Do You Have the Withholding Documentation You Need? Part 3

Understanding the Intent of the Chapters 3 & 4 Withholding Rules

This is Part 3 of an ongoing series. For further information, please visit Part 1  and Part 2 .

Jane’s FATCA implementation procedures for ABC Harness International Inc. will be based on her fundamental understanding of the various withholding rules as follows:

The intent of the Chapter 3 rules is to enforce a tax on certain U.S.-source income that is beneficially owned by non-U.S. persons. Therefore, the Chapter 3 rules first ask: What is the nature and source of the income? If the income is of a nature that is subject to withholding and is U.S.-source, withholding is required. The payor then reviews the documentation to determine if the recipient is eligible for a treaty benefit or other statutory exemption; if not, withholding is required.

The intent of the Chapter 4/FATCA rules is to obtain a level of transparency and understand where there may be U.S. interests in tiered structures. Therefore, the Chapter 4 rules focus on documentation. Consequently, the payor’s first determination should be whether the proper documentation is in place. If the answer is yes, then they have achieved the desired transparency and no withholding is required under these provisions.  However if the answer is no, than the payor must determine the nature and source of the income.  If the nature is included in the FATCA definition of a “withholdable payment,” the payor must then determine if the amount paid is U.S.-source. If it is a U.S.-source “withholdable payment” and the required documentation is not in place, than a FATCA withholding penalty is imposed.

Understanding the above framework allows Jane to design the written procedures which will ensure compliance for both sets of rules.

Jane’s next and final step will be to draft the procedures and then the implementation work will be left to John!