Notice 2016-76 – Phased implementation of Section 871(m)
Late on Friday (as far as the UK is concerned) the IRS issued the snappily titled “Notice 2016-76 IRS Enforcement and Administration of Section 871(m) and Related Withholding Provisions During the Phase-In Period” notice. The document lays out how the IRS intends to administer regulations relating to Section 871(m) during 2017 and 2018.
Phased In, Not Delayed
The industry had been lobbying for a postponement of Section 871(m) for a while, largely due to the complexity of implementation and a lack of clarity surrounding how some aspects of the regulations would work in practice. Sadly, Notice 2016-76 doesn’t represent an early Christmas present for those that would have liked to have seen the start date moved back to 2018. Instead it introduces some of the aspects of phased implementation, and perhaps more importantly the relaxed enforcement rules will come as a welcome relief to many.
The following represents an overview of the key topics covered in Notice 2016-76.
871(m) Implementation Schedule
- The IRS will take into account the extent to which the taxpayer or withholding agent made a good faith effort to comply with the section 871(m) regulations in enforcing the section 871(m) regulations for any delta-one transaction.
- Withholding agents may rely on a simplified standard for determining whether transactions are combined transactions pursuant to Reg. section 1.871-15(n).
- Withholding agents may remit amounts withheld for dividend equivalent payments quarterly.
- The IRS will take into account the extent to which the QDD made a good faith effort to comply with the QDD provisions in the QI agreement when enforcing those provisions.
- The IRS will take into account the extent to which the taxpayer or withholding agent made a good faith effort to comply with the section 871(m) regulations in enforcing the section 871(m) regulations for any non-delta-one transaction.
For 2017 and the following years a QDD’s section 871(m) amount is to be determined by calculating the net delta exposure of the QDD. In addition to the phased implementation of Section 871(m), Notice 2016-76 outlines that:
- If a QDD is awaiting receipt of their QI-EIN they may provide a statement on a Form W-8IMY that the QDD is “awaiting QI-EIN” on line 8 of the IMY and withholding agents may rely on this statement. Once the QDD receives a QI-EIN it does not need to update its W-8IMY to its upstream counterparty but must furnish its QI-EIN to said counterparty.
- The withholding agent should write “Notice 2016-76” on the centre, top portion of the tax year 2017 Form 1042 tax return.
- The relaxed quarterly deposit schedule (outlined earlier) will require deposition of amounts withheld on or before the last day of the quarter in which the tax was withheld.
All in Good Faith
The IRS has indicated that when enforcing 871(m) regulations during the phase in period it will consider the extent to which the Withholding Agent has made a “good faith effort to comply with the Section 871(m) regulations”. The notice outlines the following as examples of what it would consider as good faith efforts:
- The Withholding Agent has built or updated its documentation and withholding systems to comply with 871(m)
- The Withholding Agent has determined whether transactions are “combined transactions” – Note that this will include the simplified determination standard mentioned earlier in this blog for the year 2017.
- The Withholding Agent has reported information to other parties to a transaction.
- The Withholding Agent has implemented the Substantial Equivalence Test.
Those that are not considered to have made a good faith effort are subject to penalties.
The IRS acknowledges in the preamble of the Notice that it has noted that “withholding agents will face challenges complying with certain aspects of 871(m) by January 1, 2017 – to which I imagine a collective muttering of “thanks Captain Obvious” from compliance departments across the globe. However, the relaxation of enforcement rules over the first two years of 871(m) does represent rare acquiescence from the IRS that should provide a little more breathing space for over-burdened institutions.
The Notice ominously mentions that amendments to Section 871(m) expected and reminds us that a QI agreement Revenue Procedure is due before the end of the year. 2017 looks to be a busy year for QIs and NQIs alike and many of the latter may find themselves forced to become a QI themselves. For many firms, Notice 2016-76 is a timely reminder that withholding tax compliance is an ongoing project – offering investment clients access to the US Market comes with a heavy regulatory burden and the penalties for non-compliance are severe. Or, to put it another way, their house, their rules.
Subject Matter Expert
Chris is a subject matter expert in US Internal Revenue Code Chapter 3 (QI) and Chapter 4 (FATCA), OECD Common Reporting Standard & Automatic Exchange of Information (CRS/AEoI) and MiFID II. Chris’ responsibilities include consultation and research, alongside the delivery of TConsult’s Interim Periodic Review (IPR) product and production of content for TConsult's marketing channels.