Proposed regulations address and intend to reduce taxpayer burden in complying with certain withholding requirements under the Foreign Account Tax Compliance Act (FATCA), Chapter 4 ( Code Secs. 1471 – 1474) and Chapter 3 ( Code Secs. 1441, 1461). The proposed regulations can generally be relied upon, until final regulations are issued. The proposed regulations on credits and refunds, however, will not apply until Form 1042 and Form 1042-S are updated for the 2019 calendar year.
Under FACTA, withholdable payments made to certain foreign financial institutions (FFIs) and certain non-financial foreign entities (NFFEs) are subject to withholding under Chapter 4. A withholdable payment is:
- a payment of interest (including original issue discount), dividends, rents, salaries, wages and other fixed or determinable annual or periodical gains, profits or income (FDAP) from U.S. sources, and
- gross proceeds from the sale of the type of property that can produce U.S. source dividends or interest.
The proposed regulations make a number of changes that affect withholdable payments. The proposed regulations also clarify the definition of an investment entity and address:
- due diligence of withholding agents;
- credits and refunds of overwithheld tax; and
- nonqualified intermediaries.
Changes affecting withholdable payments
The proposed regulations eliminate gross proceeds as withholdable payments. Withholding on gross proceeds was delayed until January 1, 2019, based on concerns that withholding would require significant efforts by withholding agents. It has been determined that withholding on gross proceeds is no longer necessary given the current compliance with FATCA.
The proposed regulations extend the time for withholding on foreign passthru payments made to a recalcitrant account holder or nonparticipating FFI. Withholding is not required on foreign passthru payments made before the date that is two years after the publication in the Federal Register of final regulations defining the term foreign passthru payment.
The exclusion from withholdable payments for nonfinancial payments will include premiums on insurance contracts without cash value under the proposed regulations. The exclusion was made possible due to changes made by the Tax Cuts and Jobs Act ( P.L. 115-97), which added a more stringent test for determining whether an exception from the U.S. owner reporting and anti-deferral rules applied to passive foreign investment companies (PFICs) in the insurance business.
