The Information Reporting Program Advisory Committee (IRPAC) is required to furnish an annual report to the Commissioner of the IRS.
The 132-page 2015 annual report released on 28 October 2015 consists of four subgroup reports.
1. General
Encompassing identified areas for improvement concerning:
a) taxpayer identification number issues including Form W-9 issues,
b) the penalty abatement process, and;
c) the FAQ section of the IRS website and the need for an archived, searchable database.
2. Employer Information Reporting and Burden Reduction
Concerning:
a) electronic transmittal of employer withheld IRS tax levy proceeds,
b) pension and IRA complications,
c) publication 1586 Reasonable Cause Regulations & Requirements for Missing and Incorrect Name/TINs,
d) theft of business taxpayer’s identity,
e) publication and forms change,
f) reporting by insurance companies and third parties under IRC section 6055 and section 6056, and;
g) Affordable Care Act education.
3. Emerging Compliance Issues
Concerning:
a) form 1099-K reporting,
b) transfers of section 1256 options,
c) complex debt reporting requirements, and;
d) form 1098-T reporting.
4. International Reporting and Withholding
Concerning:
a) Notice 2015-10 – Guidance on Refunds and Credits Under Chapter 3 and Chapter 4.
b) Treatment of Negative Interest for U.S. Tax Information.
c) NFFEs Should Have a Single FATCA Status.
d) Can FFI in an “in substance” Model 1 IGA Jurisdiction Be Treated as a PFFI?
e) Certain Controlling Persons of Non-U.S. Trusts.
f) Eliminate “Reason to Know” Standard for FATCA Reporting Exemption Claims.
g) Meaning of “provided together” Regarding Circumstances Under Which a Form W-8 Remains Valid Indefinitely.
h) Glitch in “paid and received” Requirement for Foreign Source Services Income.
i) Application of U.S. Indicia Rules at Reg. 1.1441-7T(b)(5) to Forms W-8ECI
j) Form W-8BEN-E Part III, Line 15 – Treaty Claims (Special Rates and Conditions).
k) New Limitations on Benefits Certification on 2016 Draft Form 1042-S.
l) Account by Account Reporting on Form 1042-S.
m) Substitute Form 1042-S Recipient Copies.
n) Can an Entity Listed in Annex II of an IGA Check Comparable Chapter 4 Status Under the Regulations?
o) Clarify Level of Precision Required for Annex II Claims on Forms W-8 (W-8BEN-E, line 26; W-8EXP, line 15; W-8IMY, line 29.
p) Tax Form to be Provided to IGA FFI by Foreign Disregarded Entity Owned by US Person.
q) Must Form 8655 Be Filed When Agent is Withholding Agent in its Own Right?
r) Provision of an Option to Principals and Authorized Reporting Agent to Determine Which Party Will be Identified as Withholding
Agent on Forms 1042-S.
s) Box 14e of Form W-8IMY when QI Maintains no Accounts of US Non-exempt Recipients.
t) Eliminate “(other than section 501(c) organization)” from Instructions for Line 36 of Form W-8BEN-E.
Insofar as international reporting and withholding issues go, the following are some of the recommendations made in the report.
A. Guidance on refunds and credits under chapter 3 (Withholding of tax on nonresident aliens and foreign corporations), and chapter 4 (Taxes to enforce reporting on certain foreign accounts) of the Internal Revenue Code.
This initiative has arisen as a result of the IRS’ concern around fraudulent withholding tax refund claims by foreign withholding agents in the event where the IRS refunds taxes to payees. IRPAC recommends that the IRS put procedures in place to mitigate the risk of fraud. The report contains a discussion on the recommended approach and methodology to take, stating that the pro rata approach suggested in an IRS Notice (2015-10) has ‘fundamental flaws’.
B. Treatment of negative interest for U.S. tax information reporting and withholding purposes.
Guidance is required in order to account for what is termed “negative interest” (for example, interest or fees which can arise on certain transactions including payments on cash deposits, where the bank charges its customers to hold funds).
C. Non-financial foreign entities (NFFEs) should have a single FATCA status
NFFEs should be directed to use the definitions in Annex 1 of the intergovernmental agreement applicable to the NFFE’s country of organization when selecting FATCA status for form W-8BEN-E, Certificate of Entities Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities).
Treasury Regulations prescribe the FATCA status for NFFEs, however, partner jurisdiction foreign financial institutions must use Annex 1 of the IGA to work out the FATCA status of an NFFE, resulting in inconsistency.
D. Guidance is required with respect to foreign financial institutions (FFIs) in an “in-substance” Model 1 IGA jurisdiction with respect to treating the FFI as a participating FFI.
E. Certain Controlling Persons of Non-US Trusts
Treasury should modify the model IGA engaging the “Most Favoured Nation” provisions of existing IGAs to align IGA reporting requirements for controlling persons of foreign trusts with the information reporting requirements under federal law.
