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Introduction:
What The Legislation Does
The
legislation setting up Qualified Intermediary
status is contained in the IRS Tax Code in Section
1.1441-1 through 9. The text of the legislation
can be accessed through links in Annex
I
to this article. It is called 'Requirement for
the deduction and withholding of tax on payments
to foreign persons' because the original purpose
of the legislation was to impose withholding on
payments made from the US to foreign persons or
to US citizens abroad, but as now amended it also
applies to payments of US source income made to
persons outside the US by financial institutions
(called 'withholding agents') whether or not they
are in the US.
The
amended legislation was added to the Tax Code
in April 2000. In the words of the Code: 'It prescribes
procedures to determine whether an amount must
be withheld . . . . and documentation that a withholding
agent may rely upon to determine the status of
a payee or a beneficial owner as a US person or
as a foreign person and other relevant characteristics
of the payee that may affect a withholding agent's
obligation to withhold . . . . Special procedures
regarding payments to foreign persons that act
as intermediaries are also provided.'
There
are exemptions from withholding for, among other
things, income effectively connected with the
conduct of a trade or business in the United States,
and there are provisions dealing with payments
made to 'flow-through' entities (eg entities such
as limited partnerships which have 'checked the
box' and are fiscally transparent as regards US
tax) and with reduced rates of withholding where
tax treaties apply.
There
are exemptions for foreign governments, some international
organizations, foreign central banks and the Bank
for International Settlements, and there are rules
for dealing with payments made to organisations
which are 'tax-exempt' in the jurisdiction concerned.
A
withholding agent must withhold 30% of any relevant
payment made to a foreign person unless it has
documentation showing that the payee is a US person
or is entitled to a reduced rate of withholding.
However, a withholding agent need not withhold
if the payee is a qualified intermediary
(ie another financial institution that has qualified
under this legislation), is a US branch of a foreign
person or is otherwise exempt.
Normally
the documentation that will absolve a withholding
agent from withholding is a Form W-9 (indicating
US status of the payee). Form W-8 or a Form 8233
(indicating foreign status of the payee or beneficial
owner) may allow withholding at a reduced rate
under an appropriate tax treaty.
The
legislation introduces for the first time the
status of qualified intermediary, which
can be applied for by a financial institution
if it is in a country which has been approved
by the IRS as having acceptable 'know-your-customer'
rules. A country wishing to apply for approval
has to answer questions under 18 headings; once
approved, its applicable legislation and regulation
is detailed in an 'attachment'. Annex
II to this article consists of a list of approved
countries for which an attachment exists - by
clicking on a country you can see the attachment
in each case. The IRS is developing standardised
'attachments' but these are not yet available.
In
order to become a qualified intermediary
an institution in an approved country must enter
into an Qualified Intermediary Withholding Agreement
with the IRS. This 60-page document forms part
of Revenue
Procedure 2000-12,
which also contains a list of the 18 questions
needing to be answered by countries. The agreement
imposes very complex documentary obligations on
the institution concerned, but allows it to maintain
confidentiality for non-US clients. The agreement
lasts for six years, and there are external audits
of adherence to the terms of the Agreement in
the second and fifth years. An institution in
an approved country which does not become a qualified
intermediary, or one in an unapproved country,
must disclose details of all its clients to the
IRS if it wishes to avoid having to charge (or
being charged) full 30% withholding tax on payments
of US-source income.
The
IRS permits a branch of a qualified intermediary
in another, unapproved country to share in its
parent's qualified regime, providing it is subject
to the supervisory regime applying in the parent's
home country. This is explained in IRS
Announcement 2000-48. If the IRS classifies
a country as a 'tax haven' or a 'bank secrecy
jurisdiction', branches of intermediaries having
obtained qualification will be allowed to serve
out their 6 years; but the IRS will apply stiffer
audit procedures and default sanctions to branches
which qualify after such a classification and
to renewal situations.
