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January 10, 2019

Proposed Updates Make for Friendlier FATCA (article)

International Tax

The IRS recently made significant changes to the Foreign Account Tax Compliance Act (FATCA) that will bring some tax relief for multinational partnerships. In proposed regulations released Dec. 13, 2018, the IRS eliminated withholding taxes on payments of gross proceeds, suspended withholding taxes on foreign pass-through payments for qualifying foreign financial institutions, and clarified the definition of an investment entity subject to FATCA.

One of the reasons for the FATCA updates comes from a 2017 executive order that asked the IRS to review and reduce potentially burdensome tax regulations. Partnerships with overseas interests should see some benefits from the changes to tax and financial reporting requirements, which are described in more detail below.

Background

Passed in 2010, FATCA is designed to reduce profit-shifting practices by requiring foreign financial institutions (FFIs) to report their assets held by U.S. taxpayers. FFIs include banks, mutual funds, hedge funds, private equity funds, and certain insurance companies with cash value products or annuities.

FFIs subject to FATCA that do not report their assets are subject to a 30 percent withholding tax on:

  • U.S. source income, including interest, dividends, gains, or profits
  • Gross proceeds from the sale or other disposition of property that produces interests or dividends from sources in the U.S.
  • Pass-through payments related to U.S. assets

Both the FATCA requirement on gross proceeds and pass-through payments had been delayed several times as regulators worked through the guidance on how to apply the withholding tax. In 2017, the Chapter 4 withholding regulations indicated that the gross proceeds withholding would begin on Jan. 1, 2019, and the pass-through payment FATCA requirement would go into effect the later of Jan. 1, 2019, or when the finalized guidance was published in the Federal Register.

An End to Uncertainty…For Now

In its proposed regulations, the IRS affirmed that it was too burdensome to apply FATCA to either gross proceeds or pass-through payments. Gross proceeds often involve executing brokers that do not have tax documentation. Furthermore, the IRS concluded that collecting withholding tax on the gross proceeds from the sale of disposition of U.S. property only offers an incremental benefit to the profit-shifting problem while adding significant time and effort by withholding agents.

It proposed deferring the pass-through payments from FATCA on the grounds that the information is already being captured through intergovernmental agreements between the U.S. and foreign countries. More than 100 countries have intergovernmental agreements with the U.S. to facilitate the exchange of cross-border financial information. The IRS noted that once a finalized definition of a foreign pass-through payment is published, then the withholding tax would apply in the tax year beginning at least two years after the publication date.

Other Clarifications

Another aspect of FATCA that had been problematic to implement involved FATCA’s application to foreign investment entities. The clarification in these proposed regulations is similar to the guidance published by the Organisation for Economic Co-operation and Development (OECD) interpreting the definition of an investment entity under the Common Reporting Standards.

Monitor for Additional Updates

The proposed regulations can be treated as final until further guidance is issued or the proposed regulations are published in the Federal Register. For questions, comments or concerns about how the FATCA changes may affect your organization, please contact us.

Related Reading

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Copyright © 2019, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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