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By Kevyn Nightingale, LLM, CPA, CA, CPA (IL), TEP
There’s good news on the horizon for U.S. citizens living abroad. On December 13, 2018, the U.S. Internal Revenue Service (IRS) proposed reducing the scope of certain withholding tax obligations.
Since the introduction of the
Foreign Account Tax Compliance Act (FATCA) in 2010, the U.S. IRS has been increasing the amount of information it collects on U.S. citizens investing in other countries. This includes citizens residing abroad – in Canada, for example - and subsidiaries of U.S. companies. The concern was that such U.S. citizens were not reporting their foreign income to the IRS.
To compel foreign (non-U.S.) financial institutions to provide this information, the U.S. imposed withholding tax obligations on U.S. payments to foreign financial institutions, where those institutions did not agree to provide the information. Withholding applied to U.S.-based source:
Withholding was scheduled to being January 1, 2019.
However, in early 2017 a Presidential Executive Order instructed U.S. federal agencies to review regulations to reduce unnecessary burdens. Many U.S. and foreign financial institutions complained such withholding would be exceptionally complicated to administer.
The U.S. Treasury noted that 103 countries have Intergovernmental Agreements (IGAs) or equivalent arrangements, whereby the desired information can be obtained, usually through those countries’ revenue authorities. Substantially all of the U.S.’s large trading partners have IGAs. Consequently, the need for withholding to enforce compliance is greatly reduced.
In other words, the threat of the withholding was sufficient to bring the important countries, such as Canada, to the table. Now that the information is flowing, actual withholding is not very important.
As a result, the U.S.
Treasury proposed to reduce the scope of types of payments subject to withholding. Most importantly, the requirement to withhold on gross proceeds (the last bullet above) was withdrawn.
Another problem financial institutions face is there may be multiple layers of financial institutions or entities, such as trusts and partnerships, between the U.S. payor and the beneficial owner of the income. It is often difficult to obtain sufficient information to properly withhold on these “passthru” payments.
The U.S. Treasury has proposed suspending this withholding until two years following publication of final regulations. Those would be, at minimum, at least a year away, in 2020; they may never see the light of day. As unusual as tax legislation and administration has been during this past two years, this is a welcome change.
For more information, contact Kevyn Nightingale, LLM, CPA, CA, CPA (IL), TEP at 416.596.1711 or [email protected].
Related Topics:International Tax
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