With the March 31 application deadline for renewing or entering a withholding foreign partnership agreement (WP Agreement) fast approaching, partnerships must determine if they want to renew or enter into a WP Agreement. To apply, they must submit an application electronically via the Qualified Intermediary (QI), Withholding Foreign Partnership (WP), and Withholding Foreign Trust (WT) Application and Account Management System. This includes all WPs that had a WP Agreement in effect before January 1, 2017.

In deciding whether to apply, partnerships should review the WP Agreement that was recently released by the IRS (Revenue Procedure 2017-21). The terms of the new WP Agreement will control all WP Agreements effective in 2017 or later. Some of the significant benefits of the recent WP Agreement under Revenue Procedure 2017-21 are:

— Eliminating the need to disclose the identity of the WP's investors to other financial institutions

— Simplifying the documentation the WP must obtain from partners

— Receiving US-source fixed or determinable, annual or periodical income (US FDAP income) free from US withholding (although the WP itself must do any necessary withholding)

— Providing flexible rules for withholding and reporting US FDAP income

— Permitting the WP to obtain refunds rather than requiring the non-US partners to file US tax returns to recover overwithheld amounts

— Meeting IRS compliance requirements through a consolidated compliance program

We look at some of the more significant WP benefits in the following discussion.

Confidentiality and simplified documentation. A WP is not required to provide withholding agents with the documentation from its direct partners or to include its direct partners on a withholding statement. In addition, documentation and a withholding statement are not needed for indirect partners if the WP acts as a WP for those partners. Documentation and a withholding statement must be provided to withholding agents for indirect partners that are US non-exempt recipients (e.g., US individuals, US partnerships and US trusts) unless those partners are included in a US payee pool for FATCA purposes.

The WP Agreement also provides simplified documentation procedures applicable to the WP's partners. First, if the WP is a foreign financial institution in a jurisdiction whose know-your-customer rules have been approved by the IRS for use in connection with qualified intermediaries, the WP can use documentary evidence approved for use in the jurisdiction by the IRS. Such documentary evidence remains valid indefinitely unless there is a change in circumstances.

If a partner is claiming treaty benefits, the WP must obtain a treaty statement demonstrating entitlement to the benefits. The treaty statement remains valid only for three full calendar years after the year it is provided. In line with the changes made to the Form W-8BEN-E effective in 2017, treaty statements must identify the specific limitation on benefits provision that applies to an entity claiming treaty benefits. If an entity partner was documented for treaty benefits before January 1, 2017, however, a treaty statement with a specific LOB provision is not required before January 1, 2019. A WP is also relieved from the requirement to obtain non-US taxpayer identification numbers from non-US persons claiming treaty benefits even if a Form W-8BEN or Form W-8BEN-E is used and the treaty benefits are claimed for dividends or interest on non-publicly traded securities.

Modification of the lag method. Under the previous version and the new version of the WP Agreement, a WP must withhold on payments at the time a distribution is made to a non-US partner if the distribution is made during the calendar year and includes US FDAP income. If, however, the US FDAP income is not distributed during the calendar year in which it is earned, the WP must withhold on a non-US partner's distributive share of US FDAP income on the earlier of: (i) the date in the subsequent year the income is actually distributed to the non-US partner; (ii) the date in the subsequent year that a Schedule K-1 is provided to the non-US partner, or (iii) the "due date" in the subsequent calendar year for furnishing a Schedule K-1, including extensions, to a partner, irrespective of whether the WP must provide a Schedule K-1 to the partner. In other words, the withholding on the US FDAP income is delayed (i.e., lags) until the year after the year it is earned.

EY observes: Previously, it was not clear whether the "due date" for the Schedule K-1 meant the due date with or without extensions. The new WP Agreement provides that the relevant date is the due date of the Schedule K-1 "including extensions."

The new agreement clarifies that, under the lag method, the US FDAP income included in a non-US partner's distributive share is treated as "arising" in the year subsequent to the year it was actually earned by the partnership and therefore is reported on a Form 1042-S relating to the subsequent year.

To illustrate the rule, assume a WP earns US FDAP income in 2017 and that the income is not distributed. The WP obtains an extension of the Schedule K-1 due date from March 15, 2018 to September 15, 2018. On July 1, 2018, the WP provides Schedules K-1 to its partners. Withholding on the US FDAP income included in a non-US partner's distributive share is not required until July 1, 2018, and the income is reported on a 2018 Form 1042-S, which would be due March 15, 2019.

EY observes: If the lag method is used, there will be a mismatch between the income reported on the non-US partners' Schedules K-1 and when the chapter 3 reporting and withholding occurs, if applicable. Note that the lag method cannot be used for Form 8966 reporting.

Withholding on distributions. Section 3.04 of the WP Agreement addresses a WP's withholding obligations on a distribution of US FDAP income to non-US partners. The section allows a WP to estimate the portion of a distribution attributable to US FDAP income, withhold based on the estimate, and, with the 2017 revisions, report and correct any over/under withheld amount in the following year when the Schedules K-1 are due or, if earlier, provided to the partners. This is particularly helpful when there are incentive allocations that cannot be determined until the year subsequent to the year of the actual distribution. By allowing the adjustments for over/under withholding in the year following the year of the distribution, the WP Agreement obviates the need to amend previously filed Forms 1042-S.

Consolidated Compliance Program. All WPs must certify as to their internal controls and submit to a periodic review of those controls, among other requirements. A fund complex with two or more WPs is eligible to consolidate these compliance programs if certain requirements are met and the IRS approves the application. A Compliance Entity, which can be a sponsoring entity or any other entity approved by the IRS (e.g., fund manager) must be designated and will be jointly and severally liable for each WP's obligation under the WP Agreement. Additionally, the Compliance Entity must implement a compliance program that includes "uniform" practices, procedures and systems, subject to uniform monitoring and controls.

EY observes: The IRS originally announced that only a sponsoring entity could be a Compliance Entity. The expansion to allow a Compliance Entity to be an entity approved by the IRS is a welcome change and will allow a fund complex with a significant number of WPs to appoint one entity that is responsible for the daily operations of the WPs.

EY observes: The preamble to Revenue Procedure 2017-21 clarifies that "uniform" practices and procedures, and systems under the WP Agreement means "consistent in approach," not identical.

The benefit of a Consolidated Compliance Program is that the Compliance Entity will submit one "certification of internal controls" that will cover all the WPs included in the program; each WP must still undergo its own "periodic review," however, in which the WP's documentation, withholding, reporting and other obligations under the WP Agreement will be examined.

EY observes: The scope of the periodic review is very similar to the periodic review set forth in the Qualified Intermediary Agreement (Revenue Procedure 2017-15) and the certifications set forth in the Treasury Regulations that a participating foreign financial institution (including a Model 2 FFI) must submit through its RO.

WPs participating in the Consolidated Compliance Program may not seek a waiver of the periodic review requirement. Loss of this option will likely not have a material impact on WPs because the maximum amount of reportable US FDAP income on the partnership's Form 1042 must be less than $1 million for the option to apply.

Conclusion: Non-US partnerships that want to renew or enter a WP Agreement should apply now, since it appears that the IRS will not extend the March 31, 2017, application deadline. Partnerships with incentive allocations should consider entering a WP Agreement to avoid the need to address penalties when withholding and reporting adjustments are required.

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