New non-Resident Alien WITHHOLDING Regulations

Practice Areas

By: Asha Inamdar, Hima Mehta, and Shuchita Lotlikar

The Treasury Department and the IRS issued Final Regulations (T.D. 9890), effective January 2, 2020, which impact US source payments made to foreign persons, and reports by foreign financial institutions with US accounts. Originally proposed in December 2018, the regulations intend to reduce taxpayer burden under Foreign Account Tax Compliance Act (FATCA).

The IRS finalized 2018 regulations (REG-132881-17) on the Foreign Account Tax Compliance Act (FATCA). Some key changes provide greater insight on due diligence and reporting requirements, including:

  1. No more withholding on payments of gross proceeds:
    1. Previously, foreign financial institutions and non-financial foreign entities were subject to FACTA withholding on these payments.
  2. Foreign passthru payment withholding has been deferred:
    1. Foreign financial institutions do not have to withhold tax on payment that is passed through a foreign entity until two years after the rule’s publication date.
  3. Elaborated due diligence rules for withholding agents:
    1. To minimize the amount withheld, withholding agents have needed to have a withholding certificate (W-8), treaty statement, and document evidence. Under the new ruling, the treaty statement must also pinpoint the Limitation of Benefits (LOB) that the treaty is relying on.
    2. The treaty statement will have a three-year validity and a two-year transition rule if documented before January 2017. This allows time for treaty statements to be gathered.
    3. Also, the regulation allows treaty statements to remain valid for tax-exempt organizations, government, and publicly traded companies.

Extension for Certain FBAR Filers

The US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued FinCEN Notice 2019-1 on December 20, 2019. This notice extends the deadline for certain individuals that need to file a Report of Foreign Bank and Financial Accounts (FBAR) for calendar year 2019. These FBAR filers will be granted an automatic extension to April 15, 2021.

The regulations have also simplified requirements for electronic signatures for withholding agents. Withholding agents can now accept an electronically signed withholding certificate by the recipient after verifying additional documentation or information as required. The withholding agent must act in good faith and have no reason to believe that the data provided is incorrect.

Extended Deadline for Withholding Agents to Collect Taxpayer Data

The Treasury Department and the IRS issued Notice 2017-46, providing additional time to withholding agents to collect foreign Taxpayer Identification Numbers (TIN) and date of birth on account records. Withholding agents can collect a foreign TIN in a written statement and the withholding certificate would still be valid. There are few exceptions to the requirement that a withholding certificate would require a foreign TIN.

Conclusion

For assistance complying with foreign tax obligations, contact a trusted Chugh CPAs, LLP professional.

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