Menu
Tax Notes logo

Financial Institutions Seek Relief From FATCA Reporting in Identified Situations

DEC. 3, 2013

Financial Institutions Seek Relief From FATCA Reporting in Identified Situations

DATED DEC. 3, 2013
DOCUMENT ATTRIBUTES

 

December 3, 2013

 

 

Emily McMahon

 

Deputy Assistant Secretary for Tax Policy

 

United States Department of the Treasury

 

1500 Pennsylvania Ave NW

 

Washington, DC 20220

 

 

Michael Danilack

 

Deputy Commissioner (International) LB&I

 

Internal Revenue Service

 

1111 Constitution Ave. NW

 

Washington D.C. 20224

 

 

John J. Sweeney

 

Senior Technical Reviewer (International)

 

Internal Revenue Service, Office of Chief Counsel

 

1111 Constitution Ave. NW

 

Washington, D.C. 20224

 

RE: Request to Eliminate Certain Form 1099 Reporting By U.S. Payor Agents of Documented FATCA-Compliant Principals

 

Dear Ladies and Gentlemen:

On behalf of Brown Brothers Harriman, JPMorgan Chase & Co., The Bank of New York Mellon, The Northern Trust Company, and State Street Bank and Trust Company, we submit the following two recommendations on the elimination of Form 1099 reporting under Chapter 61 of the Internal Revenue Code1 by a "U.S. payor" acting as a paying agent for a principal that, for purposes of the Foreign Account Tax Compliant Act ("FATCA") and as documented by a valid withholding certificate, is a foreign financial institution ("FFI") that is a participating FFI or deemed-compliant FFI, or a nonfinancial foreign entity ("NFFE") that is an excepted NFFE or a passive NFFE that has disclosed its substantial U.S. owners. These recommendations are being submitted because Notice 2013-69, issued on October 29, 2013, indicates that further consideration of issues confronting U.S. payors is needed.2

First, we recommend the elimination of the current Form 1099 reporting obligations of a U.S. payor when it makes payments "outside the U.S." of non-U.S. source income3 as agent for a type of principal listed in the preceding paragraph. Second, we recommend the elimination of the Form 1099 reporting obligations of an agent that is a U.S payor when it makes payments on behalf of a principal that is both a passive foreign investment company ("PFIC") and a type of principal listed in the preceding paragraph, regardless of whether the payments are made outside the U.S.

U.S. Payor Agent Making Payments of Non-US Source Income from Outside the U.S. on behalf of Documented FATCA-Compliant Principals

Under current rules, a U.S. payor that is acting as an agent for a principal in making payments outside the U.S. of non-US source income is often required to issue Forms 1099 on such payments. In contrast, an agent that is not a U.S. payor would have no obligation to issue Forms 1099 on such payments.4 This creates an uneven playing field and an additional burden on the U.S. payor, which leads to additional costs and privacy concerns, which in turn harm U.S.-owned businesses. We believe that this additional burden outweighs any benefits of continuing to require such reporting in a FATCA environment. FATCA will generally require the reporting on a Form 8966 or the corresponding form pursuant to a Model 1 intergovernmental agreement (collectively, a "FATCA report") of the same payments and payees that are reportable on Forms 1099. While there are exceptions, the most notable one being the absence of a requirement of an excepted NFFE (excluding an excepted NFFE that is a direct reporting NFFE5) to file a FATCA report, we believe, based on experience, that the volume of payments made by U.S. payors on behalf of entities that will not be required to file a FATCA report is low as compared to the volume of payments which would be reportable on both Forms 1099 and a FATCA report. Moreover, the treatment of excepted NFFEs and certified deemed compliant FFIs under the final FATCA regulations is based on a carefully considered conclusion that they pose a low risk of tax evasion. Finally, under this proposal, Form 1099 reporting would continue to apply to passive NFFEs that do not disclose their U.S. owners. Accordingly, we believe that the costs and competitive disadvantages of Form 1099 reporting to U.S. payors outweigh the loss of a comparably small volume of information to the IRS.

