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Amongst the unexpected and peculiar features of the proposed Qualified Intermediary (QI) Agreement–as expanded to cover withholding on payments from publicly-traded partnerships (PTPs)–the new nominee reporting requirement per §6031 of the Internal Revenue Code (IRC) stands apart.
Background to the Revamped Sections of the Proposed QI Agreement In May 2022, the US Treasury Department released IRS Notice 2022-23, a proposed revision to the QI Agreement. Under the new draft sections, QIs may assume withholding and reporting obligations under §§ 1446(a) and 1446(f) of the US Treasury Regulations for payments connected to PTPs. The new provisions for PTP withholding are needed because a Non-US Person who sells an interest in a partnership that could earn income effectively connected with a US trade or business is subject to US federal income taxation per §864(c)(8) of the 2017 tax legislation. In parallel to this substantive rule, Congress added a new withholding dimension under §1446, imposing on a buyer of an interest subject to §864(c)(8) the obligation to withhold 10% of the amount realized. For further elaboration on these concepts, please refer the MTL blogs on §§ 864(c)(8) and 1446(a) and (f), here. The §1446(f) statutory provision, however, did not explain how that ought to work for PTPs, where the buyer and seller are typically invisible to one another. As such, the US Treasury Department promptly suspended the withholding regime for PTPs via IRS Notice 2018-02 and, via a series of subsequent notifications and the publication of the withholding regulations in late 2020, eventually, pushed the activation date to 1 January 2023. With the revamped QI Agreement, the PTP withholding regime is moving into the implementation phase. As stated in the preamble to Notice 2022-23, the objective of the new PTP sections to the QI Agreement is straightforward: To align the treatment of PTP payments with those of payments traditionally processed by non-US custodial institutions. However, rather than ensuring frictionless continuity from dividend withholding to PTP payment withholding, the proposed QI Agreement introduces a few novel aspects to the QI Regime. Nominee Reporting Requirements under the Proposed QI Agreement for PTP Withholding Some novel aspects of the proposed QI Agreement for PTP Withholding, such as the new official QI status of the “Disclosing QI” and strict demands for US Taxpayer Identification Numbers (TINs) from non-US Persons, may be disruptive of existing QI operations. Only one new feature, however, obliges parties to set up and maintain a fresh tax reporting mechanism: Nominee reporting. Nominee reporting per §6031(c) of the IRC is not a new provision and it serves an essential role outside the QI Regime. Anytime a nominee holds a partnerships interest (of any partnership, not just a PTP), the nominee is charged with ensuring that the partnership has sufficient information on the beneficial owner to provide an accurate Schedule K-1 to the partner and analogous return to the IRS. Prior to this year’s draft QI Agreement, the §6031(c) concept of a “nominee” was commonly understood to refer to a Person holding the reportable partnership interest during the partnership’s tax year in its own name on behalf of the beneficial owner of the interest (see e.g. Treas. Regs. §1.6031(c)-1T). For this reason and because PTP and other partnership interests were previously held in non-QI accounts, nominee reporting did not concern the QI system. That has now changed. Proposed Section 2.92 of the new draft QI Agreement adds a series of new definitions to accommodate the jargon of PTP withholding and partnership taxation, one of which is a definition of a “Nominee,” which explicitly includes Withholding QIs. Furthermore, proposed Section 8.07 widens the nominee reporting requirement to the other types of QI statuses, as follows–
While the mechanics of nominee reporting under IRC §6031 are markedly less cumbersome than some of the other reporting required of QIs, it constitutes an additional reporting function that must be set up, tested and maintained. First, the QI must be certain it can collect all mandatory information (notably, US TINs) before it opts for a strategy, which may depend upon interchanges of information with third parties, which tend to slow down or complicate tax reporting. Second, PTP interests may need to be shifted across custodial accounts in order to avert duplicative reports to the IRS. Third, if the QI decides to adopt the option under§ 1.6031(c)-1T(h) to intermediate the K-1s from the PTP to the beneficial owner partner, it will need a grasp of US partnership taxation concepts to provide a meaningful review of the information for which it is responsible. Finally, any defect with respect to nominee reporting is a material failure (Section 10.03(B)(1)) which, if left uncorrected, would lead to an event of default and the termination of the entity’s QI status. While any of the above challenges around nominee reporting under IRC §6031 and the new PTP Withholding provisions of the proposed QI Agreement may be softened in the final version of the QI Agreement (the IRS expressly requested comments on Section 8.07 in the preamble), It is a necessary evil. Thus, nominee reporting will likely remain a new and unexpected obligation for most QIs to fulfil. If you wish to discuss the above analysis or any other aspects of the QI Regime in greater detail, please contact us at paul@millentaxandlegal.ch to arrange a conversation.
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No rest for the compliant. So soon as one task ends for Swiss Financial Institutions (FIs), a new one rises up in its place. This hydra-headed regime for account reporting began with FATCA classification and registration in 2014, followed by due diligence and first reporting in 2015 and 2016 and then the same cycle again for OECD CRS in 2017, 2018 and 2019. The current year will be unforgettable for so many reasons, one of which is the emergence of a fully-fledged FATCA and CRS enforcement regime. Elements of this regime are varied, ranging from the issuance of FATCA group administrative requests to the evolution of the OECD’s Model Mandatory Disclosure Rules (MDRs) into the EU’s DAC6 and beyond. Swiss FIs though will endure one more burden that arrives in earnest this year: Statutory CRS audits.
Many outstanding questions remain about the shape and scope of the statutory CRS audits in Switzerland, especially as applied to trust companies, single family offices and other specialized operations. In light of this uncertainty, the Swiss Federal Tax Administration (SFTA) and at least one major audit firm orchestrated some pilot programs for late 2018 and 2019 in order to explore these questions in advance of the full-throated audit process set to begin in fall 2020. I advised and consulted with several large Swiss FIs, including leading trust companies, undergoing such CRS test audits. Below please find some of the key lessons learned. Written materials are essential
The auditor is expert
On-site data must be accessible
The interviews will test the compliance methodology
The Swiss CRS audits will be a long, arduous journey for the SFTA. Despite impressive efforts to train staff and assemble audit teams, the sheer number of Swiss FIs necessitate a multi-year process. Further, whether you are a one-client Treuhand or a global banking behemoth, no Swiss FI knows when its time will might come or how much notice it will have to prepare itself for the audit. So far, the SFTA has notified the audited FIs well in advance, but that may easily shift once the audit program starts rolling. As such, the final item of MTL advice in this blog is this: Get started promptly in order to control the tempo of the process, rather than wait for the call from the auditors and subject yourself to their timeline. For further support on the subject of Switzerland’s CRS audits, please email: paul@millentaxandlegal.ch For A CRS Compliance Program for Fiduciaries (Swiss Edition)–and other materials critical to your CRS and FATCA compliance needs–please visit the CRS & FATCA General Store. Please see below for further information about our Swiss CRS Compliance Program. A CRS Compliance Program for Fiduciaries (Swiss Edition)
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