Updated: Dec 9, 2020
Who is impacted?
All parties dealing with the current rules under chapters 3 and 4 who have been waiting for guidance on many issues will want to keep some items on their radar for yearend reporting, such as the December 2018 Proposed Rules and IRPAC Letter.
On December 13th 2018, the Internal Revenue Service (IRS) and the Department of the Treasury (Treasury) issued proposed regulations under chapters 3 (non-resident alien withholding and reporting) and 4 (Foreign Account Tax Compliance Act “FATCA”) of the Internal Revenue Code. With many key provisions and deadlines for 2019 calendar year reporting, below is a quick list to keep in mind during yearend reporting, but please see our detailed article on these Proposed Rules.
Chapter 3 Treaty Statement Relief. The deadline for obtaining these new treaty statements was extended in the Proposed Regulations to January 1 2020 (previously January 1 2019). Withholding agents must obtain new treaty statements that comply with the Limitation on Benefits (LOB) requirements for accounts or investments they documented with documentary evidence prior to January 6th 2017.
Removing the Lag Method for Partnerships and Coordinating with U.S. Withholding Agent Rules. The proposed regulations revised the date for a partnership to file and furnish Form 1042-S when it withholds tax after March 15th of the following year and designates as deposited for the preceding year. The date to file and furnish Forms 1042-S will be September 15th of the following year, which aligns with the date a partnership must file Form 1042 and the extension date for furnishing Schedule K-1. One reminder to keep in mind is the following:
On the 2019 Form 1042-S, we have already seen a new checkbox 7c for partnerships to indicate whether withholding with respect to a partnership interest occurred in the subsequent year.
We are still waiting for the following, which the IRS intends to publish:
2019 Instructions to Form 1042, which will remove the requirement that a partnership or trust apply the lag method and will incorporate the proposed regulations into the instructions.
Amended Instructions to the 2019 Form 1042-S, which will require that when a partnership is filing Form 1042-S after March 15th for a partner’s distributive share of an amount received by the partnership in the preceding year, the partnership must file and issue a separate Form1042-S for such amount for the preceding year (in addition to any Forms 1042-S filed and issued to the partner for amounts that are withheld when distributed to the partner before March 15th and reported for the preceding year).
Amended Withholding Partnership (WP) and Withholding Trust (WT) agreements, which will incorporate the proposed regulations.
Adjustments to Overwithholding Under the Reimbursement and Set-off Procedures. The proposed regulations allow withholding agents to use the extended due date for filing Forms 1042, (September 15th) and 1042-S (April 15th), to make a repayment and claim a credit. The proposed regulations remove the terms ‘without extension’ and replace ‘including extensions’ in both instances in both chapters 3 and 4. The proposed regulations also remove the requirement for a withholding agent to include a statement that the filing is a claim of credit when it uses the reimbursement procedures in the year after the year of overwithholding on Form 1042. New fields on the 2016 Form 1042 includes adjustments to overwithholding and underwithholding. As such, the statement is unnecessary.
In the proposed regulations, a withholding agent cannot apply the reimbursement and setoff procedures after the date when Form 1042-S has been furnished to the beneficial owner or payee. Taxpayers must report repayments under these procedures on the Form 1042-S furnished to a beneficial owner or payee reflects. Forms 1042-S must be consistent with the associated Form 1042-S filed with the IRS.
Qualified Intermediaries, WPs, and WTs may rely on these proposed modifications until they are incorporated into the 2017 QI agreement and 2017 WP and WT agreements.
Nonqualified Intermediary (NQI) Reporting. The proposed regulations provide that when an NQI receives a payment for which a withholding agent has already applied chapter 4 withholding and reported to an unknown recipient on Form 1042-S, the NQI that is a participating FFI or registered deemed-compliant FFI may report the withholding on a Form 1042-S to its account holders or investors as chapter 3 withholding. This applies only where the NQI determines that the account holder or investor is not subject to chapter 4 withholding. The NQI can now substantiate the credit and the account holders or investors are able to claim foreign tax credits in their respective jurisdictions.
Taxpayers may not rely on this rule until Form 1042 and 1042-S are updated for the 2019 calendar year. We already have a 2019 Form 1042-S, so we will hold tight for the 2019 Form 1042.
Foreign Passthru Payments. These items are still on the table, although we do not know when they will become effective. The IRS and Treasury are still requesting input on the methodology for determining a “passthru payment percentage,” so if you have ideas, be sure to share them!
How to Implement?
Below are a few items to consider before yearend reporting begins:
Keep watching the IRS website for updates (and our month end articles that highlight new guidance published by the IRS each month!)
Confirm tax reporting vendors are aware of updates to 2019 Forms 1042 and 1042-S. Also see our article on Publication 1179 for all 2019 Form 1099 updates.
For partnerships, discuss underwithhoding procedures with key stakeholders, and the elimination of the lag method. Identify where investors may need clarification and notification regarding the new process and how it impacts their claim for credit or refund positively.
Discuss overwithholding procedures with relevant department heads (Tax, Legal, Risk, etc.).
Keep passthru payments in mind as you are designing new payment, withholding, and reporting systems, because we still do not know when they will become a requirement.
Update process and procedure manuals to incorporate any changes required.
Update training materials and presentations to staff.
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THIS DOCUMENT CONTAINS GENERAL INFORMATION ONLY AND IS NOT A SUBSTITUTE FOR ACCOUNTING, TAX, OR ANY OTHER PROFESSIONAL ADVICE OR SERVICES. BEFORE MAKING ANY DECISION OR TAKING ANY ACTION THAT MAY AFFECT YOUR BUSINESS, YOU SHOULD CONSULT A QUALIFIED PROFESSIONAL ADVISOR.