U.S. Payor Agent of Documented FATCA-Compliant PFICs

Current rules provide that an agent that is a U.S. payor and making payments on behalf of a principal that is a PFIC is often required to issue Forms 1099 on such payments.6 These Forms 1099 are misleading to both taxpayers and the Internal Revenue Service because the PFIC rules generally result in the recognition of income each year, regardless of whether distributions are made, while the Forms 1099 are based on cash movements. Further, distributions that are not in redemption of a shareholder's stock in a PFIC are reported on Forms 1099-DIV as dividends, which generally is not the proper characterization for U.S. income tax purposes.7 Similarly, the basis information reported on Forms 1099-B for redemptions of PFIC stock is generally not the correct basis of the stock to the taxpayer.

FATCA will require compliant PFICs to file a FATCA report with respect to reportable U.S. investors, showing the account balance and "the gross amounts paid or credited to the account holder during the calendar year including payments in redemptions (in whole or part) of the account."8 This requirement to report "gross amounts paid" is more appropriate with respect to PFICs as, unlike Forms 1099, this reporting does not specify or imply a generally incorrect income tax characterization of a payment. Moreover, under this proposal, Form 1099 reporting would continue to apply to payments made on behalf of PFICs not within one of the FATCA compliant categories mentioned in the first paragraph of this letter. Accordingly, we recommend that the requirement to issue Forms 1099 on distributions and redemptions by FATCA compliant PFICs be eliminated.

Appended to this letter are proposed changes to the relevant U.S. Treasury Regulations which incorporate our recommendations.

Thank you for your consideration of these recommendations. Should you have any questions, please feel free to contact any of the undersigned.

Sincerely,

 

 

Stephen Vescio

 

Brown Brothers Harriman

 

Stephen.Vescio@bbh.com

 

617-772-6818

 

 

John V. Bresnahan

 

JPMorgan Chase & Co

 

bresnahan_john@jpmorgan.com

 

212-552-0975

 

 

Jacob Braun

 

The Bank of New York Mellon

 

jacob.braun@bnymellon.com

 

212-635-6750

 

 

Lisa M. Chavez

 

The Northern Trust Company

 

lmc7@ntrs.com

 

312-630-6761

 

 

Frederic Bousquet

 

State Street Bank and Trust

 

Company

 

fmbousquet@statestreet.com

 

617-664-3512

 

FOOTNOTES

 

 

1 The U.S. Internal Revenue Code of 1986, as amended ("IRC").

2 We addressed these and other paying agent matters in The Bank of New York Mellon, The Northern Trust Company, and State Street Bank and Trust Company joint letter dated April 30, 2012 to Ms. Corwin and Messrs. Musher, Danilack, and Sweeney.

3 "Non-U.S source income" each time it appears in this letter refers to non-U.S. source dividends, non-U.S. source interest, gross proceeds from sales of securities generating such dividends or such interest, and other payments of non-U.S. source income.

4 Treas. Reg. §§ 1.6041-4(a)(2), 1.6042-3(b)(1)(iv), 1.6045-1(a)(1), 1.6049-5(b)(6).

5 Notice 2013-69, Section III.02(D).

6 There are no exceptions to the requirement of a U.S. payor to issue Forms 1099 with respect to PFICs.

7 IRC § 6042(b)(3) and Treas. Reg. § 1.6042-3(c), which provide that a payor that is unable to determine the portion of a corporate distribution that is a dividend must treat the entire distribution as a dividend, generally result in the reporting of all non-redemption distributions as dividends on Forms 1099-DIV. In contrast, a shareholder of a PFIC who elects to treat the PFIC as a qualified electing fund must annually include in gross income as ordinary income its share of earnings of the PFIC, and as long-term capital gain its share of the net capital gain of the PFIC (IRC §§ 1293 and 1295). Similarly, a shareholder of a PFIC who makes a mark-to-market election on PFIC stock that is marketable must annually include as ordinary income an amount equal to the excess of the fair market value of the PFIC stock as of the close of the tax year over its adjusted basis (IRC § 1296). These elections are often made in order to avoid the onerous default tax and interest regime under IRC § 1291.

