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Tax Developments & Insights | July 2021

Tax information reporting discussions in June centred on the Biden Administration’s Green Book proposals relating to more comprehensive tax information reporting. But there are a few other tidbits as well: continued angst over the 1 January 2022 effective date of the section 1446(f) regulations for brokers, and a new competent authority agreement between the U.S. and Switzerland relating to the eligibility of individual retirement arrangements for obtaining reduced withholding tax rates under the U.S.-Switzerland tax treaty.

  1. The Biden Administration’s Green Book contains proposals for enhancing tax information reporting as a means to close the tax gap and provides for reporting of account inflows and outflows, and expands reporting specifically for cryptocurrency transactions.
  2. At a June tax conference, the IRS reiterated that practitioners should assume that 1 January 2022 remains the effective date of new section 1446(f) regulations as they apply to brokers.
  3. The U.S. Treasury has released a new competent authority agreement between the U.S. and Switzerland specifying individual retirement arrangements that are now eligible for treaty benefits for reduced withholding tax rates.

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1. Green Book enhanced tax information reporting proposals

Last month, we outlined a few of the tax information reporting proposals contained in the Biden Administration’s fact sheet for the American Families Plan and noted that the Treasury’s “Green Book” expanded upon these.

These proposals continue to be a topic of discussion in June, and the Green Book explanations are worth highlighting because they have the potential to significantly impact tax information reporting by traditional financial institutions as well as crypto exchanges and brokers.

Here are the highlights of the enhanced tax reporting proposals contained in the Green Book, formally known as the “General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals”:

  • Under the proposals, financial institutions would need to report gross inflows and outflows from accounts under a new comprehensive financial account reporting regime:
    • Financial institutions would need to break down payment flows for physical cash, transactions with non-U.S. accounts and transfer to and from another account with the same owner
    • New rules would apply to all business and personal accounts from financial institutions, including bank, loan, and investment accounts
    • There would be an exception for accounts below a de minimis gross flow threshold of $600 or fair market value of $600
    • This enhanced reporting would be effective for tax years beginning after 31 December  2022
  • Comprehensive financial account reporting of inflows and outflows would also apply to payment settlement entities that file Form 1099-K:
    • Payment settlement entities would be required to report not only gross receipts (as they are obligated to do now) but also gross purchases
  • Similar comprehensive financial account reporting of inflows and outflows applies to crypto exchanges and custodians
  • Separate reporting would also take place where a taxpayer purchases crypto assets from one broker and transfers the crypto assets to another broker
  • Businesses that receive crypto assets in transactions with a fair market value of more than $10,000 would have to report such transactions; and
  • Finally, under separate provisions, brokers, including entities such as U.S. crypto asset exchanges and hosted wallet providers, would be required to report information relating to certain passive entities and their substantial non-U.S. owners when reporting with respect to crypto assets held by those entities in an account with the broker:
    • This reporting is intended to provide the IRS with information that it can exchange with other countries, with the view that the IRS would receive in return information on U.S. holders of crypto assets transacting through non-U.S. exchanges
    • These broker reporting rules would be effective for returns filed after 31 December 2022.

2. Section 1446(f) broker withholding on PTP sales

At a tax conference in June, industry participants and advisors expressed concern over the challenges of modifying existing withholding and reporting processes to accommodate new section 1446(f) regulations. These regulations govern broker withholding and reporting for sales of publicly traded partnership (PTP) interests and are scheduled to be effective 1 January 2022.

Industry participants continue to wait for new tax certification forms (Forms W-8) and related form guidance, language relating to modifications of the qualified intermediary agreement and potential changes to Form 1042-S and instructions. These as-yet-unreleased updates will all be needed to implement the new broker PTP withholding and reporting rules.

At the conference, however, the IRS did not provide any indication that it would be deferring the effective date of the section 1446(f) regulations. Instead, the report is that practitioners should continue to assume a 1 January 2022 effective date for the regulations.

3. New U.S.-Switzerland competent authority agreement

The U.S. Treasury has announced a new competent authority agreement with Switzerland that specifically identifies individual retirement savings accounts that are eligible for treaty-reduced withholding rates. This stems from a protocol to the U.S.-Switzerland tax treaty that entered into force in autumn 2019.

The new competent authority agreement, contained in Announcement 2021-11, supersedes a prior competent authority agreement between the two countries that was entered into in 2004.

The new competent authority agreement is effective for dividends paid on or after 1January 2020. Effectively, the new treaty protocol and the competent authority agreement extend the 0 percent withholding rate applicable to pensions to individual retirement accounts.

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