On December 20, 2017, the Senate and the House passed a revised version of a conference report which included changes to the original bill, and what has been observed as a very fluid Tax Reform Bill (H.R. 1) proposing changes to both individual and business tax reform that take effect from 2018 onward. President Trump signed the bill into law on December 22, 2017. Thus, U.S. taxpayers, along with their advisors, welcomed in the New Year by reviewing approximately 500 pages of new tax law, and assessing how the changes will affect their respective businesses. As it relates to global custodian banks, U.S. withholding agents, and Qualified Intermediaries, several modifications made to the taxation of business organizations and individuals are highly relevant too as they will dictate treatment payments made to account holders on portfolio investments as early as January 1, 2018. Brown Brothers Harriman & Co. (BBH) implemented these changes with effect from January 1, 2018.

Whereby the bill significantly modifies many areas of both business and individual taxation, we expect not only that it will take some time for business and industry to fully digest the implications of the new tax law, but also that impacts may not be certain until corresponding regulatory guidance is released, both to clarify practical impacts as well as important administrative and procedural aspects. In the meantime, we highlight a few of the more notable takeaways and impacts of changes BBH has been required to implement effective January 1, 2018 across our Investor Services platform. These modifications, driven by the new tax reform law, impact both U.S. residents and non-residents on their portfolio investment income.


Rate Change from 28% To 24%

As a matter of background, backup withholding is a penalty tax applied to U.S. domestic payees in cases where payees either fail to furnish payors, such as BBH, U.S. tax identification (ID) numbers, or where the Internal Revenue Service (IRS) has notified a payor, such as BBH, that backup withholding must be applied as a result of a taxpayer’s failure to file, or settle a liability with the IRS. Backup withholding tax applies to worldwide income and sale proceeds paid to the account holder. BBH deducts backup withholding under three general operating models:

  1. where a direct client of BBH is subject to backup withholding
  2. where a bank intermediary, such as a Qualified Intermediary (QI) client instructs BBH that   payments made to their account are attributable to a beneficiary subject to backup withholding,
  3. where a non-U.S. resident client that is a non-Qualified Intermediary or Non-Withholding foreign Partnership or Trust allocates payments to a U.S. payee that has failed to furnish a U.S. tax ID number.


Rate Change from 39.6% (Individuals) and 35% (Corporations), To 21% and 37%, Respectively

Prior to January 1, 2018, non-U.S. residents were subject to the highest applicable income tax rates on payments of income that is “Effectively Connected with a U.S. Trade or Business” (ECI). U.S. withholding agents, such as BBH must apply tax on ECI as withholding when certain types of distributions are made to non-U.S. residents. The most common example of ECI payments that arises in the portfolio investment environment when a non-U.S. resident receives distributions specified by an issuer as ECI from investments in U.S. Partnerships (such as a Publicly Traded Partnerships (“PTP”)), or Trusts. In general, the source and character of the income and gains of these types of entities pass through to investors, and ECI payments generally arise where amounts distributed relate to the PTP or Trust conducting business in the United States (as opposed to operating as a portfolio investment fund and passing through interest and dividend income), and distributing earnings related to the business.


 Rate Change from 35% to 21%

Prior to January 1, 2018, non-U.S. residents were subject to 35% withholding tax on distributions from U.S. Real Property Holding Companies and Real Estate Investment Trusts (“REITs”) attributable to the issuer’s disposition of U.S. real property assets under the so-called Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) regime. To the extent that non-U.S. residents hold more than 10% of the issuer’s stock, the withholding tax rate has been reduced to 21% effective for distributions occurring from January 1, 2018. In practice, FIRPTA withholding must be applied when such distributions are made to non-U.S. residents. The most common example of FIRPTA withholding arises in the portfolio investment environment when a non-U.S. resident receives distributions from REITs or Trusts that either operate businesses heavy in, or invest in, U.S. Real Property (e.g. land, buildings, timber, etc.). BBH is required to apply FIRPTA withholding where issuers provide notice of the extent of distributions being attributable to gains from the disposition of U.S. Real Property by Public REITs.

Importantly, this change does not impact existing provisions allowing for relief from FIRPTA tax to the extent of smaller shareholdings, and it is still possible for non-U.S. residents to avail of “dividend” treatment on these types of distributions to the extent that constructive ownership in the issuer’s stock does not exceed 10%. Although this change does lower the maximum withholding tax rate applicable to FIRPTA distributions, we expect that the majority of portfolio investors will continue to qualify for “dividend” treatment in lieu of “FIRPTA” treatment because of the conditional application of the new rate.


 There are other notable items in the bill, and BBH will continue to monitor, communicate, and implement those that impact our clients, and our tax compliance requirements as Treasury and the IRS issue guidance. One example of a developing, and relevant, impact of the tax bill is described below:

10% Withholding Tax Rate on Dispositions of Partnership Interests

 The bill introduces a 10% withholding tax rate on dispositions of partnership interests by non-U.S. residents. At this stage, there is not an existing regulatory framework in place outlining the party(ies) responsible for this new withholding requirement, nor are there existing rules setting out the types of dispositions that should be taxable. As an acknowledgement of the complexity to practically implement this law, and in response to industry comments, the IRS released Notice 2018-08, that suspends code section 1446(f) which introduced this new 10% withholding tax rate on dispositions of publicly traded partnership interests until further guidance is issued. At the time of this writing, various industry groups are preparing responses to the IRS further stressing issues to be considered as regulations pursuant to this new law are considered. Currently, there is no “deadline” for the IRS to issue guidance, nor has the IRS prescribed a date from which this provision will become effective. BBH will continue to provide updates on industry activities and developments in this area.

Due to the way in which the bill was drafted, and the extent proposes were vetted, it is not unreasonable to expect that a future technical corrections bill will be required to rectify any drafting errors. We will continue to work to inform and engage on these changes in order to assist our clients as they deal with these challenging new requirements.

For more information please contact your relationship manager or Global Tax Services.

Compliance Notes:
This publication is provided by Brown Brothers Harriman & Co. and its affiliates (“BBH”) to recipients who are classified as Professional Clients and Eligible Counterparties if in the European Economic Area (“EEA”), solely for informational purposes. This information does not constitute legal, tax, financial or investment advice and is not intended as (i) an offer to sell or a solicitation to buy securities or investment products, (ii) an offer of services, or (iii) a recommendation to invest or not to invest in any country. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code or for promotion, marketing or recommendation to third parties. This information has (i) been obtained from sources believed to be reliable, (ii) not been independently verified, and (iii) is inherently subject to change. BBH does not make any representation or warranty as to the accuracy or completeness of the information provided and will not be responsible for any loss or damage (direct, indirect or consequential) incurred as a result of any reliance on this information. Any information provided and/or opinions expressed are subject to change without notice. Unauthorized use or distribution without the prior written permission of BBH is prohibited. This publication is approved for distribution in member states of the EEA by Brown Brothers Harriman Ltd. and/or Brown Brothers Harriman Investor Services Limited, both authorized and regulated by the Financial Conduct Authority. BBH is a service mark of Brown Brothers Harriman & Co., registered in the United States and other countries. © Brown Brothers Harriman & Co. 2018. All rights reserved. 1/2018 IS-03615-2018-01-19