8 See, e.g., Treas. Reg. § 1.1471-4(d)(4)(iv)(C) and the corresponding language at Article 2.2.a.7 of the Reciprocal Model 1 Agreement (Updated November 4, 2013).

 

END OF FOOTNOTES

 

 

* * * * *

 

 

Appendix to December 3, 2013 Joint Comment Letter Regarding

 

Request to Eliminate Certain Form 1099 Reporting By U.S. Payor

 

Agents of FATCA Compliant Non-US Principals

 

 

Reg § 1.6041-4. Foreign-related items and other exceptions

(a) Exempted foreign-related items.

 

* * *

EXISTING TO BE RETAINED: (2) Returns of Information are not required for payments of amounts from sources outside the United States (determined under the provisions of part I, subchapter N, chapter 1 of the Internal Revenue Code and the regulations under those provisions) made by a non-U.S. payor or non-U.S. middleman outside the United States. For a definition of non-U.S. payor and non-U.S. middleman, see § 1.6049-5(c)(5). For circumstances in which a payment is considered to be made outside the United States, see § 1.6049-5(e).

NEW: (3) Returns of information are not required for payments of amounts from sources outside the United States (determined under the provisions of part I, subchapter N, chapter 1 of the Internal Revenue Code and the regulations under those provisions) paid outside the United States by a paying agent, including a paying agent that is a qualified intermediary, on behalf of a principal that it may treat pursuant to 1.1471-3(d) as a participating FFI within the meaning of § 1.1471-1(b)(85), a deemed-compliant FFI within the meaning of § 1.1471-1(b)(24), an excepted NFFE within the meaning of § 1.1472-1(c)(1) or an NFFE that has complied with the applicable requirement of § 1.1471-3(d)(12)(iii)(A). For circumstances in which a payment is considered to be made outside the United States, see § 1.6049-5(e).

Re-number subsequent paragraphs.

 

Reg § 1.6042-3. Dividends subject to reporting.

 

* * *

 

(b) Exceptions.

(1) In general. For purposes of §§ 1.6042-2 and 1.6042-4, the amounts described in paragraphs (b)(1)(i) through (viii) of this section are not dividends.

 

* * *

EXISTING TO BE RETAINED: (iv) Distributions or payments from sources outside the United States (as determined under the provisions of part I, subchapter N, chapter 1 of the Code and the regulations under those provisions) paid outside the United States by a non-U.S. payor or a non-U.S. middleman. For a definition of non-U.S. payor and non-U.S. middleman, see § 1.6049-5(c)(5). For circumstances in which a payment is considered to be made outside the United States, see § 1.6049-5(e).

NEW: (v) Distributions or payments from sources outside the United States as determined under the provisions of part I, subchapter N, chapter 1 of the Code and the regulations under those provisions) paid outside the United States by a paying agent, including a paying agent that is a qualified intermediary, on behalf of a principal that it may treat pursuant to 1.1471-3(d) as a participating FFI within the meaning of 1.1471-1(b)(85), a deemed-compliant FFI within the meaning of § 1.1471-1(b)(24), an excepted NFFE within the meaning of 1.1472-1(c)(1) or an NFFE that has complied with the applicable requirement of 1.1471-3(d)(12)(iii)(A). For circumstances in which a payment is considered to be made outside the United States, see § 1.6049-5(e).

NEW: (vi) Distributions or payments from sources outside the United States (as determined under the provisions of part I, subchapter N, chapter 1 of the Code and the regulations under those provisions) by a paying agent, including a paying agent that is a qualified intermediary, on behalf of a passive foreign investment company within the meaning of § 1297 that the principal may treat pursuant to § 1.1471-3(d) as a participating FFI within the meaning of 1.1471-1(b)(85). a deemed-compliant FFI within the meaning of 1.1471-1(b)(24), an excepted NFFE within the meaning of § 1.1472-1(c)(1) or an NFFE that has complied with the applicable requirement of § 1.1471-3(d)(12)(iii)(A).

Re-number subsequent paragraphs.

 

Reg § 1.6045-1. Returns of Information of brokers and barter exchanges.

 

* * *

 

(g) Exempt foreign persons.

