On November 29, 2017, the Department of Treasury (“Treasury”) issued proposed regulations (REG-119337-17) addressing certain international tax aspects of the centralized partnership audit regime passed into law in the Bipartisan Budget Act of 2015 (the “BBA Rules”). The newly proposed regulations provide rules addressing FATCA and other tax withholding on foreign partners and the treatment of certain foreign tax payments made by a partnership. The newly proposed regulations are one piece of guidance expected from Treasury as the BBA Rules come into effect for partnership tax years beginning after December 31, 2017.
The key aspects of the newly proposed regulations include:
- Scope of BBA Rules. The newly proposed regulations clarify that a partnership’s withholding tax obligations with respect to non-U.S. partners (under chapter 3 of the Internal Revenue Code (the “Code”)) and FATCA withholding (under chapter 4 of the Code) do not fall within the scope of the BBA Rules. Accordingly, an audit of a partnership’s compliance with its obligations under either withholding regime (and collection of any under withheld tax) may be handled in a separate proceeding not subject to the BBA Rules.
- Coordination of Default BBA Rules with Withholding Tax Enforcement. Through various examples, the newly proposed regulations provide guidance on coordinating audits of partnership income under the BBA Rules and a partnership’s withholding tax obligations. Importantly, the proposed regulations would ensure that tax is collected only once, including taking into account any imputed underpayment collected from the partnership.
- Coordination of Section 6226 Election with Withholding Tax Enforcement. The newly proposed regulations also provide rules governing application of the withholding and reporting requirements under chapters 3 and 4 to a partnership that makes a section 6226 election, pushing adjustments out to reviewed year partners.
The preamble to the newly proposed regulations also provides guidance on Treasury’s views of the interaction of certain other rules with the centralized partnership audit regime, including the application of foreign tax credit rules to partners of a partnership subject to the BBA Rules, the impact of tax treaties, and modification requests based on reduced tax rates applicable to non-U.S. persons.
Although the newly proposed regulations provide much needed clarity in a narrow set of circumstances, additional questions remain for future guidance. If you have any questions with respect to these developments, please contact a member of Ropes & Gray’s tax practice group.