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Swiss Bankers Address Impact of Withholding Regs on QIs

JUL. 12, 2019

Swiss Bankers Address Impact of Withholding Regs on QIs

DATED JUL. 12, 2019
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12 July 2019

LG "Chip" Harter
Deputy Assistant Secretary (International Tax Affairs)
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington D.C. 20224

Peter Blessing
Associate Chief Counsel (International)
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, D.C. 20224

John Sweeney
Chief, Branch 8
Office of Associate Chief Counsel (International)
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, D.C. 20224

Re: Proposed withholding regulations under section 1446 (REG-105476-18)

Gentlemen:

This letter provides comments of the Swiss Bankers Association (SBA) regarding proposed regulations under section 1446 (Proposed Regulations). We appreciate the opportunity to present you with our comments, which focus on the potential impact on Qualified Intermediaries (Qls).

Our comments may be summarized as follows:

  • QIs should have the flexibility to elect or not elect withholding responsibility under section 1446, regardless of whether they assume primary withholding responsibility for other purposes;

  • To prevent any violation of local confidentiality rules, Form 1042-S reporting by a QI should be on a "pooled" basis under general QI principles, and not on a recipient-specific basis;

  • Full disclosure of owners of PTP interests to an upstream withholding agents should eliminate any withholding or reporting obligations for the financial institution making the disclosure; and

  • The effective date should be at least 18 months from the date final regulations are published, and this date should align with the effective date of any changes to the QI Agreement; also, changes to the QI Agreement should first be issued in proposed form.

Background

The QI Agreement has always excluded section 1446 from its scope, due to the way the QI Agreement defines "chapter 3" to exclude that section. See QI Agreement Sec. 2.1 O. The Proposed Regulations, however, anticipate a new role for QIs. Under the Proposed Regulations, Qls could assume primary withholding responsibility under section 1446. This will be a significant change for QIs that hold PTP interests in accounts subject to their QI Agreement (QI-designated accounts). The Proposed Regulations, however, do not provide any details for QIs, leaving any open issues to be covered by revisions to the QI Agreement (the Revised QI Agreement).

The purpose of our comments, therefore, is to address issues that arise for QIs as a result of section 1446 now falling in scope of the QI Agreement. This letter also addresses an important issue outside the QI Agreement, namely when a QI acts in a nonqualified intermediary (NQI) capacity with respect to PTP interests.

QI elections regarding section 1446 withholding responsibility — maximum flexibility needed

The Proposed Regulations would allow QIs to assume primary withholding responsibility for transfers of PTP interests. It is unclear, however, if a QI that assumes primary withholding responsibility under chapter 3 generally will also be required to assume withholding responsibility under section 1446.

QIs that have assumed primary chapter 3 withholding responsibilities have developed the system functionality to withhold on income. It is, however, a much larger issue to withhold on sales proceeds, such as transfers of PTP interests. QIs that wish to develop the functionality to withhold on such proceeds should have the option to elect primary withholding responsibility under section 1446, but there should be no requirement for any QI to do so. To the extent a QI does not assume primary withholding responsibility under section 1446, that responsibility would transfer to the upstream withholding agent.

SBA recommendation: To provide Qls with the flexibility needed to elect withholding responsibilities that match the system capabilities, SBA recommends that Qls have the following options:

1. Assume primary withholding responsibility under chapter 3 excluding section 1446 thus preserving the "status quo" for primary Qls;

2. Assume primary withholding responsibility under chapter 3 — including section 1446 thus allowing primary QIs to add section 1446 to their other chapter 3 responsibilities; or

3. Not assume primary withholding responsibility under any part of chapter 3, including section 1446.

"Pooled" reporting for payments subject to section 1446 withholding

A cornerstone of the QI Agreement has been the general rule to report income on a "pooled" basis for direct account holders. With pool reporting, client information is not disclosed to the IRS via Form 1042-S, thus enabling QIs to comply with local confidentiality laws.

The Proposed Regulations, however, do not address the potential reporting by Qls of income subject to section 1446 withholding. We note that recipient-specific Form 1042-S reporting may be necessary in some cases, but a QI should be required to report to a client only upon request.

SBA recommendation:

  • The Revised QI Agreement should extend the concept of pool reporting to payments subject to section 1446. To the extent a direct account holder wants a separate Form 1042-S (e.g., in order to file a U.S. tax return), the QI could be required to provide a Form 1042-S upon request.

  • Alternatively, if the Revised QI Agreement requires client-specific Form 1042-S reporting for income subject to section 1446 withholding, a QI should have the option to force the sale or transfer of any PTP interests outside of its QI-designated accounts, and such corrective measures would enable the QI to report on a pooled basis. Similar corrective steps were allowed in the first QI Agreement with respect to certain undisclosed accounts held by U.S. persons. See Rev. Proc. 2000-12, Sec. 6.04.

Confirmation of no withholding I reporting responsibilities for NQI that fully discloses

Some Qls do not allow PTP interests to be held in a QI-designated account, so the QI instead acts as an NQI for such investments. In these cases, a segregated account is established to disclose the owner of the PTP interest to the upstream custodian. That upstream custodian, therefore, has all the information needed in order to comply with any withholding or reporting requirements, including requirements under section 1446. However, it is not entirely clear how the Proposed Regulations would apply to the NQI described above.

SBA recommendation: The regulations should confirm that an NQI that fully discloses the non-U.S. beneficial owner through a segregated account (or by otherwise providing allocation information) to an upstream withholding agent would not have any residual withholding or reporting obligations.

Effective date and coordination with QI Agreement changes

The Proposed Regulations would go into effect after only 60 days from publication of the final regulations in the Federal Register. In light of the potentially extensive changes required by the Proposed Regulations, this timeline falls way short of any reasonable deadline for implementation. Furthermore, changes to the QI Agreement also must be issued in proposed form, allowing for comments by the industry. Finally, to ensure a consistent approach by the regulations and the Revised QI Agreement, the effective dates of should be aligned.

SBA recommendations:

  • The regulations should be effective at least 18 months from the date of publication as final regulations.

  • Changes to the QI Agreement should be issued in proposed form, thus allowing time for industry comments.

  • The effective dates for the final regulations and the Revised QI Agreement should be aligned.

Thank you for considering our comments. Please do not hesitate to contact us (petrit.ismajli@sba.ch / +41 61 295 9302) if you have additional questions about this letter.

Yours sincerely,

Swiss Bankers Association

Petrit Ismajli

Urs Kapalle

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