The IRS has provided critical clarification of its regulations requiring the collection of information on foreign taxpayers, and financial services companies must respond promptly to achieve compliance before the regulations take effect.
The IRS released temporary regulations in early 2017 that caused an uproar among financial services companies with foreign account holders. In late September, it issued Notice 2017-46, which clarifies the rules contained in the temporary regulations regarding the collection of the additional information and eases the deadline requirement.
The Temporary Regulations
The temporary regulations generally require U.S. financial services companies to collect foreign taxpayer identification numbers (FTINs) and, for individuals, dates of birth on Form W-8s, “Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals).” They also require financial services companies, beginning Jan. 1, 2018, to withhold at a 30 percent rate on payments made to foreign account holders if the forms on file lack that information.
For W-8s associated with payments made on or after Jan. 1, 2018, an account holder that does not supply an FTIN must provide a reasonable explanation for its absence. A form without an FTIN or a reasonable explanation for its absence would be invalid as of Jan. 1, 2018, likely triggering the withholding obligation.
The temporary regulations created great concern among financial services companies worried that the short time frame for remediating existing forms would result in backup withholding on foreign account holders’ assets. In response, the IRS issued Notice 2017-46.
The notice explains that the IRS intends to amend the temporary regulations to narrow the circumstances in which an FTIN and date of birth are required and to provide exceptions for certain account holders. Specifically, no FTIN or reasonable explanation will be required for accounts held by residents of jurisdictions that do not issue FTINs (currently Bermuda, the Cayman Islands, and the British Virgin Islands) or accounts held by residents of jurisdictions that do not have an in-force agreement with the United States for the exchange of tax information.
The notice also provides for a phased-in approach over a period ending on Dec. 31, 2019:
- Withholding certificates for payments made before Jan. 1, 2018, will not be considered invalid solely because they lack an FTIN or a reasonable explanation for its absence.
- W-8s signed before Jan. 1, 2018, with a three-year validity period will not be treated as invalid for payments made after Jan. 1, 2018, simply because they lack an FTIN or reasonable explanation. They will, however, be deemed invalid for payments after the earlier of Dec. 31, 2019, the expiration date of the validity period of the W-8, or the date when a change in circumstances requiring a revised form occurs.
- W-8s signed before Jan. 1, 2018, with an indefinite validity period will not be treated as invalid for payments made after that date just because they do not have the FTIN or a reasonable explanation. But they will be invalid for payments made after the earlier of Dec. 31, 2019, or the date when a change in circumstances requiring a revised W-8 occurs.
- Withholding certificates signed on or after Jan. 1, 2018, must include an FTIN or reasonable explanation.
The amended regulations also will include an alternative procedure for obtaining and associating FTINs with W-8s signed before Jan. 1, 2018. An unexpired but otherwise accurately completed W-8 that is missing the FTIN or that includes a reasonable explanation for why the FTIN is not supplied will be valid for payments made after Dec. 31, 2019, if the bank obtains the account holders’ FTIN. Alternatively, the bank can obtain an explanation in a written statement that the bank associates with the W-8, or it may have the information in files associated with the account holder’s W-8. The same is true for the date of birth requirement, but a new form must be established in the case of expiration.
Banks’ Next Steps
Although the timing has changed, the FTIN collection requirement has not, and many financial services companies face a time-consuming and burdensome process to achieve timely compliance. They must review the W-8s already in their possession to determine which require remediation and adopt new procedures going forward to see that the required information is collected. The time to start is now.
In This Issue
- The New Accounting Rule for Bond Premium Amortization – and Its Tax Implications
- You Must Prepare Now for New Partnership Audit Rules
- Time to Prepare for the New FTIN Rules
- How Not to Do Captive Insurance