Recent QI, FATCA & Section 871(m) updates


Jason Zücker summarizes the key points and comments on the implications for Swiss financial institutions (SFI) to shed some light on the latest updates regarding Section 871(m) and the QI/FATCA regimes.

Extension of Phase-in Period for Section 871(m)

On 16 December 2019 the US Internal Revenue Service (IRS) released an advance version of Notice 2020-2 (available for download here) providing for an additional extension of time for the current phase-in period (ending 31 December 2020) to 31 December 2022. At the same time, the final version of the 2017 proposed regulations have been published without any substantive changes (available for download here).

For SFI this means that they can continue to rely on the “good faith” implementation of Section 871(m):

  • for delta-one transactions entered into before 31 December 2022;
  • for non-delta-one transactions falling under Section 871(m) entered into after 1 January 2023;
  • for the simplified standard to identify combined transactions entered into before 31 December 2022.

KPMG Comments: The Notice essentially postpones the more challenging application of Section 871(m) to non-delta-one transactions until 2023. SFI will also welcome that they can continue to rely on the simplified standard for identifying combined transactions until 2023. Nevertheless, SFI (especially those acting as QDD) should not rest idle, but use this time to reevaluate their efforts to comply with Section 871(m) and ensure that they are compliant with the “good faith” standard and that this is properly documented.

  • Notice 2020-2 provides that QDDs will not have any tax or withholding obligation on the dividend and dividend equivalent payments received in their capacity as an equity derivative trader before 31 December 2022. The Notice also confirms that QDDs are not required to perform a periodic review with respect to their QDD activities before 2023.

KPMG Comments: SFI with QDD status will welcome that the issue of a potential cascading withholding tax has been further pushed back until 2023 and not having to perform a periodic review of their QDD activities before 2023 at the earliest.

QI/FATCA updates from the recent International Tax Withholding & Information Reporting Conference in the US

On 14-15 November 2019, the Annual International Tax Withholding & Information Reporting Conference was held in New York, with attendees from industry, consultants and the IRS.

With the deadline for many SFI QI/FATCA certifications having passed not more than a year ago and the next ones being already on the horizon, we would like to highlight the following main takeaways for SFI arising from this Conference:

  • The IRS stated that no formal approval of FATCA certifications will be posted to indicate acceptance of completed certifications. The submission confirmation note received in the FATCA message board can be considered as a completion notice instead.

KPMG Comments: Differing from the QI certifications, for which the status will be marked as approved in the system, this absence of formal approval generates uncertainty. Similar to QI, it is anticipated that the IRS will also review the FATCA certifications in detail. SFI should thus be ready for a direct follow up by the IRS in the event that additional information is needed.

  • The IRS addressed the cases of reporting variances identified as part of the QI certifications and said that QIs should provide detailed explanations for each variation and detail corrective actions where warranted for future certifications.

KPMG Comments: This confirms our experience with the numerous and detailed follow-up queries issued by the IRS to SFI on their QI certification regarding variances between the Forms 1042-S received and issued by SFI. Further to the enforcement and compliance initiative announced by the IRS, we have also started seeing letters being sent by the IRS to SFI to explain and correct issues identified upon review of SFI’s annual Form 1042 and Form 1042-S reporting. Keeping that in mind, SFI should ensure that they have robust procedures and controls in place for their annual Form 1042 and Form 1042-S review, in particular for the Form 1042-S reconciliation, in order to avoid variances and follow-up action by the IRS.

For full details of all topics discussed at the Conference, please refer to this detailed alert.

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