There’s been a spike in news about the Internal Revenue Service (IRS) cracking down on tax evaders. While some instances of tax evasion are intentional, such as abusing tax havens or undertaking nefarious scams, more likely situations are when individuals are simply unaware of withholding requirements. As recently as last month, the IRS announced they are employing artificial intelligence (AI) to audit the largest corporate partnerships to deepen their examination processes.
Given this increased scrutiny, one regulation to be mindful of is IRS Rule 1446(f), more commonly known as Publicly Traded Partnership, or PTP withholding. In January 2023, this IRS rule entered into force requiring withholding on distributions from in scope entities to non-US partners. Notably, these are investors realizing gains from companies with effectively connected income (ECI) to the US that would not ordinarily file US tax returns. To ensure these types of investors are being taxed uniformly and equitably, withholding standards were prescribed for partnerships which do not publish a Qualified Notice (QN) claiming their exemption from withholding on a quarterly basis.
Since these partnerships make up a relatively small portion of the total universe of business entities, some saw the introduction of IRS Rule 1446(f) as a nuisance, and not one that required an automated solution. Many believed these lists of partnerships were relatively static so some firms concluded that a manual solution, pieced together from publicly available sources and documentation, would serve as adequate compliance. Firms also took diverging views on how to handle such exposures, with some choosing to “blacklist” such positions to avoid withholding requirements, while others chose to inform clients and withhold on any potential exposures. Regardless of approach, assessing PTP withholding needs to be carried ex-post while reviewing client positions as well as ex-ante before execution. This requires making a complex determination in a short period of time as soon as a client sends an execution order.
While the full effect of this rule is yet to be seen, and IRS compliance is still ramping up, the reality is that this list of partnerships is not static. There is also a real business requirement to identify new partnership exposures as they arise to avoid unwanted consequences. For example, shortly after the regulation went live in January 2023, TXO Partners LP offered shares in an IPO. As result of being established as a partnership for tax purposes and consequently listing publicly on a stock exchange, the company became subject to the rule. More recently in October, Mach Natural Resources LP offered shares to investors and became a PTP. Identifying these quickly and systemically is vital to ensure compliance and adhere to company policy whether that is to avoid these investments or to withhold upon such exposures.
On the flip side, given the treatment by many firms to avoid these exposures altogether, there was some expectation that firms may amend their tax status to be treated as a corporation versus a partnership. Even prior to the rule taking effect, several companies including Nextera Energy, Viper Energy and Hess Midstream published notifications about their change of corporate status.
Interestingly, one of the larger partnership firms, Lazard, did not make a change from partnership to corporation until January 2024. When they did decide to make the change, they cited that this action may “broaden the eligible universe of investors” and provide a higher level of trading and liquidity. Having maintained their partnership status for a year under the new tax regime, they evidently decided shedding that designation would be advantageous.
The reason why firms need to be aware of these status changes is twofold. First, firms are competitive and wish to give their investors the largest possible selection of investment options. Removing a company from a restricted list does just that and provides more choice to investors. Second, while over withholding may not result in fines and sanctions, it can tie up a significant amount of money until it can be recovered and returned to investors. It’s in nobody’s best interest to withhold against positions where it is not required.
As the regulatory landscape continues to unfold around this tax requirement, it is becoming obvious that firms should have a strategy to comply that is more robust than manual review of public sources on a periodic basis.
How can Bloomberg help?
To help clients streamline and keep tabs on IRS Rule 1446(f) withholding requirements, Bloomberg provides a comprehensive PTP Data Solution available for enterprise-wide use.
This solution delivers several key pieces of data that are necessary to implement a robust compliance program. At the highest level, this solution provides an indicator and rationale for all equity, debt and exchange-traded product (ETP) instruments that can potentially fall into scope. Additionally, Bloomberg provides standard identifiers that allow this data to be easily integrated with other datasets for a holistic view. Bloomberg locates and tracks the existence of Qualified Notices so that their existence, nature (taxable or exempt) and expiry date can be automatically incorporated into compliance strategies. Finally, several key data points including country of jurisdiction and legal form make up this comprehensive offering. A global team of regulatory experts monitor multiple jurisdictional requirements and use this data along with available company data to produce relevant indicators. These indicators can help firms to implement efficient compliant strategies without the need to independently source all of the various required data points.
To learn more about Bloomberg’s PTP Data Solution, click here, or request a demo here.