In
practice life would be very difficult for any
financial institution which did not either sign
an Agreement with the IRS, or conform to full
information disclosure about its clients. Leaving
aside the possibility of sanctions which could
be applied by the US, there would be disadvantages
for legitimate clients who may be denied access
to reduced treaty rates of withholding tax or
who may have to use cumbersome routes to reclaim
overpaid tax. US citizens in particular would
find it very difficult in future to receive US-source
income without paying the tax on it: while payments
emanating directly from the US have always been
subject to tax, many types of deemed US-source
income (eg sale of securities through a foreign
broker or overseas income from trust and investment
funds) might previously have by-passed the official
withholding system, leaving payment of tax to
the conscience of the tax-payer.
FATCA
Proposed
changes to the QI program were put out to consultation
by the IRS in October, 2008, requiring QIs to
report all account holders that are US persons.
In addition, the existence of, and transfers to,
offshore accounts will need to be reported on
tax returns (as well as foreign account, or 'FBAR'
forms) while all US financial intermediaries will
be required to report transfers of more than USD10,000
to or from a foreign bank, brokerage or other
financial account on behalf of a US person (or
an entity in which a US person has more than 50%
of the ownership interest).
US
source interest, dividends, and other forms of
income paid to a non-qualified intermediary would
be subject to 30% reporting, although eligible
holders would be entitled to refunds. Also, a
refundable 20% withholding tax would be imposed
on gross proceeds paid to non-qualified intermediaries
located in jurisdictions that do not have a comprehensive
income tax treaty with satisfactory exchange of
information provisions.
These
rules were enacted in the Foreign Account Tax
Compliance Act (FATCA) on March 18, 2010 within
the Hiring Incentives to Restore Employment (HIRE)
Act.
In
September, the United States Treasury and the
Internal Revenue Service (IRS) stated their intent
to issue guidance on the reporting requirements
imposed on foreign financial institutions (FFIs)
by FATCA.
They
are requesting public comments on the priority
issues they have identified in the preliminary
guidance on the application of the FATCA. The
legislation makes a number of changes to tax law
affecting individuals with foreign bank accounts
and assets held abroad.
The
FATCA provisions of the HIRE Act add a new chapter
4 to Subtitle A of the Internal Revenue Code.
Chapter 4 expands the information reporting requirements
imposed on FFIs, as defined in the proposed guidance,
with respect to accounts held abroad by US residents.
FFIs
are required to deduct and withhold a tax equal
to 30% of the amount of any payment to an FFI
unless the FFI agrees to disclose the identity
of the US residents and report on their bank transactions.
The IRS intends to publish a draft FFI Agreement
and draft information reporting and certification
forms, which will be electronically filed.
The
name, address and taxpayer identification number
(TIN) is required of each account holder which
is a specified US person; and, in the case of
any account holder which is a US-owned foreign
entity, the name, address, and TIN of each substantial
US owner of such entity. The account number is
also required to be provided, together with the
account balance or value, and the gross receipts
and gross withdrawals or payments from the account.
To
facilitate this process, the Treasury and the
IRS contemplate that the IRS will issue employer
identification numbers (EINs) to participating
FFIs and that participating FFIs will use these
EINs to identify themselves to withholding agents.
Chapter
4 is generally effective for payments made after
December 31, 2012, and any US resident who holds
more than USD50,000 in a depository or custodial
account maintained by an FFI is required to report
on any such account under this legislation.
The
Treasury and the IRS intend to issue definitive
guidance in advance of that effective date to
ensure that affected FFIs have time to implement
the systems and processes necessary to comply
fully with the new withholding, documentation,
and reporting obligations imposed.
An
FFI is defined as any financial institution which
is a foreign entity, and which accepts deposits
in the ordinary course of a banking or similar
business; holds financial assets for the account
of others as a substantial portion of its business;
and/or is engaged primarily in the business of
investing, reinvesting, or trading in securities,
partnership interests or commodities.
However,
there are categories of business which have been
excluded for having to report or withhold under
the FATCA. These include certain holding companies,
start-up FFIs for the first 24 months of their
operation, hedging/financial centres of a non-financial
group, and the issuers of insurance contracts
that have no cash value.
APCIMS
believes that amendments to the process which
will require the involvement of American auditors
will be “costly and unnecessary” and
may also constitute a breach of the Data Protection
Act in the UK.
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