The IRS and U.S. Treasury released final temporary, and proposed information reporting and withholding regulations on December 30, 2016. While most of the changes are believed to be positive, many believe the relief provisions should be interpreted with caution and reservation.
The general rule under chapter three is that a withholding agent must withhold 30 percent of some U.S. source payments to a foreign person unless it can rely on documentation corroborating that the payment was made to a U.S. person or a beneficial owner that is a foreign person entitled to a reduced rate of withholding. Withholding on payments to a foreign person is not required when the foreign person assumes withholding as a qualified intermediary, a U.S. branch of a foreign person, or as a withholding foreign partnership or trust.
However, the modified rules applicable to qualified intermediaries results in more stringent requirements applicable to qualified intermediary agreements; containing a modified standard of knowledge aligning with the reason-to-know standard adopted in regulations, along with revised documentation requirements and presumption rules to align with inter-governmental agreement requirements. Finally, the term of validity for a qualified intermediary agreement was extended to six calendar years, from the three years provided in the proposed agreement. The updated final qualified intermediary agreement is effective beginning January 1, 2017.
Also, the new rules requiring withholding agents to collect a foreign TIN could prove problematic. Under previous rules, if a withholding agent did not provide a foreign TIN on a Form W-8BEN (individuals) or W-8BEN-E, the withholding agent could consider the form valid; however, under the new regulations, the absence of a foreign TIN could result in an invalid W-8BEN or BEN-E starting January 1, 2018, unless the account holder provides an explanation for not having a foreign TIN.
Additionally, some changes were made to the foreign financial institution (‘FFI’) agreements for purposes of FATCA withholding and reporting obligations. Changes were made to the FFI agreement mainly to align with subsequent changes to IRS regulations, such as the withholding and reporting rules applicable to U.S. branches that are not U.S. persons. The FFI agreement also contains new certification requirements applicable to FFIs attempting to terminate an FFI agreement, and clarifies that obligations imposed with respect to the period the agreement was in force survive the termination of the agreement.