FATCA Update: Proposed Regulations Provide Significant Relief– January 09, 2019 by Cynthia Pedersen

Global reporting regimes continue to be a focal point of today’s regulatory environment. However, with the Department of Treasury’s current focus on reviewing existing regulations to reduce unnecessary burdens on taxpayers, pursuant to recent Executive Orders, the IRS and Treasury have offered a rare gift of relief in the area of foreign filing requirements.
 
On December 13, 2018, proposed regulations were issued that will eliminate the impending requirement to withhold on U.S.-source gross proceeds under the Foreign Account Tax Compliance Act (FATCA). The proposed regulations also offer other forms of related relief discussed below. 

Elimination of Withholding on Gross Proceeds

Pursuant to IRC Section 1471(a) and 1472, FATCA requires 30% withholding on certain U.S.-source payments to foreign financial institutions and certain non-financial foreign entities that do not comply with investor identification requirements. These payments are known as “withholdable payments” and currently include U.S. source: 

  • Interest,
  • Dividends,
  • Rents,
  • Salaries, and
  • Other fixed or determinable annual or periodical (FDAP) income. 

Beginning on January 1, 2019, the definition of a withholdable payment was scheduled to expand to include gross proceeds from the sale or other disposition of property that can produce FDAP income, such as the sale of U.S. stock or U.S. debt instruments.
 
The IRS and Treasury have repeatedly deferred the implementation date of withholding on gross proceeds based on comments received by withholding agents on the burden of implementing the complex regulatory framework. Due to the success U.S. and foreign financial institutions have had in implementing the current regime and the onus on the Treasury to reduce taxpayers’ burdens, the IRS and Treasury have determined the current withholding requirements already serve as a significant incentive for FATCA compliance. Therefore, expanding the definition of a withholdable payment is no longer necessary. Financial institutions may currently rely on these proposed regulations, therefore, FATCA withholding will continue to apply only to U.S.-source FDAP income. 

Deferral of Withholding on Foreign Pass-Through Payments

Similarly, due to the success of Intergovernmental Agreements, also known as IGAs, which allow the IRS and foreign governments to report U.S. citizen accounts, the IRS and Treasury determined the impending requirement for foreign financial institutions to withhold on certain pass-through payments is also not currently necessary. This withholding requirement is deferred until two years after the publication of final regulations that define the term “foreign pass-through payment.” 

Elimination of Withholding on Non-Cash Value Insurance Premiums

A withholdable payment does not include “excluded nonfinancial payments,” such as services income, office and equipment leases, and software licenses. Due to the expanded foreign reporting requirements under other provisions of the Tax Cuts and Jobs Act, the IRS and Treasury amended the definition of a “nonfinancial payment” to also include premiums for insurance contracts that do not have cash value. 

Clarification of Definition of Investment Entity

The proposed regulations clarify an entity should not be considered an investment entity solely because the entity invests all or a portion of its assets in a mutual fund, an exchange traded fund, or a collective investment entity that is widely held and is subject to investor-protection regulation. 
 
Please contact a member of your service team or Cynthia Pedersen at cynthia.pedersen@cohencpa.com for further discussion. 
 
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.