 

EXISTING TO BE RETAINED: (1) Brokers. No return of information is required to be made by a broker with respect to a customer who is considered to be an exempt foreign person under this paragraph (g)(1). A broker may treat a customer as an exempt foreign person under the circumstances described in paragraphs (g)(1)(i) through (iii) of this section.

EXISTING TO BE RETAINED: (i) With respect to a sale effected at an office of a broker either inside or outside the United States, the broker may treat the customer as an exempt foreign person if the broker can, prior to the payment, associate the payment with documentation upon which it can rely in order to treat the customer as a foreign beneficial owner in accordance with § 1.1441-1(e)(1)(ii), or as made to a foreign payee in accordance with § 1.6049-5(d)(1) or presumed to be made to a foreign payee under § 1.6049-5(d)(2)or (3). For purposes of this paragraph (g)(1)(i). the provisions in § 1.6049-5(c) (regarding rules applicable to documentation of foreign status and definition of U.S. payor, U.S. middleman, non-U.S. payor, and non-U.S. middleman) shall apply. The provisions of § 1.1441-1 shall apply by substituting the terms broker and customer for the terms withholding agent and payee and without regard for the fact that the provisions apply to amounts subject to withholding under chapter 3 of the Internal Revenue Code (Code). The provisions of § 1.6049-5(d) shall apply by substituting the terms broker and customer for the terms payor and payee. For purposes of this paragraph (g)(1)(i), a broker that is required to obtain, or chooses to obtain, a beneficial owner withholding certificate described in § 1.1441-1(e)(2)(i) from an individual may rely on the withholding certificate only to the extent the certificate includes a certification that the beneficial owner has not been, and at the time the certificate is furnished, reasonably expects not to be present in the United States for a period aggregating 183 days or more during each calendar year to which the certificate pertains. The certification is not required if a broker receives documentary evidence under § 1.6049-5(c)(1) or (4).

MODIFIED: (ii) With respect to a redemption or retirement of stock or an obligation (the interest or original issue discount on, which is described in § 1.6049-5(b)(6), (7), (8), (11) or (12) 7, 10, or 11 or the dividends on which are described in § 1.6042-3(b)(1)(iv) and (v)) that is effected at an office of a broker outside the United States by the issuer (or its paying or transfer agent), the broker may treat the customer as an exempt foreign person if the broker is not also acting in its capacity as a custodian, nominee, or other agent of the payee.

NEW: (iii) With respect to a redemption or retirement of stock (the dividends on which are described in § 1.6042-3(b)(1)(vi)) by the issuer (or its paying or transfer agent), the broker may treat the customer as an exempt foreign person if the broker is not also acting in its capacity as a custodian, nominee, or other agent of the payee.

Re-number subsequent paragraphs.

 

Reg § 1.6049-5. Interest and original issue discount subject to reporting after December 31, 1982.

 

* * *

 

(b) Interest excluded from reporting requirement. The term interest or original issue discount (OID) does not include --

 

EXISTING TO BE RETAINED: (6) Amounts from sources outside the United States (determined under the provisions of part I, subchapter N, chapter 1 of the Internal Revenue Code (Code) and the regulations under those provisions) paid outside the United States by a non-U.S. payor or a non-U.S. middleman (as defined in paragraph (c)(5) of this section). See paragraph (e) of this section for circumstances in which a payment is considered to be made outside the United States.

NEW: (7) Amounts from sources outside the United States (determined under the provisions of part I, subchapter N, chapter 1 of the Internal Revenue Code (Code) and the regulations under those provisions) paid outside the United States by a paying agent, including a paying agent that is a qualified intermediary, on behalf of a principal that it may treat pursuant to § 1.1471-3(d) as a participating FFI within the meaning of § 1.1471-1(b)(85), a deemed-compliant FFI within the meaning of § 1.1471-1(b)(24), an excepted NFFE within the meaning of § 1.1472-1(c)(1) or an NFFE that has complied with the applicable requirement of § 1.1471-3(d)(12)(iii)(A). For circumstances in which a payment is considered to be made outside the United States, see § 1.6049-5(e).

Re-number subsequent paragraphs.

DOCUMENT ATTRIBUTES
Copy RID