The US Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) on December 30, 2016 issued final and temporary regulations (2016 Chapter 3 Regulations) under Chapter 3 of the Internal Revenue Code (Code) regarding withholding of tax on certain US source income paid to foreign persons. Although many of the changes introduced in the 2016 Chapter 3 Regulations have been previewed in previous IRS pronouncements, the regulations introduce several new concepts in response to stakeholder comments.
Treasury and the IRS also released final regulations (2016 Final FATCA Regulations), temporary regulations (2016 Temporary FATCA Regulations), and proposed regulations (2016 Proposed FATCA Regulations) under Chapter 4 of the Code implementing the Foreign Account Tax Compliance Act (FATCA) (collectively, 2016 FATCA Regulations). The 2016 FATCA Regulations make changes to a number of key definitions, due diligence and documentation requirements, standards of knowledge, identification of the payee, legal entity classification, and withholding and reporting requirements. Many of the changes introduced in the 2016 FATCA Regulations have been previewed in previous IRS pronouncements. A number of the provisions also are cross referenced in the 2016 Chapter 3 Regulations.
This insight provides highlights of the 2016 Chapter 3 and FATCA Regulations and includes observations regarding the potential impact of the regulations on withholding agents, foreign financial institutions (FFIs), and those who receive payments from withholding agents and/or FFIs. These affected parties should assess the potential impact of the changes made by the 2016 Chapter 3 and FATCA Regulations on their existing information reporting and withholding tax processes and systems.
The IRS continues to modify the Chapter 3 Regulations in response to comments from stakeholders and to make the regulations more workable in light of technological advances that have occurred in recent years. Withholding agents should familiarize themselves with the various changes the IRS has introduced, and determine the impact on their withholding, reporting, and account documentations systems and processes.
Almost two and a half years after the 2014 FATCA Regulations were released, the 2016 FATCA Regulations provide coordination and clarification on operational issues withholding agents and FFIs are facing. FFIs should read the revised FFI agreement in conjunction with the 2016 Final and Temporary FATCA regulations to obtain a complete picture of the compliance landscape.