may submit a withholding statement that excludes a Chapter 4 recipient code for one or more payees. But the intermediary may do so only if the withholding agent is able to determine the appropriate recipient code based on other information included on, or associated with, the withholding statement or that’s otherwise contained in the withholding agent’s records for the payee in question.
E-signatures and third-party repositories
The final regs permit a withholding agent to consider, in addition to the withholding certificate itself, other available documentation or information that supports that a withholding certificate was electronically signed. This is provided that the withholding agent doesn’t know that the documentation or information is incorrect.
Also, the final regs clarify that a separate request and authorization to obtain a withholding certificate from a third-party repository isn’t required for each payment made by a withholding agent when the withholding agent is otherwise permitted to rely on the withholding certificate on an obligation-by-obligation basis, or as otherwise permitted under the applicable regulation.
Treaty claims and statements
The final regs adopt, without modification, the standard of knowledge in the temporary regs for reliance on a limitation on benefits (LOB) provision associated with a treaty claim made on a withholding certificate.
The final regs incorporate the extension of time in the 2018 proposed regs for withholding agents to obtain treaty statements with the specific LOB provisions identified for pre-existing accounts to January 1, 2020, rather than January 1, 2019, which was the date included in the temporary regs.
And the final regs include the same modification contained in the 2018 proposed regs to correct an inadvertent omission of the applicable standard for a withholding agent’s reliance on the beneficial owner’s identification of a LOB provision on a treaty statement. This incorporates the same actual knowledge standard that applies to a withholding certificate used for a treaty claim.
The final regs became effective on January 2, 2020, though applicability dates vary depending on when payments were made. Consult the Elliott Davis team for additional information.