The transition from 2016 to 2017 has been anything but boring from a tax perspective. The US market in particular has seen several changes to the tax system as it’s viewed by those outside the US. Here are just seven changes that will have an impact on non-US financial firms, that took effect as of January 1st 2017:

• Revenue Procedure 2017-15
• W-8BEN
• Publication 5262
• Revenue Procedure 2017-16
• TD9809
• Notice 2017-09
• ITIN Renewals

Our subject matter experts will, over the next few days be posting more detailed blogs on each of these topics. This blog in particular is written to provide a more ‘holistic’ view of the changes and to highlight to the reader (as if you needed reminding) that accessing the US market as a financial institution is a much more complex affair than pretty much every other marke

1. New Revenue Procedure 2017-15

First and most importantly, the long awaited new QI Agreement appeared in Revenue Procedure 2017-15. There are several important new issues for QIs and also for those NQIs considering QI status in 2017. As forewarned in Notice 2016-42, all QI Agreements have already essentially been automatically terminated as of December 31st 2016. Existing QIs have until March 31st to renew their agreements. Equally if you’re an NQI assessing QI status, you have until the same date (March 31st) to sign up if you want to benefit from backdating of your status to January 1st (a big issue). Because the IRS can unilaterally change the terms of the agreement (and you can’t do so, even bilaterally), most firms should now be assessing the scale and impact of the changes in the new agreement in order to make changes to their operations, compliance program, policies and procedures.

That assessment will have to take account of the many small changes, but also some of the more major changes including 871(m) and the ‘Qualified Derivatives Dealer’ status. In fact, the QI agreement now includes obligations covered in IRC Chapter 3, IRC Chapter 4, IRC Chapter 61, Section 3406 and Section 871(m).

QIs and those advisory firms who offer the triennial ’Periodic Reviews’ mandated by the agreement will have to contend with a much more complex sampling methodology, which will affect larger QIs more heavily than the smaller ones.

It is now certain that the cost of complying with US tax regulations is going up. Both the IRS regulations and the commercial pressures from senior QIs and US withholding agents are making NQI status difficult to maintain. This is causing tension in the market – particularly at the small FI end – where, unless you work smarter rather than harder, the cost can easily seem to be much more than the benefit. This was most obvious in the last quarter of 2016, with a number of firms penalising their customers in FATCA (Chapter 4) because they had not disclosed clients as an NQI (Chapter 3). This single policy created more pressure on lower level NQIs to become QIs than any regulation issued by the IRS directly.

The Qualified Derivatives Dealer portion of the new QI agreement also means that in some cases, firms that had chosen NWQI status in the past may well be forced to become WQIs in 2017. I would note here that the Qualified Securities Lender (QSL) status, which deals with such things as substitute interest, is rolled up into the new agreement too.

Importantly of course, the term of the new QI Agreement has been reverted to six years, and not three as originally proposed in the 2016 Notice.

2. New W-8BEN

Second, we saw the release of a new Form W-8 BEN, although no new instructions have been seen yet. The changes are relatively small – at least it’s still just one page long, unlike the revisions of the past to forms like the IMY and BEN-E. Operationally, many firms take advantage of the fact that the IRS usually gives a six-month period during which you are able to continue to use the ‘old’ forms. Almost as many however, move straight into using the new forms to avoid any confusion from clients where the rules say that you should always use ‘the most current form’. The new QI agreement also references the new documentation in terms of the BEN and BEN-E relating to the level of knowledge required to validate the forms, and also the level of work a beneficial owner will have to do before being able to sign and submit the forms.

3. Publication 5262 – the QI Portal

Thirdly we saw the announcement, through Publication 5262 that the QI, WP & WT will be getting its own portal and can no longer be accessed via the FATCA Portal as previously done. Publication 5262 provides the user guide to the new portal. We can only hope that the new portal does not suffer the same problems that dogged the FATCA portal, and that the IRS gives the industry a level of consistency and stability with this one. One of the largest problems with the FATCA portal and IDES (International Data Exchange System) has been the way that changes appear to occur almost weekly, resulting in a lot of time and effort spent in financial firms keeping up to date.

4. Revenue Procedure 2017-16

Fourth we saw a new FFI Agreement. For those of you who are in Model 1 jurisdictions with intergovernmental agreements (IGAs) in place, this has little effect. The FFI Agreement referenced in this Revenue Procedure generally is the contract you would have to sign if you are in a jurisdiction without an IGA, and subsequently you would have to be using IDES or hard copy Form 8966 to submit your FATCA reports directly to the IRS. The consequence of not signing up to this FFI agreement for those covered by it would be a default status of Non-Participating FFI (NP-FFI). Most QIs and USWAs we come across won’t even allow such firms to open accounts at all.

