Operational Taxes in 2020 – A year in the life of QI, FATCA, CRS & co!

in Tax, 18.01.2021

The year 2020. A year of twists and turns…and significant developments in the area of operational taxes! From FATCA and CRS, to QI and TRACE, join us as we take you on a tour of the key changes and highlights.

Qualified Intermediary (QI)

Periodic Review for Luxembourg banks with QI status

The periodic review (to be performed in 2021) will be conducted in line with the new guidelines set out by the IRS which published a new FAQ on how QIs (not acting as Qualified Derivatives Dealers) should take into account the “good faith standard” (section 871(m) transactions).

2020 publication of new 1042-S and 1099 forms

Changes to 1042-S forms (relevant to payments made to non-US persons) relate to partnerships, clarifications on adjustments to overwitholding, and modifications to the chapter 3 status codes.

For US non-exempt recipients, changes to the 1099 forms relate to the new 1099-NEC form for nonemployee compensation.

QIs should be aware of Revenue Procedure 2020-20 that provides relief for certain individuals who remained in the US beyond a specified number of days due to the COVID-19 pandemic. For a comprehensive overview, don’t miss our newsletter.

Final regulations under section 1446(f)

In October 2020, the Treasury and the IRS released final regulations regarding withholding and reporting obligations concerning dispositions of certain partnership interests under Internal Revenue Code (IRC) section 1446(f). Under the new rules, a QI has three options:

  1. assume withholding responsibility
  2. not assume withholding responsibility and provide pooled information to an upstream custodian
  3. not assume primary withholding responsibility and provide partner-specific information to an upstream custodian

With respect to a PTP distribution, however, a QI that assumes primary withholding for any purpose must assume primary withholding for all purposes.

If a broker makes a payment to a QI that has assumed withholding responsibility, the broker must report the total amount realized without any withholding tax.  The QI can report payments subject to withholding on a pooled basis, but an account holder/partner can request an individual 1042-S form if the form is needed to claim a refund for overwithheld amounts.

And what about nonqualified intermediaries (NQIs)? Unlike QIs, they are not allowed provide account holder/partner-specific information to an upstream custodian, withholding agent or broker.  Instead, a broker must withhold 10% of the total amount realized and issue a single 1042-S form to the NQI.

FATCA and CRS

Modification

On 18 June 2020, the Luxembourg Parliament passed bill 7527 on the modification of the Luxembourg CRS Law and the FATCA Law. This new law further increased the power of the Luxembourg tax authorities enabling them to carry out an audit within a 10-year time limit.

In light of this, the Luxembourg tax authorities (which sent notifications at the end of 2019 to verify the due diligence procedures and reporting processes put in place for FATCA/CRS purposes) can conduct onsite visits and review a sample of accounts.

Deadline

The COVID-19 pandemic impacted the annual reporting deadline for Luxembourg financial institutions: it was extended to 30 September 2020 (instead of 30 June 2020) with the ACD exchanging the information received by 31 December 2020 (instead of 30 September 2020). Get the full lowdown here.

TRACE

The talk of the town

Since Finland’s announcement as the first country to adopt the OECD’s Treaty Relief and Compliance Enhancement (TRACE) Implementation Package from 1 January 2021, there has been much excitement in the marketplace about the new regime and the opportunities for financial institutions operating in global markets.

Needless to say that Luxembourg custodian banks with Finnish assets under custody should definitely keep their fingers on the pulse and closely monitor TRACE developments.

In June 2020, we brought together a panel of experts to discuss this new tax regime, and it was a hot topic at Clearstream’s Tax Webinar ‘The changing Landscape’ later in the year.

Beyond Finland

In September, the European Commission (EC) announced the Capital Markets Union Action Plan. One of its aims is to propose a common, standardized, EU-wide system for withholding tax relief at source.

Interestingly, the EC acknowledged that the existing OECD TRACE system already provides orientation on what a mechanism could look like. It will, therefore,  put a legislative initiative in place by Q4 2022 (subject to a positive impact assessment and following close consultation with member states).

EU Initiatives

DAC6

Mandatory disclosure requirements under DAC6 have now entered into force in the EU. The six-month extension has come to an end and the directive went live on 1 January 2021.

DAC7

On 15 July 2020, the EC published a directive proposal – DAC7 – which aims to extend the scope of automatic exchange of information to digital platforms. How? By placing an obligation on them to report on the income earned by sellers of goods and services who use the relevant platforms. Learn more here.

DAC8

The EC also intends to amend the DAC to include alternative means of investment and payment (e.g. crypto-assets and e-money) related to exchange of information. A roadmap for the publication of the DAC8 proposal is underway, with a consultation period running in Q1 2021 and a legislative proposal expected in Q3 2021.

KPMG expertise

Have questions or need advice navigating these changes? Our KPMG Luxembourg’s tax professionals are here to help. Get in touch!