Page 75 of the annual report states:
“IGAs presently contain terms that are not consistent with US law and regulations resulting in disparate treatment compared to entities subject to US information reporting obligations. For instance, under an applicable IGA, all US persons that are trustees, trust protectors, beneficiaries and certain other parties are subject to information reporting whether the related trust is an FFI or passive NFFE. On the other hand, under US law and applicable regulations, only US persons considered to hold an equity interest in a trust would be subject to information reporting. Applicable regulations generally provide that a grantor of a grantor trust, a beneficiary that is entitled to a mandatory distribution from a trust or a beneficiary that actually receives a discretionary distribution from the trust (in the current tax year, in the case of an FFI or in the prior tax year in the case of a passive NFFE) hold an equity interest in a trust. To be clear, under US regulations, a US trust protector has absolutely no information reporting obligations”.
“A US trustee of a non-US trust has no personal information reporting obligations, unless the trust has an obligation to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts or Form 3520A, Annual Information Return of Foreign Trust With a US Owner. Similarly, a US beneficiary of a non-US trust who is not considered a grantor of the trust and who receives no distribution from such trust has no information reporting obligations”.
“IRPAC recommends that Treasury modify the Model IGA and utilize the “Most Favored Nation” provisions of existing IGAs to conform IGA reporting requirements with respect to controlling persons of non-US trusts with US law. This can be accomplished by:
(1) clarifying the term “controlling person” to exclude (a) trust protectors, (b) trustees, and (c) persons identified as beneficiaries or potential beneficiaries of a trust and who are not entitled to receive a mandatory distribution from the trust in the current
year and who do not receive any discretionary distributions from the trust during the current year, and
(2) clarifying the term “equity interest” to read, in part, “A Specified US Person shall be treated as being a beneficiary of a foreign trust if such Specified US Person has the right to receive directly or indirectly (for example, through a nominee) a mandatory distribution or receives, in the current year, a discretionary distribution from the trust.”
“If IRPAC’s recommendation is not adopted, the information provided by an IGA jurisdiction or Model 2 FI to the IRS with respect to a trust protector, trustee or discretionary beneficiary that receives no actual distribution will be identical to the information relating to any holder of a US reportable account. Consequently, the IRS will be presented with the burdensome task of ascertaining why it received information reporting pursuant to an IGA or FFI Agreement with respect to such account but did not receive any individual information return from the identified parties. To forestall the inevitable waste of limited IRS resources, it would be practical to conform IGA information reporting obligations to existing domestic information reporting practices”.
F. Eliminate “Reason to Know” standard for FATCA Reporting Exemption Claims
The “reason to know” standard in Treasury Regulation 1.1471-3T(d)(2)(i) with respect to a withholding agent’s knowledge of a payee’s status being that the withholding agent either knows, or has reason to know, that the certification of a person as not a specified US person on form W-9 is incorrect.
G. Meaning of “provided together” regarding circumstances under which a form W-8 remains valid when accompanied by documentary evidence.
The meaning of “provided together”, with respect to the submission of documentary evidence supporting Form W-8 status, is clarified and allows the provision of documentation any time up to three years, so as not to inadvertently cause form W-8 certification to expire after the current three year validity period.
H. Glitch in “paid and received” requirement foreign source services income
Clarification of the term “paid and received” is required for the purposes of applying Treas. Reg. 1.6041-4T(a)(2), under which information returns are not required for payments of amounts from sources outside the United States in relation to services performed outside the United States which are paid by a non-U.S. payor or non-U.S. intermediary, and are paid and received outside the United States.
Clarification is sought for the purpose of determining if and when form 1099-MISC is required to be filed.
I. Application of U.S. Indicia Rules at Reg. 1.1441-7T(b)(5) to Forms W-8ECI
Regulations require modification to clarify that completed Forms 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 are not beneficial owner withholding certificates for purposes of Treas. Reg. 1.1441-7T(b)(5).
J. Form W-8BEN-E, Part III, Line 15 – Treaty Claims (Special Rates and Conditions)
Line 15 of Form W-8BEN-E “Explain the reasons the beneficial owner meets the terms of the treaty article” should be eliminated and replaced with the requirement for the payee to specify the specific paragraph(s) of the treaty article being claimed.
Line 15 currently places undue burden on withholding agents to assess the validity of the reasons provided for meeting the terms of the treaty article. The proposal aims to achieve more reliable and verifiable information for withholding agents to assess the validity of the claimant’s statement.
K. New Limitation on Benefits Certification on 2016 Draft Form 1042-S
A treaty Limitation on Benefits (LOB) certification be added to Form W-8BEN-E which withholding agents can use when completing Form 1042-S.
L. Account by Account Reporting on Form 1042-S
Additional guidance and expansion of form 1042-S to require account by account reporting, aligning the reporting requirements to account by account reporting required under FATCA intergovernmental agreements that the US government has with Partner Countries. IRPAC views that this will be helpful to US financial institutions preparing Form 1042-S for recipients of US sourced and whom are residents of Partner Countries.
The clarification of the term “account” for Form 1042-S purposes should be made, and the term should have the same meaning as the term “financial account” under Treasury Regulations for FATCA purposes.
P. Tax Form to be Provided to IGA FFI by Foreign Disregarded Entity Owned by US Person
Guidance is required for account holders which are foreign disregarded entities, owned by a US person, and which are required to certify their tax status to a foreign financial institution covered by an intergovernmental agreement.
Q. Must Form 8655 Be Filed when Agent is Withholding Agent in its Own Right?
Form 8655, Reporting Agent Authorization should not be required to designate an agent as a reporting agent when the agent is by definition a withholding agent.
A full copy of the report is available upon request – 29 October 2015.