This new FFI Agreement also references some of the ‘convergence’ issues that mean that it’s not really operationally possible to separate Chapter 4 from Chapter 3 anymore. In effect, the QI agreement now says that a QI must also be compliant with its Chapter 4 obligations. The FFI Agreement also similarly references the QI Agreement. Some firms have, in the past, tried to separate FATCA from QI matters when it comes to these regulations. This has mainly been because of the fundamentally different purposes each regulation has. Chapter 4 (FATCA) is essentially a ‘financial crimes’ issue as it is identifying ‘Americans’ to be reported so that the IRS can subsequently make sure that those Americans have correctly disclosed their non-US assets. Chapter 3 on the other hand, is a taxation regulation which more naturally fits into compliance and/or income processing. While the differential still exists, the way that the IRS is converging regulation in this area makes it increasingly difficult for financial firms to continue to separate the issues at an operational level.

5. Federal Register TD9809

Fifth we saw a new entry to the Federal Register TD9809. This entry provides some additional regulations on FATCA (as if we didn’t have enough already). In particular, it is flattening out some inconsistencies between IRC Chapter 3 and IRC Chapter 4 relating to the definition of what must be considered a US Person in the due diligence process. These updated regulations also deal with some clarification, if that’s the right word, about pre-existing account holder documentation, given that the original regulations as well as the revised temporary regulations had date-based deadlines.

6. Notice 2017-09 Election Relating To Information Returns

This Notice goes by the charming title of ‘De Minimis Error Safe Harbor to IRC 6721 and 6722 Penalties’. Its referencing the equally charming (at least to non-Americans) ‘Protecting Americans from Tax Hikes Act’ of 2015 also known as the PATH Act. Ultimately this Notice deals with information returns – for non-US that’s the 1042-S forms. Remember 1042 is a tax return, 1042-S is an information return. The Notice applies to returns due after December 31st 2016. In other words, for the March/April deadlines for QIs and NQIs. Essentially the PATH Act provides a ‘safe harbor’ from ‘de minimis errors. In English that means that if you identify an error in your reporting and that error is less than $100, you don’t have to correct the error and you will not be penalised. The reference is to ‘an information return’ which implies that this safe harbour is arranged at form level. Sections 6721 and 6722 of the Code provides that a payee can, if they want, elect not to have this ‘safe harbor’ apply. Again, in English, this means that if the payee has elected not to have the safe harbour apply, then they could be subject to penalties even if the amount concerned is de-minimis. We will go into this in more detail in future posts.

7. ITINs

Don’t forget that, if you have US clients, or if you are using ITINs with your clients as a method of making W-8 forms valid indefinitely, new rules came into force on January 1st 2017 with respect to the validity periods and re-issue of ITINs (International Tax Identification Numbers). Any ITIN issued prior to 2008 which has not been used on a federal tax return will automatically have expired on January 1st 2017. In addition, any ITIN that has middle digits of 78 or 79 and were issued prior to 2013 also expired on January 1st 2017. All of these documents are already in our GATCA Library which now contains 738 documents and links covering US tax regulations, OECD Frameworks such as BEPS and CRS/AEoI as well as EU initiatives.

So, in conclusion, it’s going to be a busy first quarter!

Most QIs are already beginning their 2016 reporting season with applications for extensions of time to file returns and testing their data at the FIRE system (Filing Information Returns Electronically). Now, they’ll also have to start reviewing the new QI Agreement to see if they are impacted and decide whether to renew and if so, use the new QI Portal to do so. They’ll need to review their validation procedures for the new W-8BEN and update their written Compliance Programs. They’ll have to update training materials and make sure they have the correct processes in place to handle the new periodic review rules. Then they’ll have to disseminate this information across all their business lines. Most will also have additional pressure to converge FATCA compliance resources with Chapter 3 compliance resources.

NQIs are also impacted, mainly because the last half of 2016 saw most NQIs under pressure to become QIs wherever possible. Those decisions now have to be based on the new agreements and other documentation noted here. That means budgetary assessments and cost benefit analyses will have to be updated. The window is also closing quickly. The cost benefit of having a QI agreement effective at January 1st should not be underestimated, but this means that NQIs need to get their ducks in a row well before the March 31st deadline that provides for this backdating benefit. That’s because the backdating is not based on the date of the application – it’s based on when the IRS issues a QIEIN. Many firms that become QIs part way through the year and don’t get any backdating, experience a very painful first year of reporting, with tax returns and information reports filed as an NQI and then also as a QI.

Of course, there are subject matter experts like us here to help, so if you have questions, do get in touch.