Technical

Operational tax update - December 2019

Martin Killer Martin Killer

FATCA/CRS

We are continuing to see an increase in the number of queries raised by HMRC regarding submitted FATCA/CRS returns. They continue to question whether entities that appear to be financial institutions (FIs) have correctly classified themselves for FATCA/CRS purposes.

We have also recently seen HMRC send out enquiries to FIs regarding account holders that were reported on FATCA returns but had missing US tax identification numbers (TINs). In such instances, HMRC is requesting that FIs confirm they have been compliant with IRS Notice 2017-46.

You may be aware that IRS Notice 2017-46 enables FIs to submit FATCA returns without US TINs, provided that the missing information was requested annually, and that the date of birth was reported. This concession applies up until 31 December 2019.

As we are nearing the end of this concession period, HMRC's guidance notes have recently been updated to confirm that UK FIs with missing US TINs can continue to report the TINs using nine 'zeros'. The IRS has also updated its FATCA FAQs, confirming that a Reporting Model 1 FFI is not required to immediately close, or apply withholding, on accounts that do not contain a TIN from 1 January 2020, and that missing TINs will not automatically result in FIs being significantly non-compliant.

However, in respect of reporting from the 2020 year (due in 2021), where an account is reported on the FATCA return without a TIN, this will generate an error notice, and trigger a 120-day period for the issue to be corrected by the FI. After the 120-day period, the IRS will then determine on a case by case basis if there has been any significant non-compliance in accordance with the terms of the UK/US IGA.

Separately, the US/Swiss protocol has now been ratified. This enables the IRS to submit group requests under FATCA, with a required response timeframe for Swiss FIs of 10 days, as stipulated in the US/Swiss Intergovernmental Agreement (IGA). The amount of client data required to be collated to meet the 10-day turnaround is significant. The Swiss Federal Tax Authority (SFTA) FATCA group requests can result in additional work for FIs, including (but not limited to) repeating US indicia search efforts (e.g. where the audit trail of indicia that triggers the pool-reporting is not sufficiently robust), and additional work being required on IT developments in order to generate the FATCA-XML.

Where possible, Swiss FIs should try to ensure that their FATCA reporting is as accurate and complete as possible, and that the relevant data is readily available should a SFTA FATCA group request be received.

How can we help?

We can assist with any letters/notifications received from HMRC and/or the IRS, and advise whether the processes and procedures you have in place are in line with current guidance and best practice. If required, we can also assist with your FATCA/CRS reporting.

Qualified Intermediary (QI) regime

The application of withholding on the transfer of Publicly Traded Partnerships (PTPs) is anticipated with potential upcoming changes to the US 1446 regulations. Under the proposed changes, a new withholding tax would apply to transfers by non-US persons of interests in partnerships that are engaged in a US trade/business. Generally, the seller’s broker is responsible for the withholding. Therefore, if a foreign broker sells a PTP interest, its US broker would prima facie be required to conduct the withholding unless it is amongst a number of exemptions, or the foreign broker is a QI that assumes primary withholding responsibility. In light of this, the QI Agreement is expected to be updated to permit QIs to include withholding in respect of PTPs within their remit and other responsibilities (e.g. 1042-S reporting) as a QI.

How can we help?

We can assist with providing regular updates on the upcoming PTP changes. If required, we can also help with conducting the periodic review and/or provide ad-hoc advice.

S871(m) updates

In September 2018, the IRS released IRS Notice 2018-72, which extends the phase-in of the s871(m) regulations.

The s871(m) regulations generally require “dividend-equivalent” payments with underlying US securities to be subject to US withholding tax when paid to a non-US person. The extension is in relation to a number of issues, including the phase-in for non-delta-one transactions (those where the delta is at least 0.8).

The s871(m) regulations currently only apply to delta-one transactions entered into on or after 1 January 2017. Non-delta one transactions were due to be brought within the scope of s871(m) from 1 January 2019, but the IRS notice extended this relief for a further two years until 1 January 2021. However, notwithstanding this, given the incidence of non-delta one trades FIs should still prepare for this upcoming change and determine which transactions could be caught.

