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June 27, 2014
New IRS FATCA Form Instructions Clear Up Some Questions
by Jaime Arora

Full Text Published by Tax Analysts®

The latest set of instructions for forms that have been updated to reflect the requirements of the Foreign Account Tax Compliance Act provide helpful clarity, but they also contain references that could be difficult for users to understand, practitioners told Tax Analysts.

The IRS on June 25 released the long-awaited instructions to the Form W-8BEN-E, "Certificate of Status of Beneficial Owner for United States Tax," as well as instructions to Form 8966, "FATCA Report."

Form W-8BEN-E Instructions

The instructions to Form W-8BEN-E clearly state that foreign subsidiaries of publicly traded U.S. companies can qualify for the publicly traded, nonfinancial foreign entity (NFFE) exception, a clarification that Deborah J. Pflieger of EY said was particularly important. She said the final FATCA regulations (T.D. 9610) seemed to indicate that the NFFE must be a subsidiary of a foreign company, although the recent proposed and temporary regulations (T.D. 9657) as well as the Form W-8BEN-E itself suggested that the parent could be a U.S. company. The instructions provide welcome certainty, she said.

Pflieger also praised an IRS tip for part 26 of the Form W-8BEN-E that she said should be helpful. In lieu of an NFFE having to perform quarterly tests to determine whether it is passive or active, according to the instructions an NFFE can claim passive NFFE status and either disclose its substantial U.S. owners or certify that it has no U.S. owners. "That's a great instruction," Pflieger said.

However, Laurie Hatten-Boyd of KPMG LLP said she was disappointed by the many references to the FATCA regulations in the instructions. Foreign persons completing the Form W-8BEN-E may not have access to the regulations, or they may not understand what they mean, she said. She wondered whether those persons might find that they need legal counsel just to fill out a tax document.

Cheryl S. Riedlinger of the Tax Reporting Group pointed out that the instructions for line 5 of the form still reference only FATCA code sections instead of clearly defining each of the 31 options. Users will have a difficult time with this, she said. At 15 pages, the sheer length of the instructions will make it impossible for some recipients to complete the form correctly, she added.

But Pflieger called the instructions' definitions clear and well-written and said they will be especially useful for form filers who cannot or do not wish to look them up in the regulations.

The instructions also spell out what information entities need to provide during FATCA's initial transition period.

Hatten-Boyd said she found it helpful that the instructions say entities do not need to provide any chapter 4 certifications until the transition period ends.

The instructions for line 5 of the form, however, state that entities don't have to provide their chapter 4 status before July 1, 2016, if they are submitting the form for a preexisting entity account. Pflieger pointed out that withholding agents still need to have that information on that date, and she suggested that the instructions may make it hard for them to explain to clients why they should provide it before then.

The new Form W-8BEN-E instructions may not meet the needs of institutions still waiting to update their systems to align with the form. Hatten-Boyd and Pflieger both said withholding agents still need requester instructions before they can program their systems, for instance.

Pflieger said one possible trouble spot involves foreign taxpayer identification numbers. The new instructions state that entities completing Form W-8BEN-E must include a foreign TIN unless they have not been issued one or the jurisdiction in which they are tax resident does not issue them. Without requester instructions, however, withholding agents do not know if they should deem a form invalid if a foreign TIN is not provided, Pflieger said.

FATCA Report Instructions

Pflieger said it was helpful that the Form 8966 instructions remind U.S. payers of withholdable payments that they have Form 1099 reporting responsibilities, because the payers often overlook that duty. However, the instructions do not fully clarify when a payer needs to report information on a Form 8966, a Form 1099, or both, she said.

It's also still unclear how much Form 8966 reporting withholding agents will do for 2014, Pflieger said. Although some IRS officials have said those agents don't need to report any information for preexisting accounts in 2014, the instructions don't read that way, she said.

IRS Making Good on Promise of Guidance

As promised, the IRS has released a slew of guidance in the run-up to FATCA's July 1 effective date. The final version of instructions for Form W-8IMY, "Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding," was published June 18, and the IRS updated the final foreign financial institution agreement on June 24.

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