Ross McGill

August 11, 2016|5 Minutes

The ‘PATH’ to Compliance


The US seems to be one of the few countries whose lawmakers have a penchant for using obscure acronyms to name their regulations or laws. The rather amusingly named ‘ or ‘PATH’, is one such. Readers of my blogs will know that this is not an inconsequential thing. In 2010 the US implemented the Hiring Incentives to Restore [American] Employment Act – my square brackets. Looking at the title, few would, at the time, have thought that this Act to encourage job creation in the US, Title V of which we all now know and love as FATCA, would have such far reaching consequences for all financial institutions outside the US.

And so I bring you the ‘PATH’ Act. While its core objective, as the name suggests, is to protect Americans from tax hikes (wouldn’t that be great as a global law?), it does have within it, changes to the way in which the US Individual Taxpayer Identification Number (ITIN) program works. This has been highlighted with the release of Notice 2016-48. Now, I hear you cry, why would a change to the ITIN program be of any concern to us outside the US. The answer is IRC Chapters 3 and 4, the QI regulations and FATCA respectively.

In IRC Chapter 4, All foreign financial institutions outside the US, irrespective of whether you are in an IGA jurisdiction or not, must document US account holders so that they can be properly reported to the IRS. In IRC Chapter 3, the status of a US person must be properly documented in order to apply the correct withholding (0%). In both cases, this is usually accomplished with the receipt and validation of a form W-9. Now, in most cases, the crux of this validation for individuals is the social security number (SSN) of the US Person presenting the form. However, not all US individuals are eligible to receive an SSN. In these circumstances, they must apply for an ITIN. The reason that both the SSN and ITIN are important is because, the absence of these numbers on a W-9 would trigger the need for backup withholding at 28%. This withholding would also be triggered if one of these numbers is present, but is invalid. So, for non-US financial institutions, its important to be aware of these rules and, of course, to be aware of any regulation or law that affects them.

The Notice that the IRS just issued is important because, amongst other things, it requires certain ITINs to be renewed. Prior to the PATH Act, ITINs were only issued once. This means that both financial institutions and US individuals need to be aware of this change mainly because it could trigger 28% withholding on US sourced income paid into any non-US financial account. Now the Notice does provide that an ITIN does not need to be renewed if its expired and its only being used on an information return (e.g. 1099). The difficulty is that foreign financial institutions will be validating W-9s much earlier in the account operation cycle and may not have the information available to know that the expired ITIN did not need to be renewed.

Apart from the monetary loss, which would of course be regrettable, financial institutions have spent a great deal of effort to ensure that, if they permit US account holders, that they do so only on condition that their documentation is valid. That’s because, in addition to requiring an account mechanism to handle 28% withholding (usually a new tax rate pool account), it would also trigger 1099 and associated 945 reporting.

The net result is that Americans need to know about this Notice so that they don’t accidentally become subject to backup withholding and non US financial institutions need to be aware so that they can put preventative policies and procedures in place so they don’t incur the hassle or the cost.

Both the ‘PATH’ Act and Notice 2016-48 are in the GATCA Resource Library.

Image Credit: Martin Brigden

Ross McGill

Ross is the founder and chairman of TConsult. He has spent over 26 years working in the withholding tax landscape with companies developing tax reclaim software and operating outsource tax reclamation services.

Ross not only sees the big picture but is also incredibly detail oriented. He can make even the most complex issues simple to understand. He has authored 10 books (including two second editions) on various aspects of tax, technology, and regulation in financial services, making him one of the leading authorities in the world of tax.