Pass-through W-9 reporting
Will the U.S. fulfil its reporting obligations under the IGAs?
It’s been 11 years since the first Model 1 Intergovernmental Agreements (IGA) was signed (with UK). There are now more than 110 IGA’s Foreign Account Tax Compliance Act | U.S. Department of the Treasury]
Meanwhile, over 110 countries (oecd.org/tax/automatic-exchange/crs-implementation-and-assistance/crs-by-jurisdiction/) have adopted CRS and are exchanging detailed account information on accounts held by residents of other countries and by passive entities with controlling persons resident in those other countries.
As the OECD notes:
The Model 1A IGAs entered into by the United States acknowledge the need for the United States to achieve equivalent levels of reciprocal automatic information exchange with partner jurisdictions. They also include a political commitment to pursue the adoption of regulations and to advocate and support relevant legislation to achieve such equivalent levels of reciprocal automatic exchange.
As of now the U.S. has not fully met its commitment to reciprocal reporting, and some have said that this makes the U.S. one of the biggest tax havens in the world.
In 2022, Charles Retting, then US Commissioner of Internal Revenue, testified before the Senate Finance Committee in support of a bill that would broaden reciprocal reporting under FATCA. He stated: “The ability to exchange information reciprocally is particularly important in connection with the implementation of the Foreign Account Tax Compliance Act (FATCA). Currently, however, the U.S. provides less information to foreign governments than we receive from them.
The website jdsupra.com published an article by by Stanley Foodman of Foodman CPAs & Advisors that includes the following table demonstrating the deficiencies in U.S. reporting.
Currently, if a U.S. financial institution receives Form W-9 from a U.S. entity, including a U.S. partnership, it has no obligation to report on foreign owners or partners of the U.S. entity.
Recent developments indicate that this is going to change—maybe not immediately, but certainly within the next few years. When this does change the compliance burden on U.S. financial institutions will increase dramatically.
Imagine a world in which U.S. entities are required to attach to their W-9s withholding statements and W-8 forms for underlying non-U.S. beneficial owners and/or controlling persons. Then imagine the increased due diligence and reporting obligations of the financial institution.
What are the signs of this potential extremely impactful reporting change - Armageddon?
Beginning Jan 1, 2024, certain entities will need to report to FINCEN certain information about their beneficial owners and those individuals who exercise substantial control over them.
The new draft W-9 has a check box. Partnerships and Trusts must check the box in line 3b if they have any foreign partners, owners, or beneficiaries.
- The FATCA Proposal, included in the Administration’s Fiscal Year 2023 Revenue Proposals is specifically directed at broadening reciprocal reporting. The proposal call for:
- Require certain financial institutions to report the account balance (including, in the case of a cash value insurance contract or annuity contract, the cash value or surrender value) for all financial accounts held by foreign persons maintained at a U.S. office.
- Expand the current reporting required with respect to U.S. source income paid to accounts held by foreign persons to include similar non-U.S. source payments.
- Require financial institutions to report the gross proceeds from the sale or redemption of property held in, or with respect to, a financial account held by a foreign person.
- Require financial institutions to report information regarding certain passive entities and their substantial foreign owners. For example, a financial institution maintaining an account for a passive entity that is a trust would be required to obtain and report to the IRS information on the owner(s) of the trust.
- When reporting with respect to digital assets held by passive entities, the proposal would require “brokers, such as U.S. digital asset exchanges, to report information relating to the substantial foreign owners of the passive entities.
The tax operations departments of U.S. financial institutions should enjoy what is certainly a temporary holiday from CRS-style reporting. Organizations should follow these developments and be prepared for potential in the U.S. to report additional data points, look through U.S. partnership entities like they do for non-U.S. entities, and provide beneficial ownership information like is done for CRS today.