Proposed regulations would reduce FATCA and Chapter 3 burdens

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January 2019

Overview

The US Department of the Treasury on December 13, 2018 released proposed regulations (Proposed Regulations) that would amend regulations under Chapter 4 (Sections 1471 through 1474) of the Internal Revenue Code (Code), commonly referred to as the Foreign Account Tax Compliance Act (FATCA), and Chapter 3 (Code Sections 1441 through 1461).

Among numerous provisions in the Proposed Regulations, the modification of the so-called ‘lag method’ of withholding and reporting on a US partnership’s undistributed income and adjustments to overwithholding under the reimbursement and set-off procedures would seem to have the most significant impact, especially on the asset management industry.

Other notable provisions in the Proposed Regulations include:

  • Elimination of FATCA withholding on both payments of gross proceeds and certain insurance payments
  • Deferral of FATCA withholding on foreign passthru payments
  • Guidance concerning certain due diligence requirements of withholding agents
  • Clarification of the concept of ‘investment entity’ in the context of determining whether an entity is a ‘financial institution’ for FATCA purposes
  • Modification of nonqualified intermediaries’ reporting of amounts withheld under FATCA.

The takeaway

The Proposed Regulations announce modifications to the Chapter 3 and 4 regulations in response to stakeholder comments related to various provisions that should be modified or eliminated in order to reduce unnecessary burdens and generally provide welcome relief to those affected.

Modifications to the FATCA withholding rules for foreign passthru payments, gross proceeds from securities sales, and non-cash value insurance premiums are favorable to those who pay or receive these amounts.

Perhaps the most significant development announced in the Proposed Regulations is elimination of the so-called ‘lag method’ of withholding and reporting on US partnerships’ undistributed income. The lag method traditionally has created a problematic mismatch between the year income was earned and the year the income was reported on Forms 1042-S/1042 and Schedule K-1. This reporting mismatch is eliminated — generally viewed as a favorable change — under the Proposed Regulations. However, impacted stakeholders (e.g., asset managers and private equity funds) will need to plan accordingly to phase out the lag method and implement the new reporting and withholding procedures under the Proposed Regulations.

Contact us

Dominick Dell'Imperio

Partner, PwC US

Kevin Brown

Principal, Tax Controversy and Regulatory Services Leader, PwC US

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