How can we help?

We can assist with assessing the impact of the s871(m) regulations, both in relation to delta-one transactions and the non-delta-one transactions that may apply from 1 January 2021 onwards. If you are QDD, we can assist with conducting periodic reviews, and provide ad-hoc assistance where required.

DAC6

The UK’s consultation period has now ended and HMRC will shortly release the final regulations (which are required by 31 December 2019). Across the UK, we continue to see many entities struggle to understand what arrangements would be caught, whether any steps should be taken prior to the release of the final regulations, and how previous arrangements, that commenced from 25 June 2018, are monitored/tracked.

Across Europe, more countries are releasing draft/final regulations and we continue to see deviations in the application of DAC6, with Poland being the most notable country to follow a very different approach and the 30-day reporting period already being live.

How can we help?

We can assist with conducting impact assessments or reviewing impact assessments already conducted internally

Corporate Criminal Offence (CCO)

Whilst the CCO regime is not new – it's been in force since 30 September 2017 – due to there being too few deadlines to ensure they have the appropriate procedures in place to be compliant with CCO, many entities have not prioritised it, and have therefore not yet conducted an impact assessment.

However, we have recently seen a shift in HMRC’s attitude regarding CCO, with an increased number of prosecutions in this area. Furthermore, the new Business Risk Review+ (BRR+) regime is now in effect (as from 1 October 2019). According to BRR+, the previous two category system of rating businesses as either low risk or non-low risk will be replaced with a new four category scale. The new risk categories are low, moderate, moderate-high and high-risk.

HMRC has confirmed that they will alter their interventions and resource allocations accordingly, depending on the business’ risk category. As a result, we recommend that an entity’s approach to CCO is considered in more detail.

How can we help?

We can assist with conducting impact assessments or reviewing impact assessments already conducted internally. Please note that impact assessments should be regularly reviewed, and we can also assist with this if required.

Making Tax Digital (MTD)

Since HMRC announced that the Bank, Building Society and Interest (BBSI) returns would be transitioning to MTD, many BBSI filers have been waiting for HMRC to confirm further details, including (most importantly) the effective date and the new schema and process.

HMRC has confirmed that the transition date will be deferred until at least the 2021/22 tax year, with no further details announced. In the interim period, and with the new BRR+ system mentioned above, it is important that the existing process and the quality and completeness of any BBSI returns are considered. We are also seeing HMRC review BBSI returns in more detail and in some instances request BBSI filers to make re-submissions; and (b) start mapping the data received in the BBSI returns to the individual's tax account.

How can we help?

We can assist with providing regular updates on the development of MTD and assist with conducting health checks on the current processes and controls in relation to BBSI returns.

Global withholding tax rate changes and reclaims

Throughout this year, we have seen a number of changes in the withholding tax rates applied by different jurisdictions, but also in the relevant processes (e.g. new reclaim processes in certain jurisdictions).

Most reclaims tend to have a filing deadline of 31 December, therefore it is important to determine as soon as possible whether there is an opportunity to reclaim any taxes incurred. Otherwise, there is potentially a year of reclaims that would have fallen out of statute. Furthermore, with Brexit, UK claimants would have to change the basis of claims from an EU/EEA claimant to a third country claim.

Processing times can differ, and it is therefore important to file claims as soon as possible. Changes and developments in cases should be monitored to ensure that claims can be maximised where possible. For example, the Court of Justice of the European Union (CJEU) recently issued its judgment in favour of the claimant, in a case involving a third country claimant that was seeking to reclaim withholding taxes suffered in Germany, on the basis that it was contrary to the free movement of capital.

How can we help?

We can provide updates on market changes and conduct a benchmarking exercise to determine if there is any withholding tax leakage, and assist with filing any reclaims.

If you have any queries, please contact your usual Grant Thornton adviser. Alternatively, please speak to Martin Killer.

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