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Trends & Developments - June 2014 - How Does FATCA Impact You?

Jun 18, 2014

The Foreign Account Tax Compliance Act (FATCA) is a complex withholding regime that is aimed at identifying U.S. people who may not have been reporting foreign income or foreign accounts. Since foreign financial institutions are the primary vehicle through which foreign financial accounts are maintained, they are the main focus of the FATCA legislation. However, the broad scope of the FATCA legislation encompasses all U.S. businesses that make payments to non-U.S. entities or individuals.

Impact on Non-Financial Businesses

While U.S. non-financial institutions do not have the level of FATCA-related issues that foreign and U.S. financial institutions have, they will have significant challenges in documenting the status of foreign recipients of payments and implementing IT systems to track the documentation received from foreign payees and correlate it with payments.

Many U.S. non-financial institutions have some knowledge of the documentation required with respect to payment of fixed, determinate, annual or periodical payments (FDAP) to non-U.S. persons under Chapter 3 of the Internal Revenue Code (IRC). In brief, a W-8 BEN is obtained for foreign payee and a W-9 is obtained for U.S. payees.

“Documentation” for FATCA purposes (Chapter 4 of the IRC) generally means one of the new Forms W-8 (or for a U.S. payee when required, the old, familiar Form W-9). With the recent release of the W-8BEN-E form, there are currently five Forms W-8 for use simultaneously under chapters 3 and 4. The addition of FATCA status and the kinds of payment relevant to FATCA have dramatically increased the length, complexity, and requirement of U.S. tax knowledge to understand and complete at least two of these: the W-8BEN-E (to be used by legal entities that beneficially own the payment being made) and the W-8IMY (to be used by various kinds of intermediary, transparent entity, or other recipients that are not a beneficial owner). The FATCA regulations increase the importance of receiving the correct form, correctly filled out. The regulations have also broadened the standard under which a withholding agent is considered to have reason to know that a Form W-8 is unreliable or incorrect, by specifying various factors that could provide such a reason.

The IRS recently released the revised Form 1042. This Form has significant changes to reflect the new withholding rules under FATCA. The IRS has broadened the circumstances under which the form must be filed, and expanded the form from one page to two.

Because the U.S. payor is ultimately liable for delinquent withholding or income tax with respect to payments it made, failure to obtain the proper documentation can result in penalties of up to 60% of amounts paid.

Recently the IRS issued Notice 2014-33 that provides a favorable transition period. According to the Notice, the years 2014 and 2015 will be regarded as a “transition period” for purposes of IRS enforcement and administration of FATCA due diligence, reporting, and withholding provisions and other related provisions, to the extent those rules were modified by temporary FATCA coordination regulations released in February 2014.

With respect to this transition period, the IRS “will take into account” the extent to which a foreign financial institution, other foreign entity, or U.S. or non-U.S. withholding agent has made “good faith efforts” to comply with the requirements of the FATCA regulations and the temporary coordination regulations.

FATCA is part of an overall increased effort by the U.S. Department of Justice to address potential tax evasion through offshore accounts and investments. The IRS continues to encourage compliance with the many foreign account and investment reporting requirements through the Offshore Voluntary Compliance Initiative.

What should non-financial companies be doing:

  • Identify all foreign payees
  • Identify various departments and U.S. subsidiaries that make payments to foreign recipients.
  • Obtain new Form W-8BEN-E from all foreign payees.
  • Identify intercompany payee payments that are likely being made for which documentation is required.
  • Update IT systems to incorporate new W-8s

Examples of departments that have control over payments for foreign recipients include: treasurer’s office, accounts payable, general counsel, and property and management.

Some payees may be reluctant to provide new W-8BEN-E – discussion will have to take place as to why the new E-8BEN-E is needed.

Trends & Developments June 2014

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